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Contribution of the Northern and Estaern provinces towards the national economy of Sri Lanka

Nov 26, 2010 1:48:30 PM- transcurrents.com

By Dr.Laksiri Fernando

(Text of DA Rajapaksa Memorial Address)

National development is not merely about the economy but the economy is central. It entails economic, social, political, cultural and even moral aspects. The contribution of the North and the East during the last three decades or so was hampered in all these spheres by the separatist and the terrorist war.

It is necessary to emphasize not only the terrorist character of the war but also the separatist aspect. One cannot be separated from the other. If terrorism was the symptom, as some people argue, separatism was the cause.[1] However, as the war is over and peace is established, prospects are high for the people, the institutions and organizations of these provinces to participate in the processes of national development and contribute to its progress.

This paper as the basis for the ‘2010 Memorial Oration of DA Rajapaksa,’ one of the most illustrious and committed national leaders of Sri Lanka, highlights both prospects and challenges of the north-east participation in the national development. It takes Mahinda Chinthana as the main framework of analysis which outlines not only the directions but also various projects and plans for the national development in the ongoing future

Present Context

Sri Lanka has entered the category of the middle income countries with over 42 billion economy and little above a population of 20 million people. This means that the country is still at the lower level of the middle income countries with a per capita income of around USD 2,085. There are vast disparities in the income distribution in the world today and Sri Lanka’s per capita income is 17 times lower than the United Kingdom, the country’s former colonial master. When Britain left Sri Lanka in 1948, the gap was wider. Sri Lanka has managed to catch up to an extent, but not to the extent of people’s aspirations or country’s capacity.

Sri Lanka was a typical ‘export-import’ economy at the beginning of independence with the agricultural sector contributing over half of the GDP.[2] The exports and thus the foreign exchange earnings depended primarily on three main products of tea, rubber and coconut. The situation has drastically changed by now the sectoral composition shows the following picture in Table 1 in contrast to 1950.

It is mainly the expansion of services and industries that has changed the composition. Although the plantation agriculture has contracted, the food producing domestic agriculture has expanded and increased. It is believed that the present composition is akin to a ‘modern economy,’ the service sector taking the lead in the economy.[3] While the spread of infrastructure and services is uneven between the provinces and districts, the overall availability of facilities is conducive to domestic development and foreign direct investment (FDI).

The most important is the growth that Sri Lanka could sustain during the last five years irrespective of the war, Asian Tsunami and the international economic/financial crisis. Sri Lanka could maintain 7.6, 6.8, 4.2 and 3.5 growth rates respectively in 2006, 2007, 2008 and 2009. While the growth rates were only 1.6 and 2.1 for the first two quarters of 2009, when the war culminated, after the defeat of the LTTE in May that year the growth picked up by 4.2 and 6.2 respectively in the last two quarters. The growth rate rose to 7.1 in the first quarter of this year followed by 8.5 in the second quarter. This figure is higher than what prevailed before the Eelam War IV that broke out in mid 2006.

The other main index of economic performance after the war is the Stock Market. There are two indexes, All Shares Price Index (ASPI) for all stocks listed in the market and the special index called Milanka[4] Price Index (MPI) for blue chip companies. The market was extremely sluggish throughout the war. In May 2009, both indexes were just above the 2,000 mark. By the end of the year ASPI exceeded the 3,000 mark while MPI recording 3,500. Together this was over a 50 percent growth; since then MPI performing always better than the ASPI as could be anticipated. So far since the beginning of this year growth has been around 100 percent. By the end of 2009 Sri Lanka was considered the best performing stock market.[5]

There are other economic fundamentals that indicate that Sri Lanka could ‘take off’ for a higher growth and development making the economy elevated to the upper range of the middle income countries. One objective of Mahinda Chinthana is to increase the present per capita income to the level of around USD 4,000 by the year 2016. Sri Lanka appears well into that direction.

For an efficient market, supervised by the state, both the inflation rate and the interest rates are maintained low. Low interest rates are an inducement for the small and medium scale enterprises (SME); which is mainly the nature of the Sri Lankan economy. The unemployment rate is all time low within the range of 5-6 percent of the labor force. The gross official reserves now stand at their highest level of USD 6.1 billion, which is equivalent to six months of imports. Following the successful completion of the fourth review of the Stand-by-Arrangement, the IMF has released the fifth tranche to the value of USD 212.5 million. This shows to the confidence that the IMF has placed on the Sri Lankan economy

Three rating agencies, Standard and Poor’s, Fitch and the Moody’s, upgraded Sri Lanka’s rating standards primarily in capital markets from B to B+, from Stable to Positive and from B to B1 respectively in September 2010. When Sri Lanka made its third global debt issue aiming at USD 1 billion, it was oversubscribed by more than 6 times within 14 hours. Between January and June this year, Sri Lanka’s exports improved by 13.7 percent and internal remittances by 13.5, compared to the same period last year. The balance of trade, however, shows a 108 percent deficit due to the heavy import of investment and infrastructure material including motor vehicles.

