The Sri Lankan economy would have been vastly different if not for the series of violent eruptions throughout the post independent period. In the nearly seventy years after independence the economy was disrupted by the ethnic riots of 1958, the 1971 youth insurgency, the communal clashes of 1977, the ethnic riots of July 1983, LTTE terrorism of over three decades, and the protracted civil war of 27 years. The JVP insurgency of 1988-89 crippled the economy and economic growth fell to its lowest level.
These eruptions of violence were serious economic shocks and setbacks. They harmed the economy in many different ways and retarded the country’s economic development. They disrupted the normal functioning of economic activities in the country, decreased production in several sectors of the economy, deterred foreign investment, impaired tourism, and caused a out migration of skilled persons and professionals that weakened the economic potential of the country.
Current protests and violence
The current continuous political protests and violence are admittedly different to these major violent events and yet damaging in many ways, especially as the economy is facing a serious crisis in its external finances. The protests and road blocks are disrupting economic activities, adding to the costs of living, disrupting economic and social life of the community, distracting the government from its economic program and delaying, deterring and deferring much needed economic and social reforms. They are discouraging foreign investment and could reverse the current tourist boom. They could aggravate the current economic crisis in external finances and retard economic development.
The continuous public protests against government policies and their subsequent retraction or non implementation have been significant causes for the erosion of investor confidence. Why would investors want to risk their capital in a country in which there are violent protests on a daily basis.
The withholding of Chinese investments in Hambantota is a clear instance of how violent protests led to the suspension of important investments which would have benefitted Hambantota and the country’s economic growth. This suspension of the expected inflows of capital of about US$2.5 billion to the government from Chinese investments in two Hambantota development projects was an unexpected setback to the balance of payments too. The government expected to strengthen the balance of payments and enhance the foreign reserves from its critical level by the inflow of Chinese capital to the government from investments in these projects. The delay and non realisation of expected funds has prevented the resolution of the current difficulties in external finances.
Influence foreign investors
The adverse impact of it could be more extensive as foreign investors would have been deterred to invest owing to wide international media coverage of these violent protests. The international investor community and especially foreign investors who wish to establish industries in the country would be driven away by this violence.
The inability of the country to attract foreign investments has had many reasons such as the lack of coherence, consistency and certainty in government policies. Statements and actions of the government have been deterrents and disincentives to investments. Certain critical statements about large investors made them pull out their investments in the bond market. Intervention in the stock market to stop a purchase of shares by a foreign investor has sent wrong signals to investors and uncertainty in tax proposals. In such an inhospitable climate the violent protests compound the country’s unattractiveness to foreigners.
The political environment of opposition to nearly every policy of the government, the protests and road demonstrations causing huge traffic problems, the opposition to Chinese investments are serious impediments to attracting foreign investment. One can hardly expect foreign investors to invest in such a chaotic country when far more hospitable locations are available.
The current protests and road blocks and incessant demonstrations could damage the current tourist boom and reverse the trend of increasing tourist arrivals since the end of the war. In a situation when the country’s exports are faring badly and consequently incurring a large trade deficit of US$9.1 billion in 2016, tourist earnings of about US$3.5 billion is a considerable relief to the balance of payments. The July 1983 ethnic violence was the most serious setback to both foreign direct investments and tourism. Being in a financial situation, even a modest setback to tourism would be a serious setback to the external finances.
Tourism that has a potential to make a vital contribution to the economy could be under threat owing to the violent protests in several parts of the country as tourism is one of the most sensitive areas of economic activity to violence. Once again we may be taking steps towards killing the goose that lays the golden eggs.
Violence has been a serious setback to tourism in some of the most attractive tourist locations such as Egypt, Indonesia and Thailand. The current protests may only be a mild irritant and inconvenience at present, but could be a serious setback if these escalate and Sri Lanka is considered an unsafe destination.
The objectives of rapid inclusive economic development and poverty alleviation cannot be achieved without substantial reforms in economic organisation and policy reforms. One of the most insidious impacts of the current continuous political protests and violence is the inability to implement much needed and essential economic, educational, social and administrative reforms.
It is most likely that in this climate of protestations, the government would shy off its reform agenda. This would be a permanent setback to economic and social development of the country. The current climate of political protests and violent demonstrations is not at all conducive for the government’s implementation of economic reforms.
In as much as violence has had a significant impact in retarding economic development in the past, the current incessant violent protests could setback the economy once again. The realisation of the country’s economic potential is once again in jeopardy. Foreign investments, tourism and much needed economic and social reforms for development could be in danger. Protests and violence are a recipe to remain underdeveloped. Political objectives of the opposition are perhaps being realised at the expense of the country’s long run economic and social development.