Now that 25 years of bloody civil war has come to an end, the island nation is seeking foreign investment to help boost its economy.
Sri Lanka banks on tourism to lift image
When S Kalaiselvam, the head of the Sri Lanka tourism development authority, hits full steam with his investor pitch, it feels like the civil war-stricken swathes of his island country are set to leave the rest of the world's holiday hotspots trailing in the dust in a matter of months.
A string of islands in the north-west, once far too close to the stronghold of the rebel Tamil Tigers, will become "like the Maldives", he said, after about US$3.5 billion (Dh12.85bn) is spent there by international and local hotel groups. A strip of the east coast near Nilaveli, regarded as one of the best beaches in the world, has already drawn 60 prospective bidders for an 8km string of luxury hotels. The number of tourists is expected to grow by more than five times by 2016 to 2.5 million. Over the same period, the number of hotel rooms will soar to as many as 50,000.
Since defeating the Tamil Tigers in May this year after 25 years of civil war, the government in the capital, Colombo, has been pushing hard to cash in its peace dividend. It is talking about more than doubling the annual per capita income of the country from $2,000 to $5,000 over the next five years and international organisations are impressed with the progress. "Recent economic developments have been stronger than expected and the near-term outlook has improved," said Takatoshi Kato, the deputy managing director of the IMF, last week as the fund released the second tranche of the $2.6bn loan.
The government, led by the president Mahinda Rajapaksa, announced last month it would hold parliamentary elections before April next year. The expectation is that Mr Rajapaksa will announce a presidential election for about the same time, aiming to reap the political benefit of his 2005 victory by going to the polls two years before it is necessary. The government last month proved international investor interest in the country with a $500 million sovereign bond that was more than 12 times oversubscribed and was priced nearly a percentage point lower than the previous government issue in 2007.
That was not surprising considering recent gains by Sri Lankan equities. The Colombo Stock Exchange Milanka Price Index rose 117 per cent from the start of this year through to the start of last month, the best performance of any market in the world. Investors have been flocking in to position themselves for a post-war boom. Jim Rogers, the legendary investor who correctly called commodities and emerging market gains this decade, has been the cheerleader-in-chief, announcing in the summer of this year that Sri Lankan equities are the only shares he is buying anywhere in the world.
But the Colombo stock market has dropped 8 per cent from its highs of last month. This is partly due to uncertainty over the election announcement and the ensuing risk of trade-union agitation, and partly from fears that the Sri Lankan billionaire Raj Rajaratnam, who faces insider-trading charges in the US, would sell his substantial Sri Lankan holdings. It has also raised questions over how resilient the international investor interest is, as well as whether it will translate into much-needed direct investment.
"The markets have so far moved purely based on expectation," says Mafaz Ishaq, the director of Calamander Capital, which launched the first Sri Lankan private equity fund in June of this year. "There are a lot of people coming through Colombo. There have been some announcements of investments, but it's coming in trickles." Those expecting a textbook post-war boom for the country should note that it never faced a textbook period of wartime austerity.
Even over the past five years, economic growth averaged more than 6 per cent, doubling economic production between 2004 and 2008 while much of the north and east was paralysed by conflict and military spending hogged some 17 per cent of the budget. It was helped by the fact that tea production, the biggest industry in the country, was located in hills to the centre and south, far from the front lines.
The underlying prospects for Sri Lanka are undoubtedly strong: a literate, well educated, English-speaking population; a relatively uncorrupt, economically liberal government; fertile land; cool upland tea country; and a near-perfect coastline for tourists. Peace will certainly mean more resources going into infrastructure and business. The government can start diverting some of its military spending towards infrastructure in coming years.
But government spending alone will not be able to accomplish much unless Sri Lanka generates more interest abroad to balance the scales. Foreign companies have invested a pitifully low $550million in the country since 2006, a period when even Pakistan drew $6bn of foreign direct investment. If peace is kept, that number should rise rapidly. International aid to fund the reconstruction of battered northern and eastern towns is beginning to mobilise. India has offered $100m and the Sri Lankan government has pledged to invest a disproportionate budget share in conflict-damaged areas. The infrastructure development, once it takes off, will feed into the wider economy.
There are also signs that corporate investment will start to flow in. The first sector to pick up has been tourism, which is expected to be up 35 per cent this year. Some operators are expecting 100 per cent occupancy rates this winter and in some resorts a room shortage is developing. John Keells, the leading Sri Lankan conglomerate, opened a newly rebranded hotel in Colombo in September this year after rushing through a three-month refurbishment, pointing out that in the 2002-05 ceasefire it had been the strongest performer among hotels in the capital.
The other industry that has drawn international interest is telecommunications. The auction last month for Tigo, the Sri Lankan mobile phone company, was won by Etisalat after a fierce bidding war with Bharti Airtel and BSNL of India. The Malaysian operator Dialog Telecom has been bolder still, beginning to invest $10m rolling out a network in areas once controlled by the Tamil Tigers. While the move initially will serve the troops clearing and de-mining the area, Dialog is clearly hoping that the 163,000 Tamils stuck in refugee camps will gradually return and become customers.
The treatment of the Tamils will be key to the resilience of the peace as well as to the Dialog investment. Sri Lanka is coming under heavy pressure from the US and Europe, and organisations such as Human Rights Watch, over its admission that it will miss its target of returning 80 per cent of the Tamils in camps to their homes by the end of this year. The decisive victory against the Tamil Tigers has brought Mr Kalaiselvam a good haul of tourists this year. But should ordinary Tamils feel mistreated and resort to even sporadic violence, most will turn around and go straight back to Pattaya, Bali and the Maldives.