SOUTH ASIA INTELLIGENCE REVIEW
Weekly Assessments & Briefings
Volume 6, No. 4, August 6, 2007

Economic Growth Amidst Conflict
Ajit Kumar Singh
Research Assistant, Institute for Conflict Management

"We admit terrorism has an impact on us," the Central Bank of Sri Lanka Governor Ajith Nivard Cabraal acknowledged on July 25, 2007, but, he added further, "with or without terrorism, Sri Lanka is on a growth path."

Despite significant economic impact, the recent escalation in violence in Sri Lanka has failed to derail the nation's economy, with the country expected to record its fastest growth in nearly three decades, according to the Central Bank.

The conflict with the Liberation Tigers of Tamil Eelam (LTTE) has claimed at least 6,015 lives between January 1, 2005 and August 2, 2007. Millions have since been forced to live as Internally Displaced Persons in different parts of the country. Nevertheless, the Central Bank disclosed on July 25 that it was projecting a 7.5 per cent growth for 2007, reportedly the highest in 29 years. Sri Lanka's economy reportedly grew by 7.4 per cent in 2006, largely driven by the telecom, garment and banking sectors. On an average, economists believe that the conflict cuts at least two to three per cent off the annual growth rate.

With USD 530 million already received in foreign direct investment (FDI) this year, total FDI is projected to substantially exceed the total of USD 600 million in 2006. Further, USD 2.3 billion were received as foreign remittances in 2006, up from 1.9 billion in 2005. Most of the money from overseas has gone into telecom and IT-related services, distantly followed by garments and the construction of high-rise properties. Foreign reserves were up at USD 2.8 billion in April 2007, from USD 2.5 billion in April 2006. All these are conventional indicators of a booming economy, emboldening the claims that the Sri Lankan economy has not been ‘derailed’ due to the escalation in violence.

The reality of this growth, despite the escalation in fighting, is corroborated further by the fact that the LTTE has realized that, to defeat the Government Forces, it needs to cripple the economy. It is currently aiming to direct major attacks on military and economic targets. In an interview on July 12, 2007, the LTTE’s political wing leader S.P. Thamilselvan declared, "Our targets would be, in the future, major military and economic structures of the Government of Sri Lanka, as peace was not possible with President Mahinda Rajapaksa. They will be targets which help the Government sustain its military operations and military rule. For instance (our) attack on the oil installations. That is one of the targets that will cripple the economy of Sri Lanka as well as the military capability of Sri Lanka, so such will be the tactic." He was referring to the April 29 incident in which a LTTE aircraft bombed oil and gas storage facilities in and around capital Colombo. The outfit dropped two bombs at the Muthurajawela gas storage facility of Shell and another two bombs at the main oil storage depot at Kolonnawa.

"This is a conflict that the country has learnt to live with," asserted Agost Benard, credit analyst at Standard and Poor's in Singapore. According to him, "Businesses still invest, factories still produce. The main reason is because the conflict is localized."

But there is a disconnect between a booming economy and escalating violence. On the flip side, inflation is currently pegged at 17 percent, the unemployment rate is at 6.2 percent, there is a budget deficit of 8.4 per cent and defence spending is at USD 1.3 billion. The Sri Lankan Rupee (LKR) has fallen by around three percent this year against the dollar, while other currencies in the region have risen. The tourism industry has taken a hammering, and there is widespread apprehension among the people of difficult times ahead. Economist Harsha de Silva thus notes, "Inflation will continue to soar as long as overall governance is poor, budget deficits are high and the state continues to spend lavishly on oil, fertiliser and food subsidies."

The relative economic growth is also imbalanced. Saman Kelegama, Executive Director of the Colombo-based Institute of Policy Studies, observes that, "While the western province, led by the city of Colombo, is booming, with its share of GDP rising to 48 per cent from 40 per cent in the last decade [2006 figures], the north and east, mostly under Tamil Tiger control, remains a development backwater… Because the north and eastern provinces have been battered, their supply capacity has reduced." The dominance of Western Province in economic activity is according to the Central Bank "a consequence of having major infrastructure centres such as ports and airports, financial houses, major import and export organizations and other service providing establishments including telecommunication."