Although the FDI inflows are still sluggish due mainly to the world decline by 29 percent in 2009, for example, it is estimated that the situation would improve after the favorable international ratings and confidence. So far this year, USD 124.2 million flowed into the infrastructure sector, USD 55.6 million to the manufacturing sector and USD 25.9 to the service sector. A reason for the FDI reluctance into the country could be the prevailing fiscal deficit which might be improved or corrected after the new budget for 2011.

North and East

Traditionally, the East was considered the granary of the country.[6] Rebellions often came from the Vanni, the central part of the North. The North and the East are two distinct and important portions of the Sri Lanka’s national economy that became obliterated by the war for nearly three decades. As the Governor of the Eastern Province, Mohan Wijewickrama, sated at the inauguration of the new provincial assembly in June 2008, after liberating the East,

The Eastern Province contributed around 14 % to the national GDP in the early eighties which declined to about 8 % thereafter because of the unsettled conditions in the Province.[7]

The above is to highlight the problem of this paper in nutshell from before going into some description of the two provinces under discussion.

The present provincial demarcations were first devised by the British for revenue and administrative purposes in 1887 and later abandoned considering the importance of the district for both purposes. As a result, the district was the main focus of analysis before the provinces again became a major unit under devolution of governance in 1987.

In terms of total area, the Eastern Province is the second largest province (9,996 km2) after the North Central (10,472 km2); and North is the third largest (8,884 km2) in the country. However, in terms of land area, the North becomes third to Uva because of high inland water area (594 km2). When considered the population percentage or population density, the North and East stand two of the lowest in the country with North Central and Uva. The relative land area of the East constitutes 15.2 percent of Sri Lanka’s total and the North 13.5 percent. In contrast, while the northern population is 5.8 percent of the country’s total, the East constitutes 7.5 percent. These population figures and land areas should be taken into consideration in estimating and generating possible contribution by these provinces to the national economy in the foreseeable future.

The disparity between the area size and the population perhaps is one major factor why these provinces were relatively underdeveloped with similar provinces like the North Central and Uva. These are the predicaments of uneven development linked to climatic and other conditions which could also give rise to social unrest again and again. All these provinces by and large constitute the dry zone of Sri Lanka. Unless these areas are planned, irrigated and taken care of by proper national policies in coordination with provincial administrations, disregarding ethnic or political considerations, the lives of the people inhabited in these provinces may remain largely destitute.

North-east in Sri Lanka is not unique in underdevelopment. Like in the world at large, there are many countries where there are ‘centers and growth poles as well as peripheries and underdeveloped regions.’[8] The objective of sustainable development is to avoid them. There is the Ministry of Development of North Eastern Region in India established in 2001 by the central government to take care of development planning and projects in eight states of North-east India covering Arunachal, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and Sikkim. Even in England, the north-east is considered relatively underdeveloped and special attention is made to develop the areas from Northumberland to Durham and from Tydale to Middlesbrough.

However, before the separatist war began, the conditions could not be considered singularly unsatisfactory in the North or the East in overall terms compared with many other regions or provinces. For this period, national accounts or survey data was not available for provinces. Most of the data was compiled on the basis of agro-climatic zones and all the districts in the north-eat except Ampara came under Zone 3. The following Table 2 gives consumer finance survey (CFS) data for four years between 1973 and 1986 presented in index form compiled taking Zone 5 or the Colombo Municipality area as the base (100) at a previous year.

While the above data corroborates with many other data available for the period, what can be seen is the common predicament that Sri Lanka has been facing in respect of centre-periphery dichotomy. This dichotomy was significantly enlarging particularly after 1977.[9] Zone 5 was the centre and all others represented the peripheries. Zone 3 composed the districts of Jaffna, Mannar, Vavuniya, Mullativu, Trincomalee and Batticaloa. This zone did not have any special disadvantage in overall terms before 1978 and by 1986 it was virtually impossible to conduct any reasonable survey to gauge the socio-economic conditions of these areas.

However, there were clear indications of significant disparities between districts within the zone, before and after, perhaps which led to unrest among the people who lived in these marginal districts. One implication of the situation is that even in the future, the allocation of resources and funding should be primarily on the basis of districts and not merely on the basis of provinces.

Prospects for Development

The major premise for the North and East contribution to the national development is peace. An extremely volatile region before, the provinces have not reported any type of disturbing violence since May 2009 and even the crime rates have gone down with the establishment of law and order.

