Prime Minister Ranil Wickremesinghe’s four-day visit to China from April 6 to 9 had kindled a lot of interest as Colombo-Beijing relations had taken a downturn after his government came to power. An article on the eve of Sri Lanka Prime Minister’s visit published in the Chinese Communist Party mouthpiece Global Times emphasized Sri Lanka’s strategic importance. It said “Currently, the China-funded constructions in Pakistan cannot serve as a strong foothold for China, given the calamitous state of Pakistan’s security. Sri Lanka can be of great importance for China in the security strategic layout in the Indian Ocean. It will not only provide security assurances for nearby navigation channels, but will also promote the 21st Maritime Silk Road.”   

However, the Sri Lanka Prime Minister’s focus during the current visit were on three urgent issues facing him: repairing the national unity government’s fractured relations with China; restructuring Chinese loans to the tune of $ 8 billion, and seeking further economic assistance to bale the country out of severe economic crunch. 

During the visit, Wickremesinghe called on Chinese President Xi Jinping and Premier Li Keqiang. He also met with Zhang Dejiang, the third-ranking Chairman of the Standing Committee of the National People’s Congress. The joint statement of Prime Minister Wickremesinghe and Premier Li issued at the conclusion of the visit touched upon the following key issues that are of special interest to India.

Colombo Port City Project

Both sides agreed to enhance their cooperation in the fields of transport, power and other infrastructure, industrial parks, and manufacturing industry etc. Sri Lanka, announcing the resumption of work of the Colombo Port City Project, expressed its willingness to facilitate its implementation. It was also willing to cooperate with Chinese companies to promote major projects as provided for in the MOU between the PRC Ministry of Commerce and Sri Lanka Ministry of Development Strategies & International Trade signed during the visit.

[Comment: According to media reports the project construction would probably resume in September-October after the monsoon. Sri Lanka probably hopes to resolve the gritty issue of compensating the Chinese construction firm for losses suffered when the government halted the construction for a year for reviewing allegations of corruption and other irregularities.]

China-Sri Lanka Free Trade Agreement (CSFTA)

After reviewing bilateral economic and trade cooperation, the two countries agreed to hold the 7th Meeting of the China-Sri Lanka Joint Trade Committee to formulate the development plan on bilateral economic and trade cooperation for next five to ten years. The two countries have also agreed to hold the third round of the CSFTA negotiations and work towards its conclusion. The negotiations would include economic co-operation, trade in goods and services and investment. 

Chinese investment

Sri Lanka welcomed further Chinese investment and would continue to create investment climate and business environment favourable for Chinese enterprises. The Chinese side agreed to encourage its financial institutions to provide financial support to infrastructure construction in Sri Lanka.

[Comment: This would indicate that China would continue to retain its competitive edge in infrastructure sector in the island. As the Sri Lankan Prime Minister has reaffirmed his support for the Belt and Road initiative as well as the 21st Century Maritime Silk Road, we can expect the Chinese finances would probably be forthcoming to fulfill the two projects in Sri Lanka.

Prime Minister Wickremesinghe has indicated to the press in China that he had asked the Chinese to swap part of the outstanding $8 billion loan owed to them into shares in Sri Lanka ventures jointly with the government. Chinese are tough negotiators; but as the outstanding Chinese loans relate to strategic infrastructure construction, Chinese are likely to be tempted to accept the offer as it would give them a firm foothold in Sri Lanka. That should be worrying to India.]

Getting out of economic gridlock

In the midst of gloomy economic outlook, the government had some cheerful news from the International Monetary Fund (IMF) which announced that it had reached a staff-level agreement to grant a $ 1.5 billion loan to Sri Lanka in support of the government’s reform agenda over the next three years. According to the IMF, the 36-month Extended Fund Facility (EFF) for 185 percent of Sri Lanka’s quota in the IMF (about $ 1.5 billion) would be coming up before the IMF board for formal approval in early June. The EEF would support government’s economic programme aimed at fundamental changes to tax policy and administration to reverse a two-decade decline in tax revenues and put public finances on a sustainable medium-term footing, easing the pressure on the balance of payments.

This would involve implementing unpopular tax reforms and restructuring State owned enterprises (SOE) to make their working transparent and commercially viable. It would also imply reforming Sri Lanka’s lax tax system - eliminating exemptions, holidays, and special rates to broaden the tax base and reform VAT and the customs code. This is going to be a difficult proposition for the government to carry out such radical reforms in a country accustomed to populist policies.

Federalism controversy

The Tamil National Alliance (TNA) R Sampanthan’s call for a federal solution to resolve the long pending issue of political independence for the Tamil minority, while speaking to TNA representatives at Jaffna, has once exposed the limitations of Tamil leadership in thinking out-of- the-box to evolve a viable solution to the ethnic question. Coming in the wake of a resolution in the Northern Provincial Council calling for a federal constitution for Sri Lanka and merger of Northern and Eastern provinces into a single unit, it has triggered strong negative sentiments from Sinhalas.

While Sinhala right wing parties were vocal in their criticism, even moderate elements of the two major national parties, the Sri Lanka Freedom Party (SLFP) and the United National Party (UNP), found it an unfeasible proposition in the constitution making process now underway. In fact, it is going to make their work a little more difficult while trying to structure the constitution in an equitable way. On the whole, it seems Sampanthan’s call was more a political knee-jerk response after NPC chief minister CV Wigneshwaran stole the thunder of federalism with a strong resolution calling for a federal constitution.

Written on April 30, 2016

Col R Hariharan, a retired MI officer, served as the head of intelligence of the Indian Peace Keeping Force from 1987 to 90. Blog: http://col.hariharan.info

Courtesy: South Asia Security Trends, May 2016 issue www.security-risks.com

http://col.hariharan.info/2016/05/sri-lanka-perspectives-april-2016_4.html