Op/Ed by Chris Devonshire-Ellis
Sri Lanka is often overlooked in Asia. A relatively small economy at just US$80 billion GDP per annum, and a population of 20 million, it is eclipsed in size by many Asian cities, let alone sovereign nations. The country’s economy is the same size as that of New Orleans.
That small size justifies the term “Leopard Economy” – Sri Lanka is smaller than the traditional Asian Tigers of Thailand, Malaysia and Indonesia, and isn’t home to any tigers itself – but the country does boast the world’s largest population of leopard sub-species in the world.
I moved to Sri Lanka (from China) in 2012, prior to which I had been regularly visiting the country for some 14 years. It is an economy that is prized as an important asset by both China and India due to its strategic location amongst the Eastern waves of the Indian Ocean. To give an idea of the space that Sri Lanka enjoys: to the West lies India, with Chennai the closest city at an hour’s flight away. To the East lies Thailand, and directly south there is no land until one reaches Antarctica.
It is that Blue Water that is providing Sri Lanka with its position as an Asian Leopard, and analysts who obtain results by looking at the smaller players will find much to appreciate here. In fact, the Sri Lankan economy is one of Asia’s fastest growing, with the World Bank suggesting that a GDP growth rate of some seven percent can be expected this year. That is also seen as sustainable through to 2020 at least.
The reasons for a resurgent Sri Lanka are numerous. Looking further back, the end of the civil war seven years ago has seen enough water go under the bridge to allow a far higher degree of unity, national development and prosperity than ever before. While I recall tanks and military roadblocks throughout what was a dirty, neglected capital city of Colombo, now there are luxury sea view apartments, 5 star hotels, gourmet restaurants and Luxury Train Carriages on the Rail network. Match that with spectacular beaches and Luxury Safari holidays and it’s easy to understand why the numbers of Chinese tourists to Sri Lanka reached record numbers during the recent Chinese New Year holidays.
Coupled with that, an ultimately unpopular but long-serving President Rajapaksa was able, in the aftermath of the end of the civil war, to remain in power long enough to get much needed energy and investment into the country. Much of that was done with Chinese investment, and although some of those have subsequently proven ‘difficult’ in terms of the potential for corruption, a lot of infrastructure progress was made. The China corruption issue when dealing with infrastructure projects is a theme, incidentally, I touch upon in my most recent book, “China’s New Economic Silk Road“, which includes Sri Lanka as part of the maritime route.
More recently, a desire to better redevelop and develop projects with India has seen both Chinese and Indian investment pour into the Port development at Colombo, as well as work commence on the North-Western Port of Jaffna, which essentially lies opposite Chennai. There is also talk of reintroducing the Sri Lanka-India Ferry services, suspended during the outbreak of war in the 1980s.
Both India and Sri Lanka are members of SAARC, the Indian sub-continent’s equivalent to ASEAN, which offers tariff reductions between members. Interestingly, China asked to join a few years ago – a move vetoed by India. Sri Lanka’s trade with India can be expected to continue to rise, after a handful of years where the Rajapaksa government’s closeness to China created some tensions. Sri Lankan-India bilateral trade is targeted to reach US$10 billion by 2017, creating some significant wealth amongst what remains a relatively small local population.
Those China ties, too, are more or less back on track, although with rather more financial due diligence being put in place. This is especially true in infrastructure development, where the large Chinese SOE Hunan Construction Engineering Group Corporation, amongst others, has been very active in developing Sri Lanka’s national highway system. Work is still underway on the expressway from Colombo to Kandy, Sri Lanka’s second city, which is expected to be completed in 2018 and will reduce the current travel time from four hours to 90 minutes. The Southern Expressway, which reaches from Colombo to Galle – close to where I live on the South Coast – was completed two years ago and reduced the travel time to two hours down from five. That development alone has significantly helped open up tourism development on Sri Lanka’s south coast, and 5 star hotel resorts are moving into Sri Lanka as a result.
China’s trade and tourism are both on the rise in Sri Lanka, with bilateral trade currently running at about US$4billion, and a China-Sri Lanka Free Trade Agreement recently signed. It is having an impact – China’s Geely automotive are prominent here in a manner that Indian autos generally are not. Sri Lanka, it seems, can pick the best from the two – not a bad position to be in.
An excellent summary of how Sri Lanka has been able to play off both China and India against each other in obtaining assistance to develop these nationally important infrastructure projects can be seen in this article: “Chinese and Indian Companies Dominate Sri Lanka’s Mega Project Business”. Those relationships, especially the depth of them, are somewhat unique in Asia, with Sri Lanka able to appreciate both its larger regional cousins. It has also shown it is quite prepared to brush off either of them as well – rumors of Chinese corruption meant an immediate suspension of all contracts with China by the new President Sirisena. Not all Asian nations can afford to act like that, and China needs Sri Lanka on its side, as does India. It is a hard balancing act to play, yet the Sri Lankans seem to be very good at it.
In addition to vastly improving infrastructure and tourism development, still low wages, plus a relatively wide spread English language capability, has led some MNCs to invest in the country as an outsourcing center, including HSBC. While getting professional services in terms of legal and tax knowledge can still be problematic, these can nonetheless be solved – often still with direct government communication and dialogue, which is a service still available in relatively small countries such as Sri Lanka. As long as corruption can be kept out of that equation, then the future for this Island Gem of an Asian nation looks bright.
A useful and complimentary World Bank Report “Economy Profile 2016 – Sri Lanka” can be downloaded here.
To obtain a complimentary subscription to Asia Briefing and Chris’s updates, please click here.
China’s New Economic Silk Road
China’s Silk Road Economic Belt is the largest and most ambitious undertaking yet proposed by Beijing. With financing and the value of resources across Eurasia running into the hundreds of billions of dollars, we outline the fundamentals of China’s plans. Included are details of the overland route from China through Central Asia, Russia and to Europe, and the maritime and overland routes through South-East Asia and beyond. Includes maps.