Galle, January 29:

Sri Lanka must commit to peace and restore investor confidence if it is to develop its potential, a senior World Bank official said ahead of a crucial review today of international aid.

The bank’s vice-president for South Asia, Praful Patel, said it was ‘deeply concerned’ about a spike in violence that has killed nearly 4,000 people and created tens of thousands of new refugees in Sri Lanka during the past year.

International lenders and donors are meeting in this southern Sri Lankan coastal town for two days to examine the island’s economy and study if their cash had been well spent. Sri Lanka plans to convert $1.5 billion in aid pledges received for this year’s development work into firm commitments during the two-day meeting, scheduled to be opened by president Mahinda Rajapakse.

The recent surge in violence is undermining the bank’s development projects in the embattled northern and eastern parts of the island. “There is no choice for Sri Lanka but to pursue peace,” Patel said. “It’s a tough path, but the path to development and prosperity for Sri Lanka can only be built on a solid commitment to peace and a realisation of that commitment.” Sri Lanka’s media minister Anura Yapa said that the government was committed to a negotiated peaceful solution to the Tamil separatist conflict which has claimed over 60,000 lives since 1972.

However, the government has also said it wants to escalate attacks against the Tamil Tigers by building on recent military gains. Over the last ye-ar, 200,000 new internally displaced people have joined 300,000 people already forced to leave their homes, Patel said.

“That is half a million people, without homes, education, proper health.” Sri Lanka, he said, has shown economic resilience but needs to end violence to restore much-needed business confidence. “The tropical island’s $25 billion economy is not performing to full potential,” he said.

The South Asian nation forecasts a blistering eight per cent growth this year, the biggest in nearly three decades, despite the long-running conflict here.

The bank, which lends around $80-$100 million to Sri Lanka each year, has some medium-term projects in conflict areas. “We now have $750 million worth of projects. Around 25 per cent of this is earmarked for the north and east for housing reconstruction, irrigation and agriculture. Some of these projects are on hold because of intense fighting,” Patel said.

As part of the bank’s overall post-conflict development plan, Patel said it would consider a government suggestion to fast-track the construction of a north-south highway.

The proposal was made by Rajapakse, who is also the finance minister, when he met Patel last year. In the interim, Sri Lanka must work hard to resolve the ethnic conflict. “The conflict costs Sri Lanka two to three percentage points of growth each year, and that is a lot to lose,” Patel said.

Analysts say Sri Lanka’s prospects for peace in short-term are on the back burner as the military steps up attacks against the rebel LTTE. With the government raising the defence budget by 45 per cent to $1.29 billion this year, they say this may deter the warring sides from meeting for face-to-face talks any time soon.

Patel warned that the government must also take measures to stamp out inflation which hit 19.3 per cent in December. High inflation had undermined the real value of wages, and about 25 per cent of households in Sri Lanka, a nation of 19.5 million people, earn less than a dollar a day.