The World Bank report Sri Lanka Development Forum: The Economy, Regional Disparities, and Global Opportunities (January 2007) notes that the recent acceleration in growth can be partly attributed to large aid flows for Tsunami reconstruction and to rapid growth in domestic demand. The economic growth experienced by the Western Province, and to some degree the South coast, is "masking stagnant or backwards trends in the North and East. While 92 per cent of households in the Western Province have electricity, for example, only 66 per cent do in the North Central region. And while 46 per cent of those living in the Western Province attend secondary school, that number has fallen to 31 per cent in the East." Although it is estimated that the conflict has reduced overall GDP growth by 2-3 percent for the country as a whole, the North and East have suffered the brunt of its impact, particularly in terms of access to basic economic infrastructure which, according to available statistics, is worse than in other poor provinces, the report stated.

The seven percent plus growth rate amid a revival of the war is, in fact, a clear indication of the increasing economic marginalization of the north and east. And the recent conflict intensification has only worsened life for the already poor people of the north and east. An August 3-Associated Press report on life in parts of the north thus stated: "A partial economic blockade of the rebel areas that has been in place for nearly a year has badly damaged the economy. Unemployment has exploded, incomes have fallen and the price of everything from chicken to baby formula has soared… With no fuel, the electrical system has shut down. Only hospital generators and small generators run by the rebels and powered by smuggled fuel are still running… Construction has also ground to a halt with a government ban on importing cement and other building materials to the area."

The tourism industry has seen some adverse impact. The tourist inflow fell 30 percent to 30,810 in June 2007 in comparison to 44,066 in June 2006. According to Central Bank data, earnings from tourism fell by 14.8 percent between January and April 2007 to USD 130.8 million, compared with the same period a year earlier. Although Central Bank Governor Cabraal claimed that "tourism never earned us more than USD 500 million a year," he admited that "negative publicity about the war is a problem when trying to drum up business abroad. It affects investor confidence, tourism, forcing people to put off plans to start projects until things are better."

The long-drawn ethnic conflict has meant that Colombo has had to redirect vast amount of resources towards rebuilding destroyed roads, bridges and other critical infrastructure, rather than initiating an up-gradation and consolidation process – key factors of a developing economy.

The LTTE’s subversive infrastructure of smuggling, drug trafficking, extortion and collection of illegal taxes also adversely impacts the economy. According to a 2006 report on the Website of the Ministry of Defence of the Government of Sri Lanka,

It is believed that the LTTE daily collects more than (Sri Lankan) Rs. 900,000 in the form of illegal tax and other revenue in this road (A9). From Omanthai in the cleared area [area under Government control], an average of 7,000-8,000 civilians and 1,000-1,200 vehicles cross the stretch of land daily. Records revealed that the LTTE extortions to be an estimated sum of Rs. 200-300 million from Jaffna bound cargo passing from its entry-exit point in Pallai. The estimated illegal tax revenue for the LTTE from the goods sent to Jaffna through A-9 road from June 01st to 19th is Rs. 65,721,821. LTTE also earned Rs. 285 million from goods to Jaffna, during March-April, on the festive eve of the Sinhala-Tamil New Year.

Jane's Intelligence Review disclosed in a report on July 19, 2007, that the annual profit margin accrued by the LTTE is in the vicinity of USD 300 million (over LKR six billion). The outfit collects huge amounts from the Tamil Diaspora in the US, Canada, Europe – particularly including Britain, France, Italy, Denmark, Switzerland, Australia, Norway, Sweden and Finland – and in several other countries, through LTTE credit card rackets, money laundering and weapons procurement networks. With so much of ‘black money’ in circulation, the ‘white’ economy is bound to suffer.

