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Bloomberg: Sri Lankan Economy Threatened by Tamil Rebel Air Wing (Update2)

By Ed Johnson and Anusha Ondaatjie

May 11 (Bloomberg) — Sri Lanka’s fastest economic growth in 30 years is threatened by a Tamil rebel air wing that attacked oil and gas plants near the capital, Colombo, and forced the international airport to close at night.

The Liberation Tigers of Tamil Eelam, flying light aircraft 200 kilometers (120 miles) from the north of the island, evaded air defenses and bombed Royal Dutch Shell Plc and Indian Oil Corp. plants and an air force base in two raids since March.

“Sri Lanka’s risk profile has gone up and potential investors now need to factor that in,” said Rimoe Saldin, finance director at Shell Gas Lanka Ltd., the country’s largest retailer of liquefied petroleum gas. “This is a new dimension that has to be assessed.”

The two-decade-long conflict in the South Asian island has been waged in the north and east of the country, far from industries that drive the $26 billion economy. The air unit, which the military says consists of five propeller-driven aircraft, has brought Colombo within striking distance of the rebels and raised questions about defense capabilities.

“The fact that the LTTE were able to fly undetected and weren’t shot down is of huge concern,” said Ravi Abeysuriya, managing director of Amba Research Lanka Ltd., an investment research outsourcing company with offices in Colombo and also in Singapore, Costa Rica and India.

President Mahinda Rajapaksa, who increased spending on the Army, Navy and Air Force by 44 percent this year to a record 139 billion rupees ($1.3 billion), said in March the air unit threatens Sri Lanka and the region.

International Assistance

Rajapaksa said he sought the help of the international community in achieving peace when he met U.S. Assistant Secretary of State Richard Boucher in Colombo yesterday, according to the government’s Web site.

“We stand with the people of Sri Lanka against terrorism,” Boucher said at a news conference yesterday, according to the government’s Media Center for National Security. “The government has every right to stop the air raids by the LTTE. We are against them, they should stop.”

The Tamil Tigers are fighting for a separate homeland in a conflict that has killed more than 60,000 people. A 2002 cease- fire collapsed last year and two rounds of talks in Geneva failed to restart the peace process.

The rebels have an estimated 12,000 fighters, including a naval force, and revealed their new air wing in a March 26 attack on the Katunayake airbase about 30 miles from Colombo that killed three air force personnel.

Air Raid

The April 29 air attack targeted a gas plant jointly run by Shell and the government in Muthurajawela, damaging fire guard equipment, and an oil storage plant in nearby Kolonnawa, jointly owned by Indian Oil Corp. and the government. Two bombs there failed to explode. Indian Oil is India’s largest refiner.

Shell’s plant hasn’t operated to full capacity since the attack, Saldin said in a May 7 telephone interview.

“We are very conscious that the oil installations are targets,” said K. Ramakrishnan, manager director in Sri Lanka for Indian Oil. “A war situation could add to risk premium and increase our freight costs.”

Oil Exploration

The violence may temper Sri Lanka’s plans in August to call for bids from overseas energy companies for the rights to three offshore oil exploration blocks west of the island.

Sri Lanka, which imports all its oil, needs to secure its own supplies as costlier imports and military purchases have accelerated consumer prices. Surging crude oil prices raised Sri Lanka’s oil import bill by 25 percent last year to $2.07 billion.

Import costs have been boosted by a depreciating currency. The Sri Lankan rupee, the worst-performing currency among 71 tracked by Bloomberg, is down 3.1 percent so far this year.

Sri Lanka attracted 35,031 visitors in March, a 36 percent drop from 54,746 arrivals a year earlier, the Sri Lanka Tourist Board said. It was the steepest fall since a 37 percent decline in December 2001.

Cathay Pacific Airways Ltd., Hong Kong’s largest airline, suspended flights to Colombo on April 29 and the international airport is now closed from 10:30 p.m. to 4:30 a.m. for the next three months, a measure that Abeysuriya said “sends a message to the world that Sri Lanka is a heightened war zone.”

The Central Bank remains confident that investment in roads, ports and other infrastructure will limit the impact of escalating fighting and maintains a 7.5 percent forecast for growth this year and expects 8 percent growth next year. The economy grew 7.4 percent last year, buoyed by a 10 percent expansion in Western province, the home of the textile and clothing industries, the biggest export earners.

“Sri Lanka has so many economic opportunities that are not related to the conflict,” Central Bank Governor Ajith Nivard Cabraal said in an April 30 interview. “We see many investors, particularly the people who have infrastructure projects in hand, as well as those who already have business in Sri Lanka, continuing with their investment plans.”

To contact the reporters on this story: Ed Johnson in Sydney at [email protected] ; Anusha Ondaatjie in Colombo, Sri Lanka at [email protected] .

Last Updated: May 10, 2007 23:55 EDT

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