The economic cost of the war has been estimated to be around USD 200 billion in the last decade only. This is around five times of the annual GDP estimated from the present amount.[10] Now the ‘cost of war’ has stopped except for the maintenance and payments for the armed forces. As the most successful section of the public sector in recent times, the armed forces are contributing immensely for the resettlement, rehabilitation and reconstruction. Development will be one outcome.

There was no doubt that even the ‘illusive peace’ during the Ceasefire Agreement (CFA) in 2002-2004 also resurrected the economy to an extent until the Asian Tsunami came.[11] However, the economy was kept apart from the national economy for the benefit of the war efforts of the LTTE. Many of the foreign funded projects and their monies also were channeled for war purposes than peace or people’s benefit. One case in point is the North East Community Restoration Project (NECORP) funded by the ADB through mainly Norwegian and Finish funding. The total amount was USD 25 million and one of the major projects was the Killinochchi General Hospital which was eventually converted into a LTTE military headquarters.

The contribution of the North to the national GDP has been the lowest for a very long period. It was around 2.5 percent in 1999 which went only up to 2.9 percent in 2004. While the contribution of the East has been double of the North, yet it was around 5 percent in 1999 which went up to 5.4 percent in 2004. One reason attributed to the low contribution was the informal or the LTTE war economy which has completely ended with the end of the war in May 2009. In 2009, the contribution of the East was around 8 percent and hope that it would go up to at least 14 percent this year as it was the pre-war contribution in early 1980s. Likewise, the contribution from the North is expected to be around at least 5 percent this year.

What would matter is not so much the percentage contribution in the short term. Since some of the other provinces (particularly the Western Province) are on a rapid growth path, obviously the contribution of the North or the East might be depressed for some time until the regional imbalances are corrected. When sectoral composition of the North and the East is compared with each other and with the national economy, there are interesting revelations.

While the Northern economy is predominantly service dominated (65 percent), the East is basically an agricultural economy (39 percent) according to 2004 figures. It might be the case that the service sector in the North appeared bigger because of the war conditions. What are clearly resuscitated at present are agriculture, fisheries and the service sector. An author from a Tamil nationalist point of view nevertheless reported the resurrection of the economy in following terms.

As for the Tamil Homeland, there is already some signs of increased economic activity in the North and East with trade booming between North East and the rest of the country and while tourism is another thriving industry. Opening of the major banks, supermarket chains in the North are signs of increased economic activity. Further more, the rise in property value over past 6 months in and around Jaffna has been phenomenal combined with the fall in property values in Tamil dominated areas in Colombo, indicating a tendency of return of the local Tamil economic ‘migrants’ to the North. This seems a clear sign of economic prosperity in the North and East in the short period.[12]

Challenges for Development

A major challenge that needs to be taken into consideration in terms of economic development in the North and the East is the vast disparities between districts.[13] This is not only in respect of population but perhaps related to that as well. In respect of population distribution, Jaffna district has more people than the rest of the other three districts of Mannar, Vavuniya and Mullativu taken together. This is very much the case at present and even before the war. In the case of population in the East, disparities are less conspicuous except between Ampara and Trincomalee.

The socio-economic disparities between districts are more significant which might impinge on development strategy. If the consumer finance surveys (CFS) of the good old days were of any indication, there were major disparities between Jaffna and rest of the three districts in the Northern Province.[14] Perhaps this has enlarged further due to the fact that Jaffna was largely liberated from the LTTE well before the other districts. This is not unusual in Sri Lanka as a whole either.

When household output, consumption, sales and stocks were surveyed for a month for non-seasonal crops, Jaffna district stood 30 times higher than Vavuniya and 90 times of Mullativu. Only Manner could compete with Jaffna yet with a 50 percent disparity. All other survey indicators on trade, transport and livestock also indicated to that direction. In the case of the Eastern Province, Ampara was similarly ahead of Batticaloa and even Trincomalee on the same indicators. There is much talk about provincial disparities after the introduction of the provincial council system, which is important. However, it should be noted that the district or even divisional disparities are equally or more important which needs priority attention.

There are other challenges which are economic as well as non-economic. When the war ended, there were over 300,000 internally displaced people. It was independently estimated that over two years might take to resettle them particularly due to the spread of landmines in areas where they had to be resettled. It is reliably estimated that almost 95 percent of the case load is now cleared, after one and half years, and only around 20,000 remain to be resettled.

This does not however mean that the resettled IDPs would automatically contribute to the economy. There are considerable social dislocation among IDPs and others. Its is estimated that over 89,000 women are widowed as a result of the war; 40,000 in the North and 49,000 in the East.[15] The most devastated is children’s education. All these might affect economic development adversely for some years to come.

