Updated Tuesday, November 20, 2012
2:27 pm TWN, By Frank Jack Daniel, Reuters
JAFFNA, Sri Lanka -- From foreign hotel towers
sprouting on Colombo's seafront to the new motorcycles and mobile phones
buzzing in war-ravaged Jaffna, at first glance, Sri Lanka seems to be living up
to its claim as Asia's latest frontier market.
But private businesses are not investing enough,
threatening the boom that has swept the island since the end of a long ethnic
conflict, while President Mahinda Rajapaksa and his family are tightening their
grip on the economy and institutions with what critics see as an unusually
personalized system of government.
The global economy may be in poor shape, but with 17
percent growth since the war ended in 2009 and an eye-popping 200-percent rise
in the stock market, investors should be flocking to Sri Lanka's palm-fringed
shores.
Instead, even home-grown businesses are shy.
The government reported US$1 billion of foreign direct
investment (FDI) last year, a record, but even officials accept that is not enough.
More worrying, because it raises questions about the reliability of official
data, the United Nations put FDI at just US$300 million last year, its lowest
level since 2005.
There are several possible explanations, but critics
say that by making Sri Lanka something of a personal fiefdom and dragging his
feet on reconciliation between the ethnic minority Tamil-dominated north and
the majority Sinhalese Buddhist population, Rajapaksa shoulders some of the
blame.
The president and his brothers control ministries and
departments accounting for about 70 percent of the budget, including finance
and defense. His elder son is an elected legislator and his eldest brother is
the speaker of parliament, where the president holds a more-than two-thirds
majority.
“A handful of people seems to have captured both
political authority and the economy,” said Harsha de Silva, spokesman on
economic affairs for the main opposition United National Party.
“Almost four years after the end of the war, we are
yet to see any established investors setting up businesses, apart for some big
hotel chains.”
One Rajapaksa brother, Economic Affairs Minister Basil
Rajapaksa, justified the system, telling Reuters that politics was a family affair
everywhere from the United States to India and pointing out that he and his
relatives were elected parliamentarians.
“It is a dynasty, but by people's choice, a people's
dynasty,” he said in an interview, and suggested that more, rather than less,
concentration of decision-making would help investment in a country where
multiple permits slow startups.
“In other countries who are successful, they were
successful because immediately one person he takes the decisions. In Sri Lanka,
the main problem is that that is not there, more decisions have to be
centralized.”
Opponents say the extensive control of commerce by the
president and his family is at the root of the country's problems.
“Half of all the ministries which are engaged in
businesses are controlled by Rajapaksa family under his ruling. That is the
main problem we are facing today,” said Sunil Handunnetti, an opposition
parliamentarian with the Marxist Janatha Vimukthi Peramuna, which used to
support the president.
Indians and Chinese
Whatever the rights or wrongs of the argument, the
investment shortfall is a problem for President Rajapaksa, whose goal of 8
percent annual economic growth largely rests on foreign inflows in the form of
debt from multilateral lenders and friends like China.
Economists say this is not sustainable in the long
run.
The president's model of rapid infrastructure
development has helped Sri Lanka bounce back more successfully than most
post-war countries, but economists and businesses are wary.
With Sri Lanka tipped as the top destination of 2013
by the Lonely Planet travel publisher and visitors up 30 percent last year,
global hotel brands are lining up. But few are investing heavily, preferring to
tie up with local players, some of which have links with the government.
Central bank Governor Ajith Nivard Cabraal said
negative reports about human rights violations during and after the war had a
chilling affect on foreign direct investment, particularly from the West. The
United Nations has urged the government to investigate reports of serious
abuses during the war.
“Asian investors understand Asia better, as far as the
ground situation is concerned, so you can see, the Indian investors are here,
the Chinese investors are here,” he said.
But de Silva said old problems worried people looking
to do business.
“Investors will come only when they see stability. The
stability will come with genuine peace. There is no cohesiveness. There is no
position of the government for the devolution of power,” de Silva said.
The Pathfinder Foundation economic think tank warns
that Sri Lanka is showing signs of “opportunistic state capitalism,” with the
government cherry-picking opportunities and creating confusion about the roles
of the private and public sectors.
Luxman Siriwardena, Pathfinder's executive director,
says Sri Lanka's investment rate of 30 percent of gross domestic product leaves
a shortfall of about US$3 billion needed to attain the government's target of 8
percent growth.
“There is also need for greater clarity regarding the
respective roles of the private and state sectors, including the military, in
economic activity,” he said.
'Not confident'
Jaffna, in the north where Tamils dominate, was once
the second city and a major industrial hub. It is just emerging from isolation
as an epicenter of the war that began in 1983. Up to 40,000 civilians may have
been killed in the government's remorseless final offensive, according to the
United Nations.
Public works and an appetite for consumer goods
fuelled by remittances from exiles have spurred growth in a town of bombed out
buildings, but businesses are gloomy about the future.
The seaside city was virtually cut off from the rest
of the country during the war that pitted largely Hindu Tamils against mostly
Buddhist Sinhalese. It could take months for people in the area to get
permission from the army to travel south.
Now, buses run daily and two domestic airlines fly
there with small prop aircraft.
The most successful is Helitours, which flies
passengers for half the price of its rival, Expo Air. Helitours is able to do
so because it is part of the air force and has lower overheads.
Helitours also flies tourists to a golf course at an
armed forces resort in another former war zone in the east — part of a network
of military businesses that extends from private security and farming to
catering and whale-watching.
Some Jaffna residents complain the military controls
too much land seized in the war. Others warn that government foot-dragging on
local elections and easing ethnic tension has deterred both locals and wealthy
overseas Tamils from investing.
Young Tamil businessman V. Kandappa came back from
Britain at the end of the war to set up a business in his parent's bomb-damaged
home — a rare returned exile. He builds homes for members of the diaspora who
dream of coming back. Almost half the population left Jaffna during the war.
“The private sector is still not confident about what
is going to happen on the ethnic front, people are scared to invest their money
in the north and eastern provinces,” Kandappa said.
