Originally Published 2010-07-12 00:00:00 Published on Jul 12, 2010
South Asia comprises of eight countries-Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Except for India and to an extent, Pakistan given our obsession with it, we know very little about other countries of South Asia.
Post-War Sri Lanka: A Resurgent Nation
South Asia comprises of eight countries – Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Except for India and to an extent, Pakistan given our obsession with it, we know very little about other countries of South Asia. In dealing with some of the general topics of common interest like Terrorism, drug trade, human trafficking, AIDS and human rights violations which will continue to engage our attention, we often fails to notice and explore the immense potential and opportunities each one of these countries has. This is also the reason for the failure of the South Asia Association for Regional Cooperation (SAARC). In this paper, I choose to focus on Sri Lanka – a country whose identity and existence became dependent on the presence of the LTTE for almost 26 years. Of late, it has become essential to take notice of a country like Sri Lanka whose post-war energy and enthusiasm is worthy of awe and appreciation.

Sri Lanka – an Introduction

Sri Lanka is a country of about 20 million people with about 90% of literacy rate. There are four major religions practiced in Sri Lanka – Buddhism, Hinduism, Islam and Christianity. Majority population is of the Buddhists Sinhalas (70 percent) followed by the Tamils (12%), Muslims (8%) and Christians (8%). Discriminatory practices against the largest Tamil minority by the Sinhala majority have plunged the country into a vortex of violence and bloodbath which lasted for more then 25 years and resulted in the loss of about 100,000 innocent lives of the citizens of Sri Lanka. In May 2009, the ethnic civil war came to an end with the death of a formidable leader of the rebel group LTTE Vellupillai Prabhakaran. His death brought Sri Lanka into the realm of opportunities which, if properly utilise, could revive its economic fortunes in and around South Asia.

To begin with, a democratic Sri Lanka is one of the first countries to liberalise its statist and import-substitution policies in favour of market and export-oriented policies in 1977 under the premiership of the late President Julius Jayawardhene. Despite such a promising start, the country and its economy suffered badly due to the ethnic conflict from 1983 to 2009. Notwithstanding the negative effects of war, the country’s Gross Domestic Product (GDP) continues to grow at five percent annually during the last 10 years before plummeting down to 3.3 percent in 2009 due specifically to global financial downturn. Tea, Cotton textiles and apparels, rubber and tourism form the backbone of Sri Lanka’s export economy. In 2009, postwar exports of Sri Lanka were to the tune of US $ 8.1 billion. Imports far exceed Sri Lanka’s exports at US $ 14 billion during the same year. US, UK and India form the major markets for Sri Lanka and India, Singapore, Hong Kong, China and others which includes UK and US as well, are its major suppliers.

Political Impact over the Economy

With Mahinda Rajapaksa, a second time President of Sri Lanka and the chairman of the ruling United People’s Freedom Alliance (UPFA), the Sri Lankan economy is once again tilting towards a more statist approach. It seeks to divert the funds and development assistance towards the disadvantaged sections and areas of the country. This is actually a positive step in restoring the confidence and faith of the thousands of displaced and impoverished people in the political system of the country.

For the purpose of cutting off of the government expenditure, the President Rajapaksa has sworn in a smaller cabinet with selected key portfolios. In a cabinet of 37 ministers from 51 in its previous version, President Mahinda Rajapaksa has retained a number of key portfolios to himself which include finance, defence, ports, aviation and highways. Mercifully, this time round he desisted from repeating his earlier experiment of reducing a security cover for the government ministers and important officials in order to save public money. The experiment caused the untimely deaths of some of the important ministers holding key portfolios in the Rajapaksa administration in 2009.

With Finance and Defence portfolios vested in a single authority of the President, they are expected to function smoothly without any coalition pressures. Besides, political stability that comes after the twin polls (parliamentary and presidential) in Sri Lanka is likely to result in unanimous policies and decision-making in all the important sectors affecting the country.

Post-war Budget Dilemma

The purpose behind introducing severe measures to cut down on the government expenditure is to attract more foreign aid and assistance to rebuild the war-torn nation. As the Ministry of Finance said in its 2010 budget circular to various government ministries and departments, “improving living conditions and restoration of economic activities through accelerated resettlement, rehabilitation and reconstruction programmes” will remain the priority areas of the 2010 budget.

