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Political Instability  May Hamper Sri Lanka's Economic Growth - 2003-11-09

In Sri Lanka, there are worries that the country's political crisis could adversely affect economic recovery. India, on the contrary, says its economy will grow more than expected this year.

Sri Lanka's economy has been showing promising signs of recovery over the past year, since the government and Tamil rebels ended 20 years of ethnic conflict and began a fragile peace process.

But political instability now engulfs the country after the president briefly declared a state of emergency and suspended parliament, provoking a showdown with the prime minister and raising worries about the future of the truce.

Stock markets had risen by 70 percent this year on optimism over the peace process. They plummeted after the president's announcement, taking a fall of nearly 20 percent, although they bounced back on Friday.

Dushant Vijaysingha, a senior researcher with Asian Securities in Colombo, says the crisis has dented investor confidence and damaged business sentiment.

"There would be a slowdown in direct investment in the first half or the first quarter of 2004, which could have an impact on growth targets in 2004," he said. "Investors would take a wait-and-see approach, which would mean that a lot of investments that were planned may take a while to materialize."

Businessmen are also dismayed that a free trade agreement with the United States has been put on hold - apparently also due to the political uncertainty. The pact was to have been finalized during Prime Minister Ranil Wickremesinghe's recent visit to Washington, but U.S. officials said they would wait until the Sri Lankan parliament was restored to power.

There are also worries about a slowdown in the buoyant tourism sector: tourist arrivals had increased by 21 percent through September.

The news is more hopeful in neighboring India. The country's central bank forecasts economic growth of 6.5-7.0 percent this year, which is higher than earlier projections of six percent, although the bank has expressed concern about the government's rising budget deficit.

The bank says the increased growth will be achieved on the back of higher exports, and improved industrial and agricultural production.

The forecast comes as Indian stock markets continue to rise, and there is a greater optimism about the Indian economy than ever before.

In a recent survey, the Wall Street investment bank, Goldman Sachs, said India could become the world's third largest economy by 2050. That projection was based on expectations that India's economy will grow consistently at five to six percent for the next 50 years.

However, several economists in India caution that the potential will only be fulfilled if the country proceeds faster with economic liberalization, and steps up efforts to improve such social problems as illiteracy.