Current Sri Lanka Armed Forces' (SLAF) military successes, however, have the potential to yield some advantages, according to some commentators. Kelegama thus observes: "If the Government gets more control over the east, it can be uplifted closer to other provinces… The people, who are sick and tired of the war, will appreciate economic activity increasing."

With vast stretches of land cleared of the LTTE in the North and East, agricultural activities are bound to increase. Government control over these areas can enhance trade because, being an island nation, most of the trade activities are carried on over the seas, on which the LTTE had greater control till its recent reverses. It remains to be seen whether the Government is able to consolidate its hold, build the infrastructure of governance and the economy, or whether a wounded LTTE will hit back with fury to jeopardise the current and amazing story of economic resilience in Sri Lanka.

NEPAL

Turmoil in the Terai
Prasanta Kumar Pradhan
Research Assistant, Institute for Conflict Management

Disorder and chaos prevails in the Terai (also known as Madhesh) region, with several armed groups operating unimpeded, creating a serious challenge to the beleaguered state.

While the presence of at least a dozen armed groups has been reported in the area, the most prominent are the Madheshi Janadhikar Forum (MJF, also known as Madheshi Peoples’ Rights Forum) and the two factions of the Janatantrik Terai Mukti Morcha (JTMM) led by Jaya Krishna Goit (JTMM-G) and Nagendra Kumar Paswan a.k.a. Jwala Singh (JTMM-J), respectively. With a well trained armed militia, these groups are currently orchestrating unrest in the region, engaging in killings, abduction, looting and extortion. Other entities presently active in the region include the JTMM – Bisfot Singh faction, Madheshi Rashtriya Mukti Morcha (Madheshi National Liberation Front), Madheshi Mukti (Liberation) Tigers, Terai Cobra, Terai Baagi, Terai Army, Madheshi Virus Killers Party and the Royal Defence Army.

As SAIR has noted earlier, the "identity, profile and aspirations of the Madheshis have abruptly acquired increasing importance in the fragile political detente in Nepal." According to the 2001 Census, 48.4 percent of the over 23 million Nepalese in the country reside in the Terai region. "Madhesh, also known as Terai or Tarai, is the flat southern region of Nepal, extending from east to west. It occupies about 17 per cent of the country’s landmass. The word 'Madhesh' is said to be derived from 'Madhya Desh' meaning 'country in the middle'. Economically, Madhesh is the most productive region of Nepal, accounting for its most fertile lands and the overwhelming proportion of its agricultural output. In addition, a large number of agro-based industries, including jute factories, sugar mills, rice mills and tobacco factories, have been established throughout the region."

According to MJF leader Upendra Yadav, the Madheshis are the victims of ‘internal colonialism’ as well as regional and racial discrimination by the pahade (hill people) rulers. The MJF demands complete autonomy from the pahade rulers, and has started an ‘armed struggle’ to secure this objective. S.N. Mehta, the Sunsari District president of the Madhesi Youth Forum, the MJF’s youth wing, claims that around 800 cadres are undergoing training in Sunsari, and they are planning to increase the number of cadres to 1,500 soon, and would expand their base and activities to cover all the Terai Districts.

The JTMM-J and JTMM-G, on the other hand, are secessionist in nature and demand complete independence from Nepal. Both the JTMM groups do not recognise the pahade rule and seek an independent Terai state. Goit has, thus, declared: "Terai was annexed by the Nepali pahade rulers and then parts of it were ceded to them by the British through treaties. By the Indo-Nepal agreement of 1950, all other treaties stood abrogated… Terai should have become free then… It is simple, we are free, we should be free."

