Peace Dividend

Whe

n Thavarasan Singham returned to his grocery shop in May, the shutters were still riddled with bullet holes. Back in 1990, Singham's town of Mankulam, in northern Sri Lanka, was caught in the cross fire between Tamil guerrillas and Sri Lanka's predominantly Sinhalese army. After the Tamil fighters retreated, the army drove into Mankulam. Singham knew what was coming next. Pulling down the shutters of his shop, he ran out the back door with his wife and four children, just before bullets and mortar shells burst into every store in the Tamil-dominated village. For the next 13 years, Singham, now a 56-year-old with a clenched jaw, gleaming eyes and a look of reptilian toughness, took refuge with his family in the nearby village of Mallavi while Mankulam was repeatedly ravaged by the civil war. In May, Singham finally came home. He and his 20-year-old son, Ramanan, rolled up the shutters of the shop, swept away the debris, repainted the walls and stocked up on goods. Business is still slow, and the farmers who come for batteries, kerosene and groceries can often buy only on credit. But these are minor irritations. Singham looks around the store in wonder at the blue bottles of kerosene stacked over the red bottles of oil, the sacks of rice, and the colorful satchels of malt powder festooning the doorway: "I never thought it would be possible to come back here."

Like Singham, millions of other Sri Lankans are finally beginning to rebuild their lives. As the 20-month cease-fire between the government and the rebel Liberation Tigers of Tamil Eelam (LTTE) brings Sri Lanka its first real respite from a 20-year civil war, the island nation of 19 million people is enjoying its biggest economic boom in decades. Foreign tourists are rediscovering Sri Lanka's fabled beaches, local consumers are on a spending binge and corporate profits are surging. The economy is expected to grow by 5.5% this year. Land prices are rising, and the stock market is up 73% since January. "This is a new start for Sri Lanka," says Don Harold Jayawardene, managing director of the Stassen Group, the nation's largest diversified conglomerate.

Of course, the prospect of a permanent peace remains in doubt: talks between the LTTE and the government have been stalled since April when the rebels walked out of negotiations. But the LTTE has decided to return to the negotiating table, offering new proposals on Friday for creating an autonomous governing body for the north and east of the country. Sore points persist: the LTTE claims that the Sri Lankan army still prevents thousands of Tamils who fled their towns during the strife from returning, and the government balks at the rebels' demand for control over the police and security forces of the country's north and east. But Prime Minister Ranil Wickremesinghe says he wants to keep the peace talks going, and though decisions in the LTTE are ultimately made by its enigmatic supremo, Velupillai Prabhakaran, the LTTE's operatives on the ground insist they too want no more bloodshed. "We're talking about peace, we're not talking about war," says Thaya Master, an LTTE spokesman.

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Meanwhile, the long-anticipated peace dividend is palpable all over the country—a reminder to both sides of how much Sri Lanka has to lose if it slips back into war. In Colombo, the nation's capital, checkpoints and armored guards are still conspicuous. But many roads that were closed off for security reasons have reopened, and shiny new imported cars clog the main traffic arteries at rush hour. "This year, sales are up sharply," says Nobuhiko Kato, managing director of Toyota Lanka. Fueled by a booming financial sector that offers consumers easy purchasing plans, Toyota forecasts that the number of its cars sold in Sri Lanka will rise from 480 in 2002 to 850 this year—a long-awaited sign that the worst has passed.

The new prosperity extends far beyond Colombo's busy shopping malls and car showrooms, boosted in part by the resumption of internal trade with the Tamil-dominated northern and eastern areas of the country, isolated for years by a government-imposed embargo. Before the peace process began, Wickremesinghe says, "we were a market of 15 million. Now we are a market of 19 million." In Dambulla, a trading town in the center of Sri Lanka, vegetable sellers now do brisk business with Jaffna, the chief city in the Tamil north: these days, large onions and pineapples are sent up north, while trucks carry small red onions, bananas and beetroots south. Cheap agricultural produce from the north is one reason why inflation has dropped to barely 7% from more than 14% in 2001: in Dambulla, the price of small red onions has come down this year from 60 rupees (60¢) a kilo to 35.

