How Sri Lanka Dodged Turmoil in EMs Between Washington’s Human Rights and China’s Free Trade

While several emerging and frontier markets have suffered from turmoil amid the Federal Reserve’s tapering, Sri Lanka has not. Why? 

Today, many emerging markets continue to reel from the outflow of foreign capital. Sri Lanka is not among these countries – not because it listened to the International Monetary Fund (IMF), but because it did not.

In the past few years, the IMF had been pushing Sri Lanka to rely on cheap borrowing costs by expanding the amount of government debt that foreign investors could buy. It was wonderful advice, if one presumed that those costs would remain low. But it was a devil’s pact, if one did not.

In contrast to his peers, the Governor of the Central Bank of Sri Lanka Ajith Nivard Cabraal capped the share of foreign capital permitted in the island-state’s treasury markets at 12.5%. At the time, it was considered an odd move, possibly a dumb one. Cabreel was said to be behind the curve. Today, he is seen as Sri Lanka’s “maestro”.

The contrarian approach explains why Sri Lanka’s monetary policy avoided the worst turmoil of the emerging markets. However, the policy stance does not explain why the country’s growth is accelerating.

Economic promise
Last year, Sri Lanka recorded economic growth of 7.2%, while many other emerging economies were struggling. In the process, it has begun to diversify its dependence on exported agricultural commodities, while expanding in service, banking and insurance, and information technology.

Today, Sri Lanka thrives on tourism, tea export, clothing, rice production and other agricultural products. Overseas employment, especially in the Middle East, contributes substantially to foreign exchange.

Amid elevated inflation and slowing though resilient growth, Sri Lanka hopes to safeguard its economic stability while launching new structural reforms. According to official data, Sri Lanka’s growth has been over 6.3% annually since 2009. While opposition has alleged that government is manipulating economic data, the island-nation’s economic renaissance is changing its landscape and people.

As per capita income has doubled since 2005, Sri Lanka’s poverty has been halved and income inequality has declined. With over 20 million people, average per capita income in Sri Lanka is currently more than US$6,000, about a third less than in China, but a third higher than in India.

Toward free trade with China

Sri Lanka is a diverse country of many ethnicities, languages and religions, with a rich Buddhist heritage. But as an island country off the southern tip of the Indian subcontinent, its geographic location has great strategic importance. Until recently, the United States, the United Kingdom, and India were Sri Lanka’s largest export destinations, whereas India, Singapore, the United Arab Emirates and China were its major import partners. But things are changing.

For years, China has funded roads, railways, airports and ports, which, in turn, have accelerated Sri Lanka’s economic development. In 2007, the two signed a bilateral investment promotion agreement, with Chinese companies investing in Sri Lankan special economic zones.

The number of Chinese tourists may double to 100,000 in the near future. Further, China has funded infrastructure projects worth about $4 billion. In mid-February, President Mahendra “Mahinda” Rajapaksa toasted with President Xi Jinping in Beijing. Both expressed their hope for a free-trade pact by the end of the year.

To Sri Lanka, the free-trade pact could mean accelerated modernization. At the same time, Washington announced it would back the call by the United Nations Human Rights Council (UNHRC) for an international investigation into charges that Sri Lankan troops killed some 40,000 civilians while crushing Tamil rebels at the end of decades-long civil war in 2009.

When Washington was still Colombo’s only viable alternative, human rights were not the most prominent aspect of the bilateral relationship. Instead, Washington’s interest in human rights violations has gone hand in hand with the decline of its sphere of influence in Sri Lanka.

The bitter bilateral debacle has escalated ever since last November, when Sri Lanka’s rights record came under fire at the Commonwealth Summit, while President Rajapaksa’s government has rejected calls for international inquiries into atrocities during the civil war.

What is really at stake is the legacy of colonialism that paved the way to the long and agonizing civil war.

Colonial legacies, and decades of civil war

The history of intermittent colonial warfare began in 1505 with the arrival of the Portuguese, who were followed by the Dutch East India Company, and eventually by the British. In turn, the latter brought the Tamils into the island as indentured laborers to work on estate plantations.

With a dominion status, Sri Lanka – known as “Ceylon” at the time – proclaimed independence in 1948. In the 1960s, socialist economic policies were instituted in the island-country, which strengthened ties with the Soviet Union and China, while supporting a policy of non-alignment.

In 1972, the country finally became a republic, repudiating both its dominion status and colonial name. A few years later, it became the first South Asian country to liberalize its economy, but soon saw almost three decades of civil war.

The devastating conflicts were coupled with political friction among liberals and socialists, while ethnic animosities led to an on-and-off insurgency by the Tamil Tigers (LTTE), the escape of over 150,000 Tamil civilians, along with Indian efforts at intervention.

After the dust settled in 2009, Sri Lanka was under President Rajapaksa’s rule, the LTTE had been defeated, almost 100,000 people had died and some 300,000 been displaced. Today, the Buddhist Sinhalese are the majority (75%), while the Hindu Tamils remain a significant minority (11%).

Currently, President Rajapaksa is very popular in Sri Lanka because he was able to stabilize the conflict-torn country and initiate its economic revival – after three decades of bitter civil war.

What next?

In September, the US-led resolution will ask the UNHRC to report on progress with the international investigation into alleged war crimes in Sri Lanka and to provide a report by March 2015. Despite its promise, Sri Lanka remains a torn country.

If torn countries can sustain their unity, they will be stronger in the future, as Nelson Mandela’s South Africa once demonstrated. But if that unity fails, their promise will weaken, as reflected by the current division of Ukraine and the Crimea.

But not all US allies in Asia intend to co-sponsor a US resolution to investigate alleged human rights abuses in Sri Lanka. Recently, Australia became one of them when Foreign Affairs Minister Julie Bishop advocated Australia’s policy of engagement and said that the UN-backed inquiry was not the “best way forward”. Public opinion reflects the new realities. According to US surveys, fewer than 15% of Sri Lankans any longer approve of US global leadership, whereas most either disapprove or are uncertain about it.

To China, the pact reflects rebalancing in South Asia, particularly with Pakistan, Bangladesh and now Sri Lanka – all these strategically vital partners that border India and US-led security alignments in Asia.

The original version was published by AsiaTimes Online on May 19, 2014