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Factbox: Five political risks to watch in Sri Lanka

Sri Lanka is heading into election mode, after President Mahinda Rajapaksa's government said early presidential and parliamentary polls will be held by April. Following is a summary of five key risks in Sri Lanka, which won a 25-year war against the Tamil Tigers in May:

world Updated: Nov 13, 2009 20:26 IST
C. Bryson Hull

Sri Lanka is heading into election mode, after President Mahinda Rajapaksa's government said early presidential and parliamentary polls will be held by April. Following is a summary of five key risks in Sri Lanka, which won a 25-year war against the Tamil Tigers in May:

ELECTION FEVER

Expecting Rajapaksa to win re-election to a second six-year term is still a safe political bet, in spite of growing union threats and the emergence of former army commander General Sarath Fonseka as a potential challenger. Already, trade and university student unions which back the opposition JVP, Sri Lanka's main Marxist party, have threatened slowdowns from Nov. 11. Past election seasons have shown they can disrupt normal economic life. The first shot was fired by workers from the state-owned oil company in a four-day slowdown last month to demand pay raises Rajapaksa promised to deliver after the war ended, but has not.

Key issues to watch:

-- Fonseka has been silent on his plans, but his presidential candidacy would split Rajapaksa's core nationalist vote base because he could no longer lay sole claim to the war victory at the ballot box. That could derail Rajapaksa's plans to have a two-thirds majority in parliament, which would give him the votes to change the constitution.

-- Continued job actions by unions. Sri Lankan unions have in the past made life difficult for incumbents, and full-on strikes would bring the country to a standstill.

ECONOMIC REFORM

Although foreign direct investment into Sri Lanka has picked up now the war is over, investors say there are plenty of reforms that need to be made on both the macro- and microeconomic levels. Doing business can be a tricky affair in Sri Lanka. The bureaucracy and tax code are what one might expect from a former colonial shipping outpost with a post-independence history full of socialist policies. The effective corporate tax rate can be over 60 percent, according to the World Bank. Corruption exists, but is lower than some regional peers.

Monetary policy is seen as having been well communicated, and exchange-rate management has generally viewed as having benefited both exporters and importers. Under Central Bank Governor Ajith Nivard Cabraal, inflation has fallen from record levels last year to single digits. But last week, the president in his capacity as finance minister cut state bank lending rates in half, in a move analysts say was driven more by election politics than sound fiscal management. Central bank officials said they were not made aware of that decision, normally their purview, until after it happened.

Key issues to watch:

-- Any sign of an erosion in fiscal policies laid down by the central bank, which were instrumental in the negotiations to secure a $2.6 billion International Monetary Fund (IMF) loan. Credit rating agencies say adherence to the IMF plan is crucial to international investor confidence in Sri Lanka, which last month issued a $500 million sovereign bond.

-- Any signs that Cabraal is being sidelined so the government can dish out the usual election-season largesse, which could run it afoul of the IMF.

PRESSURE OVER WAR'S FALLOUT

Western countries, and groups in the Tamil diaspora who supported the Tamil Tigers, are pressing for some kind of accountability for thousands of civilian deaths at the end of the war. Sri Lanka is adamant its soldiers fought in proportion to the LTTE threat and did not violate international law.

The US State Department, at the behest of Congress, prepared an overview report of potential war crimes which hit the government and Tamil Tigers in equal measure last month.

The European Union's executive has also recommended Sri Lanka be suspended from a trade preference called GSP Plus, which has been a boon to the nation's apparel industry, its biggest earner of foreign exchange. The government is adamant it can live without GSP Plus, and diplomats say the government's lack of interest in answering the accusations will make it hard to reverse the negative recommendation.

Key issues to watch:

-- The government is due to answer the EU's report by Friday, and diplomats say willingness to show compromise would be welcomed. But the exigencies of the upcoming election, where anti-Western sentiment is a strong vote-getter, mean there is unlikely to be much compromise until polls are over, by which time it could be too late.

-- In the case of the US war crimes report, Sri Lanka has promised to investigate. Diplomats Reuters spoke with said there are independent organisations making more thorough probes which could yield an international response.

-- What General Sarath Fonseka says during an interview requested by the US Department of Homeland Security. Local newspapers this weekend reported that Fonseka, a US green card holder presently visiting Oklahoma, has been asked to incriminate Defence Secretary Gotabaya Rajapaksa, the president's brother.

REFUGEES

One big risk is how the government handles roughly 260,000 Tamil war refugees who fled fighting in the waning months of the war, and are now being held in military-run camps. Western countries, India and the United Nations are pressing the government hard to send them home, and Rajapaksa has said 70-80 percent will be resettled by January. So far, about 15,000 have been sent home, and last week the government said it had begun moving at least 40,000. Those pressuring Sri Lanka say holding them will breed resentment detrimental to reconciliation between the Tamil minority and the Sinhalese majority.

Key issues to watch:

- Look for the rate of returns to pick up, or for countries paying for the camps to stop funding them if the government does not keep on target.

SECURITY

The Tamil Tigers are finished as a guerrilla fighting force, but there are still well-financed members of its international network out there and no shortage of Tamils raised on the LTTE's virulent propaganda who are furious at how the war ended.

Sri Lanka says there is minimal threat, but military and police checkpoints are ubiquitous in the capital, Colombo.

The broad message is that the military and intelligence agencies are not finished neutralising remnants of the Tiger networks responsible for assassinations and suicide bombings.

Key issues to watch:

- A gradual easing of security -- this will indicate greater government confidence it has finished the LLTE.

- Any attack credibly attributed to Tiger remnants. It would likely be shrugged off quickly by investors -- Sri Lanka's economy remained strong throughout much of the 25-year civil war.