Sri Lanka lies at the center of one of the busiest shipping lanes in the world and is a central trading point for Asia. Since 2007, following the end of its 26-year civil war that led to the deaths of seventy thousand people, the government has taken a number of steps to attract foreign investment. The goal has been to transform its economy from rural and agricultural to centering around urban and manufacturing functions.
Despite steady growth in the post-civil war years, which reached as high as 12 percent in 2012, Sri Lanka has faced continued political turmoil, tightened monetary policies, and high levels of debt. This led to only 3 percent growth in 2018 – the lowest in 17 years. Coupled with the Easter Day bombings of April 2019, investors remain on the sidelines and will continue to, until there is clearly defined political and economic stability.
China’s foreign and economic policies, specifically those under the Belt and Road Initiative (BRI), have put Sri Lanka directly into the sight of Chinese goals. BRI, which was proposed by China’s President Xi Jinping in 2013, includes a $5 trillion budget for infrastructure projects that spans 60 plus countries across Asia, the Middle East, Europe, and Africa to support increased trade and economic ties to further China’s global ambitions. Sri Lanka’s position with China puts them into what many scholars have called, China’s “String of Pearls”, a chain of ports and areas spanning from the Middle East to Indonesia that is funded or influenced by China.
China has invested heavily in Sri Lanka, lending the country over $8 billion for a number of infrastructure projects, including the building of a new port in the city of Hambantota. This led to outrage amongst the Sri Lankan public, ousting President and strongman Mahainda Rajapaska, who served as President
of Sri Lanka from 2005 through 2015 and heavily courted the Chinese to invest in the country. of a new port in the city of Hambantota. However, like many other countries that have sought loans from China as part of the BRI initiative, it has left Sri Lanka heavily in debt and unable to repay these loans. As a result, the Sri Lankan government agreed to turn over the port of Hambantota to the Chinese for 99 years in exchange for the cancelation of these loans.
Facing slowed growth and an unstable political situation, already wary investors were once again shaken with the string of Islamic suicide bombings occurring on Sri Lankan turf in late April 2019, which killed over 250 people - many of them tourists. Sri Lanka’s economy, which depends heavily on tourism and accounts for 5 percent of the country’s GDP, is expecting a 30 percent drop in tourist volume as a result of these events. Sri Lanka could see losses of over $1.5 billion in tourism-related business, according to Finance Minister Mangala Samaraweera. Though, in a bid to help revive Sri Lanka’s economy, the central bank agreed to cut its lending rates and reduced the value-added tax on hotels and tour operators from 15 to 5 percent to contain the fallout from the bombings.
Despite political and security uncertainties, The Japanese and Indian governments have recently announced a joint venture to develop the Colombo Port in Sri Lanka's capital. This is widely regarded as an effort to counter Chinese influence in Sri Lanka and the wider region. Unlike agreements with the Chinese government, this development project will leave 100 percent ownership of the East Container Terminal in Colombo in the hands of Sri Lanka Ports Authority. Sri Lanka will hold 51 percent of the Terminal Operations Company, while India and Japan will hold the remaining 49 percent. Though both the Indians and Japanese have stated that this new project should not be seen as a push back to China’s belt and road, this follows a recent trend of similar joint projects and increased defense cooperation between the two countries.
Following the Easter Day bombings, along with confidence in business and politics at an all time low, expect foreign investors to remain cautious until the situation stabilizes. Although this is the case, the Sri Lankan government remains bullish on attracting foreign investors, aiming for $3 billion in FDI for 2019. According to Central Bank Governor, Dr. Indrajit Coomaraswamy, despite the Easter Sunday attacks, “they have not thrown macro-fundamentals off track,” and though tourism will undoubtedly take a hit, he noted that manufacturing exports and agriculture have not been affected.
Sri Lanka will continue to be a place to watch in the larger geopolitical struggle, as countries such as India, Japan and the U.S. look to push back against increasing Chinese influence in the Indo-Pacific region. Expect this power struggle to open more opportunities for non-Chinese investment, particularly as the public continues to remain wary about Chinese indebtedness.