Sri Lanka's government says the country's economy is continuing to grow, but economists caution renewed hostilities between the government and Tamil rebels will continue to hamper the South Asian country's potential.  VOA's Steve Herman reports from Washington an international donors' conference is to discuss Sri Lanka's economy later this month.

Soldiers inspect the wreckage of a bus in Meetiyagoda, Sri Lanka, 6 Jan 2007

Sri Lanka's government is forecasting continued growth exceeding seven-percent for 2007.  Thanks to robust exports of clothing, jewels, and petroleum products, treasury officials say the country's economy recorded an overall 7 percent growth rate last year.

But with an upsurge in clashes between government troops and Tamil rebels in northeastern Sri Lanka and bus bombings in the south, international donors appear wary of committing new aid to the country.  That is a sharp reversal of the mood of two years ago when several-billion dollars of worth of international commitments and aid pledges poured into the country in response to the devastating tsunami that hit the Indian ocean area.

Published reports in Colombo say the Sri Lanka Development Forum, to be held January 29-30 in Galle, is expected to rebuff requests for additional funds.  Instead the forum is expected to focus on reviving the peace process, development and human rights.

Shantayanan Devarajan

The potential loss of further outside assistance may not be as severe as it would appear.  The World Bank's chief economist for South Asia, Shantayanan Devarajan, says Sri Lanka's economy has shown itself to be quite resilient to the long-standing civil conflict.

"Of course, the hostilities are extremely troubling and the increasing intensity is even more troubling," he said.  "At the same time, Sri Lanka has been through similar hostility periods, and maybe even worse over the last 20 years.  And really what is quite impressive is that the economy has continued to grow at a steady pace of five to six percent."

But the World Bank's lead economist for Sri Lanka, Rocio Castro, says two decades of strife has cost the country two- to three-percent of its gross domestic product annually. 

"It does affect the arrival of foreign direct investment and of new emerging activities to take off," he noted.  "We expect it will continue this way.  So Sri Lanka has the potential probably to grow at 8 percent, 10 percent."

Castro says the civil conflict also prevents the government from focusing on much needed economic reforms that would give the country an additional boost.

The World Bank's Devarajan, an ethnic Tamil, says despite the setbacks his country has faced during the past decades, its people have shown a remarkable ability to thrive despite various calamities.

"I think there is some intrinsic robustness of the economy and, perhaps, the resilience of the Sri Lankan people who seem to be able to weather not only tsunamis and other natural disasters, but man-made disasters, shall we say, like conflict, and manage to proceed with development," he said.

The analysts also say internal political tension is further stalling economic progress.

President Mahinda Rajapakse's People's Alliance continues to clash with its partner over economic policy.  The People's Liberation Front, a Marxist party, accuses the president of backing away from promised leftist economic policies he made in return for support in the 2005 election.

Violence has increased since that election, despite a 2002 truce signed by the government and Tamil rebels.  The Liberation Tigers of Tamil Eelam have been fighting for an ethnic homeland for more than two decades.  About 3,000 people died last year in the conflict, which has claimed 67,000 lives since 1983.