March 1, 2010 / 11:07 AM / in 9 years

FACTBOX-Key political risks to watch in Sri Lanka

By C. Bryson Hull

COLOMBO, Aug 2 (Reuters) - Sri Lanka has flooded its newest harbour, the first stage of the $3 billion Hambantota port that gives the Indian- Ocean island nation an economic foothold along one of the world’s busiest shipping lanes.

It is the first step in President Mahinda Rajapaksa’s plan to transform his nation’s economy since the end of a quarter-century war in May 2009. Many execution risks remain before he reaches his ambitious goals.

Following is a summary of key risks to watch in Sri Lanka:

* FISCAL REFORM

Although the International Monetary Fund (IMF) gave an encouraging nod to a delayed 2010 budget introduced in June, the budget deficit target of 8 percent of gross domestic product is more than the 7 percent the IMF wants.

Sri Lanka had a 9.9 percent deficit last year, also well outside the IMF target. So the country is under pressure to deliver on plans to boost revenue, rationalise a byzantine, costly tax code and above all, tighten fiscal discipline.

What to watch:

— Whether Rajapaksa’s administration gives into the classic temptation of all Sri Lankan leaders: dipping into public coffers to boost subsidies or dole out state jobs.

— Whether the government takes concrete steps to make state-run entities revenue earners. Most of the deficit reduction plan hinges on completely turning around loss-making state ventures hampered by subsidy schemes or mismanagement.

— The recommendations of a presidential tax reform commission, expected in mid-August.

* STATE SECTOR LABOUR UNREST

Rajapaksa has yet to make good on a promised pay hike for Sri Lanka’s state employees. He kept the pressure off since his election in 2005 by appealing to workers to wait so he could pay for the war against the Tamil Tiger separatists.

But since the war ended in May 2009, public sector trade unions have been demanding he deliver. The government says the rise will come in 2011 but impatience is growing.

Already, university students have held strikes, which traditionally presage labour union unrest. A handful of state workers in the last month have held token strikes.

What to watch:

— The tenor and frequency of student and labour strikes. If they rise above token acts, that’s a clear sign of more to come.

— Whether trade unions drop their support for Rajapaksa and drift back toward the now-rudderless opposition. Union members in Sri Lanka have traditionally been quick to lose fealty to leaders they view as doing too little for them.

* THE RAJAPAKSA FACTOR

The president and his family together have direct control of nearly 70 percent of this year’s budget through the portfolios they hold. Three brothers occupy key positions. One is the parliament speaker and another runs the state security apparatus with a special brief to develop prime state-owned property in Colombo. A third runs a new ministry overseeing tourism, nation building and investment promotion, which encompasses just about all the lucrative post-war investment and development areas. The president is also the finance minister, so in short, any big investment decision needs a Rajapaksa blessing.

What to watch:

— Whether Rajapaksa and his family show evenhandedness in the development of public-private investment partnerships.

— Whether Rajapaksa can shake off concerns among wealthy local investors that his government will interfere with investments to settle political scores, or for coercion.

* CONSTITUTIONAL CHANGES

The president’s ruling alliance is just six votes shy of the two-thirds parliamentary majority he needs to change the constitution. Rajpaksa and opposition leader Ranil Wickremesinghe struck a deal on July 13 to return Sri Lanka to leadership by an executive prime minister. [ID:nSGE66C0I0]

The agreement in principle also contemplates changes to reduce the president’s vast powers, but a similar deal in 2000 fell apart at the last minute so there are no guarantees.

If Sri Lanka returns to a prime ministerial system of leadership, the president would be free to pursue that post and bypass the existing two-term limit he now faces.

Sri Lanka has had a relatively disastrous history of changes wrought by constitution and many Sri Lankans are watching to see if Rajapaksa follows a more virtuous path.

What to watch:

— Pronouncements from either side about the deal, and any signs of progress. Few expect anything to happen until Rajapaksa takes his oath for a second term in November.

— Whether Wickremesinghe, facing internal calls from his United National Party to step down, holds on and stays true to the agreement. He backed out of the 2000 deal.

* WAR CRIMES PROBE

A raucous protest against a U.N. war crimes panel further soured already bad relations between Colombo and the world body, after a cabinet minister close to the president had demonstrators surround the U.N. office in Colombo. [ID:nSGE669JDV]

Over Sri Lankan objections, U.N. Secretary-General Ban Ki-moon in June appointed a three-member panel to advise him on accountability issues related to the end of the war last year.

Thousands of civilians died and rights watchdogs have alleged that surrendering Tamil Tigers were gunned down.

Sri Lanka insists its own presidential commission can probe any war crimes, but the country has a dismal record of investigating rights violations over the last four decades.

What to watch:

— The panel’s recommendations, and whether those lead to the start of an international probe, demanded by rights watchdogs.

— How far China and Russia are willing to go to block any moves to get an outside probe going. Both countries have already blasted the panel’s creation as unnecessary. (Editing by Andrew Marshall)





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