Most other demands of these diverse groups have strong commonalities and focus principally on regional autonomy with the right to self-determination, proportional representation in the Constituent Assembly, ending discrimination against the Madheshis, return of seized lands by the Maoists, etc. Moreover, taking their cue from the success of the Maoist insurgency, all the Terai ‘liberation groups’ believe that they can achieve their desired goal by resorting to violence and intimidation. Jwala Singh claims his group has already formed armed militia in 12 of the Terai’s 20 Districts, adding that, "We are planning to develop our military strength to a brigade." His faction, with a cadre strength of a few hundreds, has a central committee, central and district level Terai ‘governments’, a Terai Liberation Army and District committees across the region.

The cadre strength of the JTMM-G remains difficult to estimate, though unconfirmed reports suggest a support base of a thousand, including hard-core cadres and sympathisers. The Goit faction functions with a central committee, East and West Terai Regional Bureaus, village, ward and cell committees and a parallel military organisation.

Though these groups are present across the Terai region, major incidents have been reported mainly from the Siraha, Dhanusha, Morang, Sarlahi, Bara, Saptari, Mohattari, and Rautahat Districts. These incidents include the killing and abduction of civilians, Government employees and also Maoists, the last of which are regarded as the foremost enemies of the Madheshi movement and people. According to Institute for Conflict Management data, 14 incidents involving various armed Terai groups were reported in June 2007, while 23 were reported in July 2007. This included one civilian and four Maoists killed in June, and eight civilians and three Maoists in July. Apart from the killings and abductions, the Madheshi groups have been involved in capturing land and disturbing day to day life by calling for frequent strikes in the region.

One commentator has remarked that "raw anger characterises the mood in the Tarai… The political landscape in the Tarai today is characterised by uncertainty and a confrontational mood. There is virtually no state presence across the eastern plains, and the Kathmandu leadership, across the political spectrum, is perceived as insincere… In a political landscape characterised by violence, frequent strikes and state inertia, the Madhesis are suffering."

Significantly, the three principal Madheshi groups – the MJF and the two principal JTMM factions – are splinters of the CPN-Maoist, and parted ways with their parent group because they came to believe that the Maoists were not serious about the development of the Terai region, necessitating a separate and independent struggle for their ‘cause’. The split has given rise to the inherent rivalry between the Terai armed groups and the Maoists, leading to frequent and bloody clashes. On March 22, 2007, Prachanda termed the MJF a ‘criminal gang’ and demanded that the Government outlaw the group. Similarly, on June 18, the MJF demanded that the Maoist-affiliated Young Communist League be proscribed and that the Maoists immediately be expelled from the coalition Government. The Maoists also have their own organisation in the Terai known as the Madheshi Rashtriya Mukti Morcha (Madhesi National Liberation Front), and now seek a ‘democratic republican state’ based on federal autonomy and proportional representation. Unlike the JTMM factions, the Maoists reject secession, demanding "a unified Madhes region" comprising all its communities.

The Government has failed to confront the armed Madheshi rebels as many of the Police posts which were evacuated during the Maoist insurgency are yet to be restored. Of the 141 Police posts that were either displaced or merged, the Government has restored only 59 in the Terai region, leaving behind a gap of at least 82 police posts. The continued threat from various armed groups have hindered the process of restoration of these posts, and consequently of the re-establishment of some state control over the region. Any move on the part of the Government to mobilise its Armed Forces faces stiff resistance in the Terai. Worse, the Security Forces are ill-equipped and utterly demoralised by the success of the Maoist insurgency. The Nepal Police has a current strength of 47,349 and the paramilitary Armed Police Force (APF) has 20,428 personnel for the whole country, a mere fraction of what is needed to meet the nation’s multiple internal security challenges.

