Sri Lanka will lose millions of dollars unless it makes peace with Tamil separatists, diplomats and officials have said as a review of aid entered its second day.

 

But the government seemed determined to resist pressure from international donors and lenders to link aid to progress in the island's peace negotiations with Tamil Tiger separatists.

The EU, a backer of the Norwegian-led peace efforts, made its displeasure known by sending low-level representatives to the Sri Lanka Development Forum, diplomats said on Tuesday.

 

The EU has also criticised the government's human rights record in the face of escalating fighting with Tamil rebels.

Late last year, Germany announced a halt in any new aid to Sri Lanka and asked others to follow suit.

 

A delegate from a lending agency said: "[The heads of diplomatic missions] are giving the government the cold shoulder. They are not happy."

 

 

The United States, breaking ranks with its European partners, sent an ambassador, Robert Blake, but he issued a warning to Sri Lanka against pursuing a military solution to the drawn-out Tamil separatist conflict.

 

"We remain unwavering in our conviction that there can be no military solution to this terrible conflict," Blake said.

 

Blake urged Sri Lanka to "seize the opportunity to forge a power-sharing deal that can form the basis for talks" with the separatist Liberation Tigers of Tamil Eelam (LTTE).

 

But Sri Lanka's military has vowed to step up attacks against the rebels.

 

Diplomats and lenders attending the closed-door conference feared that the government might not take their warnings seriously.

 

A delegate said: "Some of the biggest lenders to Sri Lanka came out strong for a power-sharing deal.

 

Harsha de Silva, an economist at LIRNEasia, a regional economic think-tank, said: "The tone suggests that [the government] imply that donors should support the war."

 

Separate aid from conflict

 

Nimal Siripala de Silva, Sri Lanka's chief peace negotiator, dismissed donor concerns, saying the government could not resume talks unless the Tigers agreed to negotiate.

 

"The international community must catch the Tigers by their collars and bring them for talks. We are for peace, but we can't keep quiet when the LTTE continues to attack us," de Silva said.

 

Sri Lanka believes that donors should separate aid from the conflict and allow the administration to press ahead with its own economic agenda.

 

Nivard Cabraal, Sri Lanka's central bank governor, said: "We are not ready to accept any conditions linking aid with peace.

 

"This is not a pledging conference, but an opportunity for donors to share their views on our 10-year development strategy."

 

Sri Lanka plans to convert $1.5bn in aid pledges received for this year's development work into firm commitments during the meeting.

 

 

Analysts said Sri Lanka might borrow commercially and raise aid from countries that would not link funding to human rights and any peace process.

 

Last year, Sri Lanka borrowed $680m comercially.

 

Cabraal said the government planned to raise $200m by selling government bonds to foreign investors this year, further reducing the dependency on aid.

 

The government raised this year's defence budget by 45 per cent to $1.29bn and analysts say most commercial borrowings may go to pay for military costs.

 

The World Bank's vice-president for South Asia, Praful Patel, urged Sri Lanka to end the conflict that has claimed more than 60,000 lives since 1972 and salvage the economy, warning that there were tough times ahead.