Sri Lankan rioting shakes economy

Sri Lanka's reputation as a stable Third World democracy and a safe haven for foreign investment was tarnished if not destroyed in communal violence which erupted in late July and early August. Two weeks of killing and burning left over 400 people dead and destroyed hundreds of businesses and factories. It was the most serious outbreak of violence since Sri Lanka became independent in 1948, and has dealt a serious blow to the freemarket economic development policies of the government of President J.R. Jayewardene (see MM, May 1983).

The violence was sparked by disputes between the nation's Sinhalese majority and Tamil minority. In northern Sri Lanka, a Tamil guerrilla group called the Tigers advocate separation of the Tamil -populated regions and political unity with Tamil states in southern India.

Government officials say economic development has been set back three to five years as a result of violence directed against the Tamils. Although they make up only 18 percent of Sri Lanka's 15 million population, the Tamils have long been the nation's most successful traders and businessmen. In Colombo, for example, they only make up 10 percent of the population but own more than one-third of the businesses. Most of the stores and businesses in the main business district were destroyed during the July riots.

American diplomats estimate that there are now 150,1)00 displaced persons as a result of the violence. According to government and press reports, some 50,000 Tamils are living in refugee camps established by the government.

The government, however, appears to have emerged stronger than before. President Jayewardene used the rioting as a pretext to extend the political control of his United National Party, accusing an unnamed foreign power of instigating the riots, banning three opposition parties, and arresting 31 mostly left political leaders. Any political party that advocates Tamil separatism has been outlawed.

Reports conflict as to how seriously the rioting has affected international investments. Steve Halliwell, publisher of the political risk services division of Frost & Sullivan, said "the impact on foreign investment and business operations will be minimal." He added: "This does not represent a long-term trend towards cultural warfare."

However, international investments dependent on local, Tamil-owned businesses may have suffered. According to American diplomatic sources, 17 major factories wholly or partly owned by 'Tamils were completely destroyed, including three that produce textiles for export, and two that employed several thousand people each.

Ross Rodgers, Sri Lanka desk officer at the State Department, told Multinational Monitor that as a result of the rioting, "all their economic planning will have to be rewritten." Rodgers said that as much as half of the textile industry-a major foreign exchange earner-was destroyed, and 80 percent of the retail shops in Colombo were gone. American pharmaceutical firms that depended on Tamil-owned supply companies have been affected. But most international investments were unscathed, because they were located in special `free trade zone' industrial parks or outside the major population centers. It has been suggested that these factories may even gain by taking over business from the unlucky Tamil owned factories that were destroyed.

Nevertheless, Rodgers has few kind words for companies thinking of entering Sri Lanka. "If I were a foreign investor," he said, "1 would stay away."

- Josh Martin

Rocky road continues for IMF bill

Following a pitched battle in Congress, the House of Representatives narrowly approved an increase of $8.4 billion in the U.S. contribution to the International Monetary Fund (IMF) on August 3. The vote was 217 to 211. In the next few weeks a House and Senate committee will meet to negotiate differences between their respective versions of the bill. New events, however, continue to threaten its final passage.

The bill emerged from the House laden with 18 amendments, the only ones to survive out of nearly 60 that were proposed. A slew of amendments were championed by members of Congress who call the IMF bill a bailout for large New York banks. One amendment directs the U.S. representative to the IMF to vote against requests for funds that would be used to pay back imprudent loans. The U.S. representative is also instructed to work toward converting high-interest, short-term loans to low-interest, long-term loans.

Another amendment limits the fees that commercial banks charge for renegotiating loans, and spreads the payment of these fees over the lifetime of the loan. Still other restrictions would force banks to reduce their rate of new lending in countries where bank lending is already excessive.

Only $5.7 billion of the total increase was actually granted by the House outright. To receive the remaining $2.6 billion, earmarked for a newly expanded emergency fund for severely cashsqueezed countries ed only $500 million to developing countries in the first quarter of 1983 versus an average of over $9 billion per quarter in 1982 and over $16 billion in 1981. Direct government financing would substitute for those commercial bank loans.

In the first step in that direction, the , Export-Import Bank announced on August 17 that it would guarantee up to $1.5 billion in commercial bank loans to Brazil and $500 million to Mexico-the largest single package ever proposed by the agency. According to a recent issue of Bank Letter, a trade publication for bankers, the Ex-Im Bank offer is the initial stage of a $10 billion rescue package masterminded by a cabinet level interagency policy group. Bank Letter reports that the Ex-Im Bank may not require that the loans be tied to the purchase of specific U.S. goods-a departure from normal Ex-Im Bank practice.

Such an arrangement opens the administration to further charges that it is bailing out the large New York banks. "Sure it's another bailout," says analyst Mark Hulbert, publisher of the Hulbert Financial Digest. "But it's not new. If it wants to, the administration has all sorts of ways it can transfer sums of money to countries without going through Congress." Hulbert doesn't believe the move will jeopardize the IMF legislation since, he says, the legislators showed themselves willing to sanction bank bailouts in the IMF debate itself. But others believe it may add fuel to the fire of opposition to the IMF bill.

The administration maintains that it has no intention of substituting for commercial bank lending to countries like Brazil. Instead, it says, it is trying to encourage commercial banks to continue lending. In Brazil, most medium and small banks as well as non-U.S. banks have pulled out, leaving behind only the nine largest banks, which cannot write off their outstanding loans without collapsing. The administration may also be trying to encourage European governments to follow its example in providing incentives for private bank lending. Foreign banks have not, in the eyes of U.S. bankers, borne their fair share of the international debt burden.

Finally, the administration also may be trying to derail any attempt by Brazil to declare a formal moratorium on its debt. But while a massive flood of funds may make it more difficult to declare default, one congressional staffer points out, Brazil may also feel less inclined to toe the austerity line being drawn by the IMF. Soaring unemployment and increasing cutbacks in social programs have sparked massive protests in Brazil in recent weeks and Brazil has put off the latest requests from the IMF for even more austerity. New funds "take some of the pressure off," one source told Bank Letter.