However, the government declaration of priority spending to rebuild the war-ravaged areas of the North and East of Sri Lanka has not gone down too well with its foreign lenders, especially the IMF. In March 2009, International Monetary Fund has signed the agreement with Sri Lanka under which the Fund has agreed to give a grant of US $ 2.6 billion in three instalments depending upon Sri Lanka’s ability to meet certain pre-conditions. The grant was given to tide over Sri Lanka’s Balance of Payment crisis after its foreign exchange reserves fell to an eight-year low in the midst of the ethnic war, much to the displeasure of the traditional western donor nations. The Government’s resolve to increase its spending in the North and East would mean that Sri Lanka will not be able to lower down its budget deficit in the year 2010 to six percent from seven percent in 2009 as agreed under the agreement signed with the International Monetary Fund (IMF)1. Nonetheless, Sri Lanka’s Central Bank Governor Mr Cabraal is hopeful that the IMF agreement might exclude development spending in the North from its budget deficit calculations.

The first post-war budget of Sri Lanka is expected to be released in July 2010. For the purpose of meeting financial requirements of the various ministries and departments, the government has voted for an interim budget for the first four months of 2010. Delay in budget could postpone the third tranche of the US $2.6 billion IMF loan.

Mounting Defence Expenditure – with a Purpose

Even after defeating Tamil rebels in mid-2009, Sri Lanka’s defence expenditure continued to remain at all time high this year too. In 2010, Sri Lanka’s parliament has approved an additional sum of Sri Lankan Rupees 33 billion (US $287 million dollars) to pay for hardware and beef up security in former conflict zones. It is widely believed that Government’s intention is to add 100,000 more defence personnel to the already bloating Sri Lankan armed forces. Such a massive recruitment drive will definitely put an additional burden on the public exchequer but this move is necessary to ward off the possibility of any future regrouping of the LTTE like separatist forces.

According to the list based on the Stockholm International Peace Research Institute, Sri Lanka ranks 66 among 153 countries in its defence spending which is third highest in South Asia. Barring India and Pakistan, Sri Lanka’s defence expenditure is comparatively higher then most of the countries double its size like Bangladesh, Nepal and Afghanistan. Sri Lanka has continuously been increasing its defence expenditure in the last 2-3 years. In 2009 at the height of the conflict, Sri Lanka has allocated a record 1.6 billion dollars for defence which is a billion dollar more from its earlier defence allocation of about US $ 1.5 billion in 2008.

Undoubtedly, it makes Sri Lanka one of the most militarized country of South Asia. The advantage which accrues from such a high level of defence spending is the security of Foreign Direct Investment projects (FDI) in the country. Stricter security measures have not only helped in ensuring protection to the developmental works going on in the North and East but also restore the investor’s belief and confidence in the country’s internal security management.

Rising Foreign Direct Investments

Sri Lanka is the third smallest country in South Asia followed by Bhutan and Maldives. It is slightly larger then West Virginia and smaller then Ireland2. Being small in size with a tiny population does not make a country unattractive to foreign investors and Sri Lanka is not an exception.

Figure. Foreign Direct Investment in Sri Lanka since 2004
Figures in million dollars (US $)

Source: World Bank, World Development Indicators

Figure 1, shows that foreign direct investment in Sri Lanka considerably rises from the year 2004 onwards even during the period of intense fighting in 2008-09. Although there are many critics who don’t agree with these statistics, the actual numbers coming from such prestigious institutions like World Bank signifying the rising levels of FDI in Sri Lanka speaks otherwise. Nevertheless, the graph shows FDI levels sliding during the year 2009 but it has more to do with the global financial downturn instead of an ethnic civil war. The FDI situation improved during the first quarter of the year 2010 as US $250 million has already come to the country for investment purposes, according to the figure released by the Board of Investment in Sri Lanka. The government now expects FDI inflows to quadruple to US $4 billion by 2012 as the end of the civil war has opened up immense possibilities in Sri Lanka.

Sri Lanka’s strategic location astride the major trading routes in the Indian Ocean, its nearness to the large Indian market, enhanced security ensuring the protection of the investor’s property, high standards of its working force, open economy, high literacy levels3 and the various free trade agreements it signed with different countries are some of the reasons which makes the island nation attractive to the foreign investors. Besides, Sri Lanka moved up to 29th position in 2008 from 47th position in 2007 in terms of ease with which to start a business in the country, according to the World Bank. Also, the country places absolutely no restrictions on repatriation of earnings and allows 100 percent ownership to foreign investors in all businesses, said Dhammika Perera, Chairman Board of Investment (BOI) in Sri Lanka.

