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For firmer growth, Sri Lanka needs China's soft power

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Workers look as excavators move rubble at the construction site for a Chinese company in Colombo on Dec. 4.   © Reuters

HAMBANTOTA, Sri Lanka -- Billboards promise a futuristic paradise on the road that leads to this sleepy fishing town on Sri Lanka's southern coast. Smiling pictures of the country's president, Mahinda Rajapaksa, appear on most of them. Others include his siblings or sons -- members of the large Rajapaksa clan who hail from this region and effectively run post-conflict Sri Lanka.

     A short distance from Hambantota, about 190km from the capital Colombo, are early signs of the planned transformation of this flat terrain of shrubs and forests teeming with wildlife. An international airport has been carved out of a jungle inhabited by elephants. A gleaming cricket stadium now rises out of a dust bowl. The centerpiece of this Rajapaksa-led development model is a massive new harbor.


 The president, after whom both the airport and port are named, is receiving kudos from devout voters here. "The president is the lifeblood of this area. Look at Hambantota, it is even better than Colombo," remarked convenience store owner Sujith Sayakkara, 33. "Before, this place was nothing more than shrub jungle."

     He also has China to thank. The Magampura Mahinda Rajapaksa Port is the result of loans from the Asian giant. The first phase of the port, costing $320 million, taps Hambantota's strategic location in the Indian Ocean, just next to one of the world's busiest shipping lanes, traversed by 70,000 vessels annually.

     This Chinese footprint is visible from most parts of the South Asian island nation as it rebuilds after nearly 30 years of domestic conflict. Highways, railroads, ports, and coal and hydropower plants are in this mix. The latest is the new highway connecting Colombo to the country's oldest international airport. The Export-Import Bank of China lent the government $248.2 million to construct the 25.6km stretch, which opened in late October. It is part of nearly $4 billion  worth of government-approved infrastructure projects, most of them funded by Chinese loans.


China in 2013 became Sri Lanka's largest foreign direct investor, accounting for 24% of inflows. Colombo had by November attracted $1.2 billion of a targeted $2 billion, according to government figures.

     Rajapaksa's growing dependence on China is not limited to economic dealings. Colombo is desperately seeking international friends as it feels the heat from the U.S., Britain and India to address alleged human rights violations in the closing phase of the ethnic conflict, which tore apart relations between the majority Sinhalese and minority Tamil communities. According to a United Nations-sanctioned report and human rights groups, an estimated 40,000 civilians may have been killed as government troops crushed the Tamil Tiger separatists in the final onslaught that ended in May 2009.

     Sri Lanka's human rights record will come under scrutiny again in March, at the annual session of the U.N. Human Rights Council in Geneva. Washington sponsored a tough resolution against Sri Lanka at the council last March, the second consecutive year that the Rajapaksa regime was taken to task. Adding to the pressure were criticisms leveled by U.K. Prime Minister David Cameron when he last November visited Sri Lanka for the Commonwealth summit.

     China recently reminded the international community where it stands, issuing a statement from its embassy in Colombo commending Sri Lanka for "big strides in promoting human rights and realizing national reconciliation."

     China's growing role in shaping Sri Lanka's fortunes is rooted in Rajapaksa's rise, following his first election victory in 2005. China had by 2009 replaced Japan as the country's largest donor. Nearly 94% -- or $4.76 billion -- of the $5 billion-plus in Chinese loans and grants to Sri Lanka between 1971 and 2012 came after 2005. The shift was matched by military aid Beijing offered Colombo in its final assault against the Liberation Tigers of Tamil Eelam, when arms sales hit an estimated $1.8 billion, according to local sources.

     "China has been helping Sri Lanka quite a lot in areas of high security importance to us against the LTTE," said Nihal Rodrigo, Colombo's former envoy in Beijing. "But China has not become a means to seek a comfortable bloc away from the West."

     Even so, the tilt toward China is also the result of a Sri Lankan success story. Despite conflict, the country's economy grew steadily on the back of exports such as tea and garments, maintaining an average of about 5% annual growth. Such progress helped the country's transition into a middle-income economy, but also rendered it ineligible for loans from traditional lenders such as the World Bank.

     A "postwar bump" saw the Sri Lankan economy hit 8% annual growth in 2010 and 2011 before it dipped to below 7% in 2012. "The post-conflict rebound helped all sectors both on the supply side and the demand side," noted the World Bank. The country's Board of Investment has been trying to tap this favorable climate to attract new foreign capital. Some $1.3 billion in investment funds flowed in during 2012, a slight increase from $1.1 billion in 2011. Investments in tourism have been the main draw, helping the board cross the $1 billion mark for the first time since it was established in the late 1970s. The lead project is the seven star, 661-room Shangri-La Hotel -- a $500 million  investment rising rapidly near Colombo's most famous promenade.

Long way to go

"FDI (foreign direct investment) sources are diverse, with the main investors now from the Asian region such as India, China and Southeast Asian countries," Dilip Samarasinghe, Board of Investment spokesman, told the Nikkei Asian Review. "Investors who manufacture goods are attracted to the fact that Sri Lanka has FTAs (free trade agreements) with both India and Pakistan and see the island as an excellent base to access these markets."

     Yet, the FDI flows do not match the boastful expectations of the Rajapaksa regime, which was hoping to reap a post-conflict bounty by affirming business-friendly budgets since 2010. "The inflow of FDI has been dismal," said Nishan de Mel, executive director of Verite Research, an independent think tank. "Investors are not feeling confident about Sri Lanka, but are taking a more wait-and-see approach."

     The manufacturing sector similarly needs a shot in the arm, as growth figures mask a worrying dip in exports. "It is troubling that Sri Lanka's export performance has been on the decline," said Anushka Wijesinha, a research economist at the semigovernment Institute of Policy Studies of Sri Lanka. "The exports-to-GDP ratio had fallen from 33% of gross domestic product in 2000 to about 22% in 2010, and has stayed around that level until the most recent period."

     Meanwhile, a widening trade deficit -- nearly $10 billion annually -- has put pressure on Sri Lanka's $59 billion economy. So has the national debt, which hovers at nearly 60% of GDP. Fitch ratings, an international ratings agency, issued a warning in late October about Sri Lanka's "reliance on debt-creating capital."

     Most disturbing, a climate of growing impunity and decline of regulatory authorities serves as a warning to foreign investors contemplating a country run by the Rajapaksa clan. "If one looks at the main regulators, such as the central bank, they are all political instruments of the government," said J.C. Weliamuna, chairman of Transparency International Sri Lanka. "With the war victory, the priority has shifted to consolidation of power of the regime."

     But, in Hambantota, where Chinese loans with interest rates as high as 6.25% pour in, such concerns are inconsequential. Residents like Sayakkara, who belong to the island's majority Sinhalese community, have returned their native son, Rajapaksa, twice to power on the back of his nationalistic rhetoric. "With all these projects in place, Hambantota is the best place," he said.

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