12 January 2015

What next for Sri Lanka?


Former Sri Lankan President Mahinda Rajapaksa may have suffered a surprise defeat last week at the hands of his former ally Maithripala Sirisena, but there is no doubt that the economy flourished under his control. Despite being beset by constant national, environmental, political and social disasters over the past half century, Sri Lanka has proved to be remarkably resilient. With a GDP expansion of 7.8% in 2014, and predictions of 8% for the foreseeable future, it’s clear that Sri Lanka has entered the early stages of catching up with its more developed Asian neighbours.

Since British withdrawal from Sri Lanka in 1948, they have been subjected to inconsistent government veering from socialism to the beginnings of a more free market economy post-1977. Deregulation, privatisation, and more openness to international competition have since then all been key to laying the foundations of the current boom. However, there was still little government stability – or focus on a national economic policy – until Rajapaksa’s government defeated the Tamil Tigers in 2009 after 26 years of insurgency. Rajapaksa immediately attempted to capitalise on this stability by removing presidential term limits, reasoning that political stability would lead to greater investment and confidence. Ironically, this may actually have weakened his position, following arguments that he had monopolised power and was becoming increasingly authoritarian and corrupt. The question remains however: will Rajapaksa be proved right now that the political situation has taken an unexpected twist?

Modern Sri Lanka

Since the country faced bankruptcy in 2001 when its debt equalled 101% of its GDP, Sri Lanka has transformed its economy to a remarkable degree. Its key economic indicators are among the best in South Asia. Not only does it have a comparatively high GDP growth rate, but per capita income has doubled in the last five years to US$3654 in 2014. This trajectory is set to continue – GDP per capita is projected to reach US$7500 by 2020, which would distinguish it as an upper middle income economy according to the World Bank. Inflation is also under control at 3.3% last year, whereas unemployment is at a relative low at around 4%. Furthermore, the headcount poverty ratio has declined by more than half from 2006/7 to 6.7%. Undoubtedly, therefore, Sri Lanka is not only doing extremely well now, but is theoretically likely to continue to do so for the foreseeable future.

Tourism, which unsurprisingly suffered a huge blow in 2004 after the Indian Ocean earthquake, has tripled since 2009 – Sri Lanka earned $2.3 billion from tourism in 2014, a 35% rise from the previous year. This looks set to rise, with Forbes declaring it one of the Top Ten Coolest Places to visit in 2015. In order to sustain tourism as a viable economic source, however, the new government must develop its tourism policy. Unless a dedicated tourist minister is appointed to create a sustainable national tourist policy, Sri Lanka risks being overrun, unable to cope with demand and in danger of destroying the attractions that tempt tourists in the first place. As an example, there was a 20% increase in arrivals in 2014, to 1.527 million, risking saturation of tourist areas. The new government must capitalise on the tourism industry by means of better research and on focus sustainable development.

Sri Lanka is highly dependent on external financing, expecting to attract $2.4 billion in FDI in 2014. This is, however, somewhat of a double-edged sword. Whilst China has provided billions of dollars in investment for major infrastructure projects, improving transport links and creating ports, opponents of Rajapaksa criticised him for being too dependent on expensive short-term Chinese debt. However, as the governor of the Central Bank of Sri Lanka Ajith Nivard Cabraal has said: “We have built new infrastructure. We have built new capacity.” Investing in infrastructure will help exponential growth in the future. Similarly, Sri Lanka is highly dependent on India for oil, with whom Sirisena’s government will want to rebuild links after Rajapaksa offended the Indian government by stalling investigations into human rights abuses during the civil war. Perhaps we shall see a revival of the Comprehensive Economic Partnership Agreement between the two nations.

What next?

The newly instated government had not yet laid out a comprehensive economic plan – presumably not wishing to draw attention to how well the economy was doing under Rajapaksa. Despite pledging to reduce the cost of living and offering an Rs 10,000 (US$76) salary increase for public servants, Serisena and his supporters were too concerned with straightening out their own ideological differences and getting elected to create a complete and competent economic plan. Since the budget deficit is expected to decline to 4.6% of GDP in 2015, perhaps they will continue with the previous government’s ambitious infrastructure development initiatives. A change in government will of course result in renewed focus on the state of the Sri Lankan economy, but thanks to a strengthened foundation in infrastructure and capacity, and an effective workforce which ranks highly on the Human Development Index, the new government is in a positive place from which to continue.

This government would do well to note a few things. Firstly, it will be important to promote a unified Sri Lanka and attempt reconciliation and harmony between the increasingly violent Buddhist monks and other ethnic factions. Internal social dissent in Sri Lanka could cause extreme instability in the country, stalling potential growth. Prosperity for the region largely depends on perceptions of political stability and confidence, which is why it is important for the new party to establish control smoothly. Finally, the new government must learn its lessons from the mistakes of other Asian nations. In deposing Rakapaksa, Sri Lanka has proved it will not tolerate the authoritarian and corrupt power that blossoms in China, but it is still in danger of the environmental dilapidation and poor factory conditions that are reproduced across Asia.

Assuming no more natural or social disasters, Sirisena’s job should be plain sailing. The budget on January 29 will serve to confirm the path the new incumbents intend to take from here on. But the wheels are already long in motion for Sri Lanka to continue increasing its path to prosperity.