The Northern Province or particularly Jaffna was well prominent for its educational and professional contribution to the national economy in yesteryears. By the time of independence, Jaffna produced around 15 percent of the key three professions of doctors, lawyers and engineers. Even by 1985, educational standards of the Jaffna community were exceptionally high, with 25 percent of the age group of 15-60 years having GCE (O/L) and 10 percent of the same age group attaining GCE (A/L). There were 1,411 degree holders, with 140 of them having postgraduate degrees. Irrespective of the war, the educational standards of Jaffna have not deteriorated. Thanks to the functioning of the University of Jaffna under trying conditions, there are more graduates today than anytime in the history. This is a welcome sign for the resurrection of the economy in the North and their contribution to economic planning. The situation in the East is not dissimilar with having two universities functioning under similar circumstances

In considering the North and East contribution to the national economy or national development, the ethnic challenge cannot be ignored or overlooked. As there had been open discontent from these provinces in the past three decades, a political reconciliation is in order. As President Rajapaksa stated before the UN General Assembly on 26 September 2010, ‘economic development and political reconciliation should go hand in hand.’ There are provincial structures in place under devolution to address many of the issues as the obstacles of terrorism are now eliminated.

However, two important matters have to be reconsidered under devolution. First is whether, the provincial councils have the competence or full capacity to handle all the 35 functions attributed to them under the 13th Amendment. Second is how far the present system obliterates the issues of districts or the local government system as a result of the overwhelming concentration of power in the hands of the provincial councils. There needs to be some form of rethinking about devolution, moving towards more cooperation between the central government, provincial councils and local governments. ‘Cooperate devolution’ might be the right word and the formula.


Sri Lanka is in a different paradigm altogether after the end of the war. There were various reasons why Sri Lanka could not progress enough compared to some other countries in the region in the past. It is an exaggeration to consider the north-east issue or the war as the only reason. The main reason was the ‘lack of a proper strategy’ in addressing the fundamental issues, including the war, in a comprehensive manner. This gulf has now been filled by Mahinda Chinthana. Connected to this issue is the question of political leadership and political will.

Sri Lanka inherited a political culture from Britain and according to this culture political plurality was overemphasized to the extent that ‘concerted national effort’ for development or social progress was almost impossible until major rethinking and changes have taken place recently. A concerted national effort is now forged through broad political coalitions of various parties and formations, minimizing divisiveness and also maintaining the main tenets of dissent, freedom and political plurality. The most important need of the hour is for the political parties and the groups representing the North and the East to participate in this ‘grand coalition’ more broadly than as at present.[16]

There are different views as to how a national economy could be constructed and developed. In economic terms, the infrastructure development is emphasized along with the importance of technology. There are other factors and sectors that need to be developed. While there is no much dispute over what appear to be technical or pure material conditions necessary for such a development, the main controversy appear to be on two directions. First is the private sector public sector mix or the role of the state.

While there are extremes of view on the matter, Mahinda Chinthana has developed a conception of a ‘developmental state’ where the market is allowed to function with public sector participation and supervision. Second is the center-provincial policy mix in the national development. Yet again there are extremes of view, the present paper argues for a mixture of national-provincial participation in development where devolution could be implemented in a cooperate fashion. It might be on that basis that ‘expected contribution from the North and the East’ could be anticipated for the ‘national development of Sri Lanka.


[1] This analysis does not deny ethnic grievances, real or perceived, as a breeding ground of both separatism and terrorism. However, the root causes are identified mainly in the ideological sphere rather than in the economic or social sphere.

[2] D. R. Snodgrass, Ceylon: An Export Economy in Transition, Yale University, Illinois, 1966.

[3] Sri Lanka may be called ‘post-industrial’ geared to a ‘knowledge economy.’

[4] The word Milanka is coined from Sinhala words Mila for price and Anka for index.

[5] Annual Report of Colombo Stock Exchange 2009.

[6] Thuraiappa Navaratnaraja, ‘To Make the East a Granary of Sri Lanka,’ Asian Tribune, 2 June 2008.

[7] www.ep.gov.lk 11 June 2008.

[8] W. D. Lakshman (ed.), Dilemmas of Development: Fifty Years of Economic Change in Sri Lanka, Sri Lanka Association of Economists, Colombo 1997, p. 189.

[9] 1977 marked the introduction of unbridled open market economy without supervision by the state.

[10] The Institute of Policy Studies (IPS) estimated in 1996 the cost to be two times of the GDP at that time.

[11] Muttukrishna Sarvanathan, “Informal Economy in the Conflict Affected Regions in Sri Lanka: An Exploration,” Pathfinder Foundation, Colombo, August 2006.

[12] Yatharthan, “Economics of the Cause of War in Sri Lanka – Can be Key to Lasting Peace,” tamilweek.com, 4 March 2010.

[13] This is very much similar to other provinces as well.

[14] Department of Census and Statistics, The Survey of Household Economic Activities – 1984/85, Colombo, 1986.

[15] Daily Mirror, 30 September 2010.