Sri Lanka: Baffling Economic Stunts In Colombo – Analysis


By Dr. Kumar David

Irrespective of whether one agrees or not, programmatically, with a slew of economic signals coming out of Colombo recently, it is not possible to put ones finger on exactly what’s going on and make sense of it. Contradictory moves that confound rational explanation are being played out and since the government is notorious for its lack of transparency, and nothing that Ministers say can be taken at face value, media commentators are reduced to guessing games. Before offering readers a sample of the motives that are being attributed to the government let me summarise the Pandora’s Box of economic moves that the Rajapakse government has opened.

Incompatible policies

The government made a sharp rightward economic policy turn in close consultation with the IMF starting with the 2010 Budget. The IMF provided a $2.4 billion standby facility released in several tranches in exchange for which the government undertook to reduce the fiscal deficit by raising fuel and electricity prices, phasing out subsidies, raising indirect taxes and better tax collection. A business friendly environment was created, incentives provided and a more market friendly import system put in place. Rajapakse reneged on wage increases he had promised as an election gimmick and wage demands to match inflation were resisted. However the centre piece of the strategy was a focus on foreign investment hopes and pipedreams of making Colombo a regional financial hub. Impetus was given to tourism and plans initiated for numerous overseas hotel chains to set up shop. Ministers spoke of tourist arrivals increasing tenfold within five years.

Then quite suddenly about a week ago the government rushed a Bill hatched in utmost conspiratorial secrecy through parliament to takeover 35 firms (A Bill to Vest in the State Underperforming Enterprises etc). All 35 were partially government owned and were described as non-performing. The Bill was defined as a matter of national urgency; the ever obliging Supreme Court provided a fig leaf certifying it as not inconsistent with the Constitution so that it could be rushed through parliament in 48 hours. The right to challenge any takeover in the courts was smothered by legal and constitutional provisions. By simple supplementary legislation additional businesses can be appended to the list at any time. The Colombo business classes and business chambers are wetting their pants and firing off salvos of protest all to no avail.

No foreign owned enterprises were included in this initial list of 35, but surprise, surprise, a statement in the Board of Investment (BoI) website that reassured foreign investors that the Constitution and bilateral agreements were guarantees against nationalisation of foreign owned assets was suddenly and mysteriously modified on or about 10 November. The new version is silent on the matter of guarantees and no explanation has been offered for the change. The BoI is the government’s foreign investment promotion arm and its practical facilitation outfit.

Then the Minister of International Monetary Cooperation, Mr Amunugama, stated at an international Tax Conference in Colombo that provisions would be introduced to convert foreign investment loans (that is government debt) in projects into equity capital. In simple words what this means is that if say China has made a loan of $200 million for power station project X and Sri Lanka has contributed $100 million, the Chinese could be made 2/3rds share holders and Sri Lanka a 1/3-rd share holder in a new joint company in which the ownership of X is vested. Sri Lanka would no longer be indebted to China to the tune of $200 million and no future obligation to repay, or to pay interest. The former creditor, now shareholder may, of course, earn dividends if the company did well. It is not clear whether the intention is to give creditors the option of converting to shareholder status or whether it would be compulsory. The legislation has still to be drafted.

Breakdown of trust

There are other strange goings on as well, but these four points convey a convoluted and contradictory game plan. Obviously the new moves will scare off foreign investors in the way that local capitalists have already taken to bed-wetting. In a hypothetical worst case, first a loan from China or India, say for project X is solicited; BoI guarantees against expropriation are relaxed; debt is forcibly converted to equity; enterprise X is declared to be underperforming and finally taken over. If my scenario painting is going too far, the government has no one but itself to blame for being treated with such suspicion. Whether war crimes, connection with drug dealers and the underworld, pecuniary dishonesty out of control, or blanket lack of transparency, it is none but the government of Sri Lanka that is to blame for the unqualified distrust with which it is treated.

Investors will be wooed with sweet promises and assurances that this or that legislation is a one-of act and no other enterprises will be taken over, or that the conversion of debt to equity will be voluntary and at the discretion of the creditor. Capitalist investors, and foreign governments extending project loans, however, will take a longer view. What will it be like say 5 and 10 years down the road? The government may renege on assurances or find other ways of doing it, such as leaning on friendly countries to “volunteer”.

Trying to make sense of it

I have briefly outlined the reasons why I describe this set of measures as inconsistent and strategically contradicting each other. I have put this question to some commentators who have come up with different responses. I will report three, any one of which may hold the key. The first and simplest says: “Don’t be silly, don’t look for economic logic or policy motives, just follow the money”. I find this the most plausible thesis though I will not put my finger on any specific transactions as the most lucrative – a few conspicuous examples have been pointed out to me but it is still heresy. What is well known all over the world however is that it is in the multiplication of transactions themselves that the money is made. If 10% in made on enterprise X when it moves through a transaction, if it travels from status A to B and then from status B to C, the facilitator collects 20%. It is in the interest of corrupt parties to multiply the occurrence of transactions. For example, if communications spectrum could be sold once and then needed to be transferred or leased again, Indian readers will appreciate how a strategically placed Minister could collect twice.

The second thesis takes as its point of departure revenge against political opponents. Again plausible examples have been presented, but not in public or in the media, so I will refrain from suggesting examples. However there are two broad directions to look; first, businessmen or enterprises who support the opposition UNP or tycoons whose links to far-fetched challenger Chandrika Bandaranaike have earned deep antipathy. The second possibility is that anti-government media is to be castrated. It is of course quite likely that the money trail and the vengeance mission overlap.

The third variant of motivation analysis does attempt to do what the first refutes; look for economic reasons and a policy rationale. It attempts to tie together the first two bullet points in the conundrum that I started with, but is not concerned with the other two. This thesis suggests that the intention is to first acquire underperforming semi-government, or even wholly private enterprises owned by incompetent locals, and then re-privatise them to foreign investors. One point that makes this version plausible is that the IMF has not screamed its head off about the acquisitions Act. The Rajapakse brothers’ economic programme is so deeply linked and underwritten by the IMF that it is unlikely that the measure was enacted without IMF consultation and approval. If this is correct, then the reading of intended eventual foreign ownership of these companies makes sense.

Whichever the real explanation there is no denying that the Rajapakse brothers are gliding with great cunning and innovation. It seems that New Delhi is not the last bunch of fools that they will run rings around.


SAAG is the South Asia Analysis Group, a non-profit, non-commercial think tank. The objective of SAAG is to advance strategic analysis and contribute to the expansion of knowledge of Indian and International security and promote public understanding.

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