Dilrook Kannangara

Oil and gas prices have risen and supply shortages are felt in many parts of the world. While supply quantity shortages are worse in 2026, price increase has been small compared to 1990/91 war when prices jumped 250% initially and stayed elevated for a few months before collapsing. The base price was very small in comparison to today ($17 per barrel verses $70 a barrel) but the impact was higher as the Sri Lankan economy was a fraction of what it is today.

However, despite the shock to both supply and prices and the loss of foreign exchange (Kuwait was then the largest source of forex), Sri Lanka survived without any economic downturn. To make matters worse, Sri Lanka was just 7 months into the recovery period after 2 years of JVP subversion and large-scale destruction, IPKF vandalism of northern infrastructure and months into renewed war with Tamil terrorists. Sri Lanka managed to beat all these and stayed afloat economically. This is unlike 2022 and 2026 when even smaller comparative shocks (both internal and external) easily rock the economy and people’s quality of life.

Why?

What changed from 1990/91 to 2022 and 2026?

What happened to the resilient Sri Lankan economy that was immune to 2 insurrections, one long domestic war, one invasion, global financial crises, Asian financial crisis (except the impact in 2001), collapse of the Soviet Union and the Eastern European bloc, a tsunami and many external wars?

Surprisingly the reason is post-2009 Sri Lanka or post-war Sri Lanka. It is much weaker than itself during the war.

Post-2009 Sri Lankan economy is like low-lying areas of Colombo suburbs that go under water after every regular and medium scale rainfall.

The north and the east are now economically integrated with the rest of Sri Lanka. It was not the case before 2009. There are no exports from the north and the east. However, they have some of the largest per capita imports. During the war, these imports were restricted. From 1990 to 1994 Sri Lanka imposed a complete economic embargo on the north and parts of the east that were not under government direct control. As a result, their imports collapsed to near zero. A vehicle was hardly seen in the north, electronic equipment was not required as there was no electricity, no phones as there were no connections, batteries, gas, etc. This saved Sri Lanka billions of dollars each year. And it didn’t cost Sri Lanka anything as the north did not have any exports. Neither did the north pay income taxes. It was a situation where Sri Lanka had nothing to lose from the north. Things marginally changed for Jaffna peninsular in 1996 with its liberation.

Things changed for the better since 2009 after Sri Lanka won the war. However, along with peace came massive imports including vehicles, phones, electronic gadgets, Hindu statues, gold, imported food items, overseas education and trips, etc., etc. Diesel, petrol and gas demand from the north increased many folds. At least 10,000 vehicles travel from the north to Colombo each day and night one-way. They consume most petroleum of any transport route in the island due to distance. The north and east are net electricity importers from other areas as all attempts to build powerplants there failed due to protests. A very small power generation capacity is functioning which is insignificant in the scheme of things.

However, the increase in imports was not met with an increase in exports from the north as it has none. The result was a massive and catastrophic deficit and snowballing debt to close the annual deficit. It is this deficit that ruins Sri Lanka’s economy when any economic shock, bog or small, local or international, occurs.

How about remittances? Although the north receives a large amount of foreign remittances, they are expended in private consumption. Comparatively the north received far more foreign remittances during the war as the northern economy collapsed. Loved ones of the Tamil Diaspora had to be sustained through donations. (Tamil Diaspora donations to the LTTE were at most one tenth of their donations to their loved ones in the island.) Therefore, the mechanics of remittances does not improve the crisis brought on by the dearth of exports from the north.

Ignorance and denial of these facts is the main reason for Sri Lanka’s continuing economic vulnerability. Not everything about peace is good and not everything about war was bad. It depends on how it impacts what matters to the people and that is not straightforward. Blame it on Kaliyuga, capitalism, conspiracies or whatever, economic realities have the final say in all human concerns. Sri Lanka was billions of dollars better off each year during the war than during peace time.