The telecommunication sector followed by the power sector is the highest contributor in terms of FDI value securing almost 68 percent in 2008. Infrastructure and manufacturing sector have been contributing 13 percent and eight percent respectively to the Sri Lanka economy in terms of FDI4. The leisure sector is expected to attract more foreign investment in the years to come as Sri Lanka has been rated as one of the ‘must visit’ travel destinations in 2010 by various international news agencies like New York Times and National Geographic.

At present, the sectoral distribution of FDI in Sri Lanka’s economy is agriculture (16.5%), industry (26.9%) and services (56.5%). Globally, the ideal range of sectoral FDI distribution is agriculture (6.0%), industry (30.6%) and services (63.4%)5. It is thus, clear that the gap between the global sectoral distribution of the FDI and in Sri Lanka is only marginal. To bridge the margin, the current dispensation is shifting emphasis more towards inviting foreign exchange in the service sector like telecom, power and tourism. However, agriculture and fishing being the main sources of livelihood in the devastated North and East should not be overlooked by the policy makers. Similarly, textiles and apparels which has always been one of the top foreign exchange grosser should be paid more attention in terms of attracting more FDI, especially after the proposed withdrawal of the Generalised System of Trade Preferences (GSP) by the European Union in the wake of the deteriorating human rights situation in the post-war Sri Lanka. Malaysia emerges as the biggest foreign investor in Sri Lanka with the total investment of US $150 million. India ranked second with US $126 million with the advent of the Bharti Airtel Ltd. in Sri Lanka’s telecommunication sector. Contrary to the popular belief pertaining to China as being the No.1 investor in Sri Lanka, its total investment in the island nation is to the tune of US $27 million securing for it a ninth place in the list of Foreign Direct Investors in Sri Lanka.

Colombo Stock Exchange

When on 18th May 2009 Sri Lankan armed forces annihilated the LTTE, the mood was upbeat in Colombo Stock Exchange (CSE). It was evident when the Colombo Stock Exchange climbed 16 points in 2009. It has gone up to 47 points in the first quarter of this year.

A milestone was achieved on 2nd May 2010 when the prestigious CSE opened its branch in Jaffna peninsula. Better known as the cultural capital of Sri Lankan Tamils, Jaffna for the most part of the ethnic conflict, remained cut off from the rest of the island nation. The bourse is open with the objective to share peace dividends with the business community of the North, CSE Chairman Nihar Fonseka said. It is not only that they have opened up the branch in the Northern Jaffna but provisions are also made to impart financial education to equip potential investors to participate actively and prudently in stock trading.

In 2009, Colombo Stock Exchange was named as the Asia’s best performing bourse and the second-best performing stock market in the world after Russia. The prevalence of a positive atmosphere throughout the country has prompted Central Bank of Sri Lanka to revise and upgrade its earlier pessimist growth targets. The revised growth estimates for the year 2010 now falls between 5-6 percent for a US $42 billion Sri Lankan economy6.

Why Invest in Sri Lanka?

The end of a 26-year old civil war in Sri Lanka has placed the country on the radar of many global companies. Sri Lanka with its strategic location and warm and friendly people has the potential to be a ‘Singapore of South Asia’. Barring India whose domestic sensitivities towards Sri Lankan Tamils have clouded their relationship at the height of the ethnic conflict, Sri Lanka has no issues with any other country of South Asia. Post-war too, the art of winning like-minded friends and supporters remain one of the highlights of Sri Lanka’s pragmatic foreign policy.

In a post-war phase, Sri Lanka’s relations with its traditional western donors have not considerably improved which will hit their apparel industries hard, although its strategic importance has been recognised by the United States. A recently released United States Foreign Relations Committee Report on Sri Lanka labelled ‘Sri Lanka as the strategic ally which the US cannot afford to loose’. The report, famously known as the Kerry-Lugar Report, advised the Obama administration “to take a broader and more robust approach to Sri Lanka that appreciates new political and economic realities in Sri Lanka and U.S. geo-strategic interests.”