In view of the significant power of the armed Madheshi groups and the relative popular support they enjoy in the region, the Government has been compelled to invite them for talks. After repeated refusals, the MJF finally agreed to sit for talks on June 1, when it presented a 26-point charter of demand. The major demands include the restructuring of the state and the formation of a Commission to implement such restructuring; the inclusion of Madheshis in all organs of the state; a federal system of governance; proportional representation; withdrawal of charges against MJF leaders; compensation to those injured during the Madhesh agitation; and the redressal of a number of other grievances of the Terai people. The demands that have been acceded to by the Government include the formation of a State Restructuring Commission, declaring those killed during the Madhesh agitation as martyrs, providing compensation to families of the dead, and providing relief and treatment to those injured during the agitation. The Government has also agreed to carry on a dialogue to seek the help of the UN technical team in further talks; drop charges against MJF leaders, ensure access of Madhesis, Dalits (lower caste Hindus), women, Janjatis (indigenous nationalities) and backward people, to all organs and levels of the state, and a proportionate distribution of resources. An agreement was also reached on demands such as the return of seized properties by the Maoists, ensuring industrial security and an early declaration of the date for Constituent Assembly elections. However, controversial issues, including an autonomous Madhesh province, the right to self-determination and proportional representation remain unresolved. The second phase of talks between the MJF and Government ended in failure on July 25. In the third round of talks on July 28, the MJF, surprisingly, demanded the dissolution of the Interim Parliament, leading to the collapse of the talks.

On July 13, in a letter to the Chief of the United Nations Mission in Nepal, Ian Martin, Goit said that he was ready to hold a peaceful dialogue with the Government, provided the UN or any other credible international agency agrees to broker such talks, and hinted at the possibility of a resumption of negotiations if the Government created ‘an amicable environment’. However, Peace and Reconstruction Minister Ram Chandra Poudel dismissed Goit’s proposal for mediation, insisting that that all internal matters would be solved internally through a dialogue with the Government.

On July 15, Home Minister Krishna Prasad Sitaula gave a 15-day deadline to the agitating Terai groups to come forward for talks, and warned of ‘strict action’ if they failed to comply. Jwala Singh rejected the ultimatum on July 17, and accused the Government of "trying to mobilise the Army to suppress the Terai movement for liberation." His group also gave a counter-ultimatum to the ‘hills-origin’ Government officials in Terai to relocate out of the region within two weeks, or else face dire consequences. Jwala Singh asserted that southern Nepal was the ‘autonomous state’ of the Madheshis and "The dialogue with the Government will take place only to demarcate the independent state of the southerners." He added, further, that there was no chance of talks with the Government as the Madheshis had declared Terai an ‘independent state’.

On the other hand, the little-known Madheshi Mukti Tigers (MMT) has also expressed its readiness to sit for talks with UN mediation, if the Government meets its conditions, which include the declaration of a cease-fire by the Government, declaring people killed in the Madhesh movement as martyrs, releasing its detained cadres and dropping of charges leveled against them.

With the Constituent Assembly elections scheduled for November 2007, the Government is trying hard to bring the rebels to the negotiating table, at least, for a peaceful conduct of the elections. The MJF has already been registered as a political party with the Election Commission and is ready to take part in the elections only if its conditions are met by the Government. It has also threatened that they would not allow the election to be held if their demands are not met. Jwala Singh said that, "If the pahade Government tries to forcefully hold elections then the consequences will be grave. And the pahade rulers will be responsible for that." Similarly, Goit has declared that the new Constituent Assembly would only "renew the slavery of my people…. Nepal has no right to conduct an election here and talk about a Constituent Assembly. We don’t belong to them."

Underlying all this is a fact that there is a serious political vacuum in the Terai. While the mainstream political parties have proved to be utterly ineffective in redressing the grievances of the Madheshi, the Maoists and a mélange of Madheshi groups have been fighting to occupy this vacant political space.

It is obvious that it is virtually impossible for the Government to meet the preconditions set by armed Terai groups, under prevailing circumstances. This was the case even before the MJF added the further obstacle of a demand for the dissolution of the Interim Parliament and Government. While the Government is evidently willing to concede the relatively low-key demands, the core demands like proportional representation, autonomy, etc., remain can hardly be addressed. Within such an environment, where armed groups confront both the state and the Maoist cadres, the possibility of holding elections for the Constituent Assembly in the Terai region appear bleak.

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