A surge in spending by international aid agencies is also stimulating the economy, even reaching up to the ravaged Tamil north, where a highway to Jaffna is being rebuilt by the Asian Development Bank. Although thousands of Tamils who had to leave their homes during the civil war still languish in refugee camps, conditions in the north are slowly improving. In Killinochchi, an LTTE-controlled town that saw some of the fiercest fighting, a landscape of burned-out, bullet-scarred buildings is intermittently relieved by a brand-new office or restaurant. The LTTE has even opened its own café in town, where its guerrillas, retrained as waiters, now wield oversize plates of pungent curry instead of guns.

Yet Sri Lanka still has a lot of catching up to do. In 1977 it became the first South Asian country to dismantle its socialist economy. Foreign investment was welcomed, and from 1977-84 the economy grew by 6% a year. But in July 1983, long-simmering tension between the nation's Sinhalese majority and the Tamil minority led to violent anti-Tamil riots, and the country plunged into civil war. By 1987, Sri Lanka's growth rate had halved. Tourism and tea exports remained relatively strong, and in the 1990s, Sri Lankans fancied that the country's economy had learned to live with the fighting. That illusion ended in 2001, when the LTTE launched an attack on Sri Lanka's only international airport: tourists stayed away, insurance companies slapped a surcharge on all goods shipped to Sri Lankan ports, and the economy slipped into its worst recession in decades.

There are still plenty of economic problems, including a bloated public sector that employs more than a million Sri Lankans and a tax system so riddled with loopholes that evasion is rampant. Of about 32,000 registered businesses in the country, only some 9,000 file tax returns. "Paying corporate income tax in this country is almost voluntary," says Jeremy Carter, the top representative of the International Monetary Fund (IMF) in Sri Lanka. The combination of high governmental spending on defense and the civil service along with a low revenue base meant that national debt had swelled to alarming levels by the time Wickremesinghe came into office in late 2001. Thanks in part to a drop in defense spending, he has since made significant progress in balancing the country's books, slashing the budget deficit from 11% of GDP in 2001 to less than 8% this year. Milinda Moragoda, Minister for Economic Reforms, says the government has also opened up the state-controlled insurance and gasoline-distribution sectors to private competition and has improved the tax collection system.

For prosperity to continue, though, the peace must hold. On Oct. 24, President Chandrika Kumaratunga, Wickremesinghe's main political rival, convened a giant rally in Colombo to charge that the government was preparing to hand over the north and east to the LTTE by acceding to all its demands. In addition to offending the Tamil population—which is mostly Hindu—by holding the rally on the Hindu sacred day of Deepavali, Kumaratunga is considering an alliance with an ultra-nationalist Sinhalese group in the next elections. Those elections could be held at any time: constitutionally, the President has almost arbitrary power to dismiss the Prime Minister and dissolve Parliament. While Wickremesinghe is credited with bringing about peace, scandals featuring politicians linked to his party could gnaw at his already slender parliamentary majority in new elections. Mahinda Rajapakse, a prominent opposition politician and close ally of the President, insists that his own party will not stop peace negotiations if it comes to power: "We will keep talking with the LTTE, but on different terms." Many observers, though, fear that those changed terms will spell the end of peace. "Wickremesinghe is someone we can talk with," warns Master of the LTTE. "There are other politicians we can't talk with."

Noting that the economy expanded even during the war-torn '90s, Carter of the IMF argues that Sri Lanka "has the potential to keep growing, even if the worst happens." But any growth it achieves in a state of resumed conflict will be a parody of what this highly literate, resource-rich country can achieve in peacetime. Toyota, for instance, expects any resumption of fighting to slash its sales by up to 25%. A foreshadowing of a Sri Lanka gone wrong already awaits visitors to the posh Welcombe Hotel in Trincomalee. Owned by Sri Lanka's Tourism Minister, the once famous hotel was renovated and reopened in May, and rooms were immediately sold out. In August, however, skirmishes broke out between the LTTE and Muslims in the region. "At once our business dropped," says Rohita De Silva, the hotel's manager. Now the gleaming hotel sits almost entirely deserted, an eerie premonition of what could happen to the country if a few reckless politicians scuttle the peace talks. Even the pugnacious shopkeeper Thavarasan Singham knows he'll have no choice if the shooting resumes. "I'll have to pull the shutters down and go back to Mallavi," he sighs. The next time Singham's little shop closes down, so will a big part of Sri Lanka's future.