Sri Lanka has also been able to develop friendly ties and close relations with ideologically diverse set of countries like India, Pakistan and China. Pakistan is one of the two countries, the other being India, with which Sri Lanka has signed a Free Trade Agreement (FTA). Both the sides have agreed to raise the bilateral trade figures to US $1 billion by 2010-11. Although with India, Sri Lanka’s trade has reached US $2 billion, the balance of trade is heavily tilted towards the latter. With a stable government firmly in place in Sri Lanka, India is trying to revive Comprehensive Economic Partnership Agreement (CEPA) for further enriching its economic ties with Sri Lanka. Bollywood too, has shown its interest in the picturesque island when it recently organized International Indian Film Academy Awards (IIFA) in Sri Lanka, despite protests and boycott by the Tamil film industry in Tamil Nadu. As many as 10 Indian industries have expressed interests in setting up their factories in the North in food processing, plastics and glass recycling, garments and ready-mix concrete. It is also being said that Sri Lanka could profit from its proximity to India just as Hong Kong is profiting from being a trade hub to China.

Post-war, Sri Lanka has gifted development projects worth US $ 6.9 billion to China. It includes among others, a Special Economic Zone, a 1000-acre Tapioca farm, Hambantota port, 900-MW coal-fired Norochcholai power plant, Colombo-Katunayake expressway, Pallai-Kankasanthurai railway line and Jaffna housing complex for army. China was the fourth largest trading partner for Sri Lanka with a surging imports (US $1.4 billion) but stagnant exports (US $46.08 million) in 2009.

Another feather has been added to the tear-drop island when Sri Lanka graduated to a middle income emerging market status by the IMF in January 2010. Sri Lanka’s elevation from a low income status depends upon various factors. One of them is the country’s continuous strong economic performance for the last five years signalling resilience to shocks including the expiration of the Multi-fibre Agreement. Secondly, exports have been showing signs of recovery with Gross Domestic Product (GDP) growth returning to the pre-crisis levels. Thirdly, the country’s public debt is declining gradually. Finally, Sri Lanka’s ability to access international markets and oversubscription of it’s recently – issued five-year sovereign bonds have further made it eligible for the status upgradation.

The World Bank report released in May 2010 said that despite a weak global economy, Sri Lankan economy grew by 3.3 percent in the latter half of 2009 which was fastest rate recorded since 2002 showing signs of stability. Although inflation moved up gradually from 0.7 percent in September 2009 to 6.3 percent in March 2010, it is likely to remain low throughout the year 2010. It is in part attributed to the increase in the agricultural production in the North after the defeat of the LTTE in these areas. Besides, an increased foreign exchange reserves pegged at US $5 billion and 32 percent growth in hotel industry after the end of the conflict along with a rise in the employment opportunities and large-scale reconstruction projects in the North, are expected to sustain and accelerate economic growth in Sri Lanka throughout 2010, the World Bank report said.

Futuristic Scenario

According to the report released by the World Bank, the short term prospects for the Sri Lankan economy are positive. The civil war is over and nation-(re)building processes are on the anvil which will take some time to materialise. It is not fair to put pressure on the country which has just liberated itself from the tentacles of terrorism/ separatism to meet the targets which are considered impossible even by the international standards. Sri Lanka is the country which has resettled millions of Internally Displaced Persons (barring some thousands who are still in camps) in a record time of eight months. Also, it cannot be denied that despite a weak global economy and strain on domestic resources due to a prolonged civil war, the country has managed to achieve high standards in economic management. It has made a remarkable progress in almost every field ranging from agriculture to service-oriented telecommunication and tourism.

In South Asia, transitions are not always positive and peaceful as can be seen in the countries of Pakistan, Afghanistan, Bangladesh and now, Nepal. Sri Lanka has proved itself an exception. It has not only successfully annihilated the forces of terror which is proving an uphill task even for the world superpower, but has also manage to portray a picture of a united nation with strong leadership, flourishing economy and hope for a bright future.

Endnotes and Additional Thinking

1 Under the IMF Agreement, Sri Lanka is required to cut
down its budget deficit to five percent by 2011.
2 Area of Sri Lanka is 65,610 sq km. and Area of Ireland is
70,273 sq km.
3 Sri Lanka’s literacy rate is about 90 percent which is one of
the highest in South Asia
4 ’Government targets US $1 bn FDI’, Irangika Range, Daily
Mirror, 28th January 2009
5 ’Foreign Direct Investment and Sri Lanka’ S. Sivathasan,
The Island, 1st March 2010
6 ’Sri Lanka sees foreign investment quadrupling as the civil
war ends’, Cherian Thomas, www.bloomeberg.com, 1st June
2009, accessed on 15th May 2010

(The views expressed in the write-up are personal and do not reflect the official policy or position of the organization.)

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