War-torn Sri Lanka sees hope for recovery in economic aid. Though peace pact is still shaky, Colombo seeks help to rebuild devastated economy

A drop in the level of ethnic violence has provided an opening for economic revival in Sri Lanka. On Dec. 4, officials of Sri Lanka and 14 other countries as well as lending agencies met in Paris to discuss a $400 million aid package to rebuild houses, roads, and communications.

The government here hopes it will set this island nation on the road to recovery from the four-year civil war that has left more than 7,000 dead and the economy in shambles.

``Our country must rise, phoenix-like, from the ashes,'' Finance Minister Ronnie De Mel told the Sri Lankan Parliament recently. ``Economic recovery and economic revival is the only way to hold the peace and to consolidate the peace.''

But observers say the turnaround that began when Sri Lanka and India signed a peace accord on July 29 is still shaky. In October, the Indian Army, which was brought in to enforce the peace plan, battled Tamil separatists in their Jaffna stronghold. The guerrilla fighting continues today. Last month, Sinhalese extremists opposing the accord unleashed a wave of bombings in the south, including the capital, Colombo.

The Tamil minority has long claimed discrimination by the Sinhalese who account for about 80 percent of Sri Lanka's 16 million people. Since 1983, when anti-Tamil rioting swept the country, Tamil militants have been fighting the government for their own homeland in the north and east.

The resurging violence threatened to postpone the Paris meeting, which observers said would have been a serious setback for President Junius Jayewardene's government. Fresh outbreaks could still choke off desperately needed new aid from the United States, Canada, and other major donors.

Annual foreign aid of $600 million now provides about one-third of government revenues. Finance Minister De Mel says Sri Lanka needs $3 billion in new foreign assistance over the next three years to rebuild the country and create new jobs.

``The extremists know they have the government by the economic jugular,'' an Asian diplomat in Colombo says.

The ethnic conflict has been a severe blow to the Western-leaning economic plans of Mr. Jayewardene. After coming to power in 1977, the President opened the country's socialist economy to new foreign trade and investment.

Huge development projects were launched. New factories were set up using the country's low-cost labor. Plush hotels rose in Colombo. Sri Lanka seemed poised to become another Asian miracle economy patterned after Hong Kong and Singapore.

Although largely confined to the north and east, the ethnic strife has taken a toll throughout the country. Spending has tripled to convert Sri Lanka's ceremonial Army into a fighting force. This has sent the budget into deep deficit.

Since violence began in 1983, tourism, a key foreign exchange earner, has collapsed and tourist arrivals dropped by half. Economic growth shriveled from 7 percent to 4 percent, and unemployment jumped to more than 25 percent in some areas.

Thousands of farms and fishing boats, mainstays of the Sri Lankan economy, were destroyed, and refugee camps were filled with unemployed. Tens of thousands of people fled overseas, including many young educated Tamils, whose loss will harm the economy for years to come, observers predict.

``If I did not stop this conflict, we would have been bankrupt,'' Jayewardene says.

The economy already is starting to pull out of its tailspin, officials insist. Businessmen are dusting off long-delayed expansion plans, and foreign investors' interest is reviving.

In two Colombo free-trade zones, foreign investment this year has tripled to $18 million. And new projects totaling $100 million are on the drawing board. Still, the government has invested $4 million in new security at the industrial parks, and businessmen say the threat of terrorism makes them think twice about relocating.

With the Indian Army bearing the brunt of Sri Lanka's war against Tamil extremists, the government hopes slowly to reduce its $1 billion annual budget deficit and curb rapidly rising double-digit inflation.

India also has pledged $40 million in aid, half of which must be spent on Indian capital goods and services. Talks are under way between the two countries to jointly operate a controversial oil depot in the port city of Trincomalee and to cooperate on oil exploration.

Sri Lankan critics of the peace accord worry their country could become a political and economic satellite of its giant neighbor. ``They already have taken over the north and east of our country,'' a Sinhalese businessman says. ``Now they want to dominate our economy.''