All eyes on Sri Lanka

Colombo is a very special city indeed. Part burgeoning business centre, part colonial capital, the city is dotted with skyscrapers and ancient Hindu temples. It is a city still struggling to find its place in the world after a long and bloody civil war scarred the face of Sri Lanka – but it is a hopeful place. Since the peace agreement half a decade ago, the local government has invested in modernising the country’s infrastructure and attracting foreign business.

The island’s capital has been a vital trading port for over two millennia. Because of its strategic Indian Ocean location and its natural geography, Colombo has always been a bustling hub of activity. The fortress that gave rise to the settlement that is Colombo today was built on a plateau between three mountain peaks known as the Trikuta Mountains, according to the ancient Hindu epic Ramayana and the Mahabharata. The city, then known as Lankapura, was at the centre of a vicious battle between Indian kings in the twelfth century, before being claimed by Rama. These battles are depicted in the murals of the Khmer temple of Angkor Wat in Cambodia.

Portuguese colonisers arrived in Sri Lanka in 1505, drawn to the island for its strategic location and convenient natural harbour. They concluded the first of a series of treaties made between Sri Lankan kings and European rulers looking for a foothold in the West Indies. These deals, though centuries old, have defined modern Sri Lanka in many ways: it is a country welcoming of foreigners, and eager to trade and do business. Though the trade agreements between Sri Lanka and the Portuguese quickly soured, King Rajasinghe II of the central Kingdom of Kandy was able to broker deals with the Dutch. In exchange for protection against Portuguese Goans, the Dutch were granted access to the island’s main trading goods, such as cinnamon and teak.

Sri Lanka became a vital trading hub for the Dutch East India Company, until 1796, when the British moved in. The colonial architecture from this period is a defining aesthetic feature of Colombo. The city is dotted with grand Portuguese forts, Dutch houses and British administrative offices, making it one of the most visually diverse Asian capitals. When the British finally granted Ceylon – as it was then known – independence in 1948, they left behind some of the urban infrastructure that makes Colombo so unique today. Tramlines and cars crisscross the city and past the Khan Clock Tower.

Colonial roots
The centuries of different colonial rulers have made Sri Lanka unique in Asia. Though the country retains its Hindu and Tamil roots, the Europeans that roamed the island for so long have indubitably influenced it. Places are named using Portuguese, Dutch and English words, people have European names and Colombo remains a multi-ethnic, multicultural hub despite losing its status as capital in the 1980s. However, like many other former colonies in Asia, the country was left in disarray when the British withdrew in the late forties. No representative administrative structures were established and tensions started to mount between the Sinhalese population and the minority Tamils. Historic conflicts between these two ethnic groups have always existed but peaked under British rule in the 1920s and were then left to fester when they withdrew.

By the early 1980s the situation was unsustainable and the Sri Lankan Tamil youth and their militant factions including the Tamil Tigers (LTTE), started operating a parallel government, independent from the ruling Sinhalese government in Colombo. In 1981 the incumbent government attacked Jaffna Library, burning over 90,000 books, including palm scrolls of high historic importance for the Tamils. Two years later, 13 soldiers were killed in a Tamil ambush, sparking riots and what came to be known as the ‘First Eelam War’. The Tamil government decided to demand secession.

What followed were 26 years of terror and violence; the Tamil Tigers used guerrilla techniques to target members of Prime Minister Jayawardene’s ruling United National Party, who retaliated with bloody massacres and ethnic cleansing policies. Atrocities were committed almost daily by both sides.

International forces got involved and sanctions were approved but nothing calmed the violence. However, in 2001, the Tamil leaders announced they were once again ready to negotiate a ceasefire. By then the Sri Lankan economy was in tatters and the south of the country was a wasteland after two and half decades of near-constant shelling. A new political party, the United National Front, won the 2001 elections with an overwhelming majority, campaigning on a platform of peace and unity.

By 2002 the Tamils and the new government had reached an ‘understanding’. Though by no means a straightforward process, the ceasefire meant international flights could be re-established between Colombo and other capitals, and the process of slowly rebuilding the economy could begin. Though many regions, particularly in the poverty-stricken south, were still under Tamil control, the ceasefire held.

As 2008 approached, tensions mounted. Terrorist action plagued Sri Lanka once more. It seemed that the dream of peace was dead when the Foreign Minister, a Tamil, was assassinated. The government was terminated and accused of war crimes, and combat resumed on the embattled island.

Though this period was the bloodiest in Sri Lanka’s recent history, government forces finally crushed the Tamil resistance, amid cries of human rights violations and the slaughter of civilians. According to Human Rights Watch, the Sri Lankan army was responsible for indiscriminate artillery attacks, while the Tamil Tigers refused to grant safe passage for fleeing civilians.

An estimated 200,000 people were killed in a narrow 14km strip of land near the coast at Vanni – a supposed no-fire zone. But by 2009, the Tamil Tigers had been beaten down, and President Mahinda Rajapaksa told the world from a summit in Jordan that his government, “with the total commitment of our armed forces, has in an unprecedented humanitarian operation, finally defeated the LTTE militarily.”

Rebuilding and healing
Throughout the civil war, Sri Lanka maintained some enviably high socio-economic indicators; according to Colombo Fort, the Sri Lankan board for business, in 2009 the country already boasted one of the highest literacy rates in Southeast Asia, with 91.4 percent of the population being able to read and write. Overall, 50 percent of university graduates have studied technical or business disciplines, making the Sri Lankan workforce one of the most competitive in market terms.

The Sri Lankan government has been diligently ensuring the rest of the world knows that not only are the hard civil war days over, but that the island is open for business too. It is a slow process – at the moment, the fastest-growing industries are tourism and regional banking. But there is a lot of potential. Foreign direct investment rose nearly four percent in 2013, from $1.34bn to $1.39bn. The figures are significantly short of the $2bn target set out by the government, but the economy did grow. Over the last four years, as much of the world endured sluggish growth and emerging markets cooled off, Sri Lanka grew by an average of 7.4 percent annually – albeit thanks in part to huge state-led infrastructure schemes.

The signs are looking very positive for 2014. Lakshman Yapa Abeywardena, the Investment Promotion Minister, told Reuters that in the four months to May 2014 the island had already attracted 100 percent more investment than during the same period in 2013. “This year, we will be able to get at $2bn,” he said. He is probably right.

When the US announced it would be tapering its asset purchase programmes in October last year, most emerging economies rose rates in order to stop fund outflows. Sri Lankan authorities did the exact opposite and lowered their rates. “We have seen inflation at the lower levels,” Ajit Nivard Cabraal, Governor of the Central Bank of Sri Lanka, told CNBC. “We have been seeing the growth rates at the right levels. We have seen the external sector coming back to fairly robust levels. So all those gave us the confidence that we were on track to having inflation at lower levels in the future.”

Cabraal suggests the economy could grow by eight percent in 2014. And while that is probably true, much of this is driven by state-owned infrastructure development, funded by foreign commercial loans, and according to Abeywardena, around $4bn in FDI will be required to sustain these levels of growth. Investors are also concerned by government nationalisation of key private ventures and the takeover of nearly 40 private companies. But while this wave of nationalisation, which mainly affected private transport companies, may have been a misstep, the local economy remains strong.

“We have developed our infrastructure, particularly the ports and airports, which means our services have now improved quite dramatically,” said Cabraal. “And we are seeing the services sector, particularly the hubs we are looking at – maritime, aviation, knowledge, activities as well as the commercial and energy – all now contributing a lot more to our economy than they did in the past.”

The performance of the Colombo Stock Exchange proves the country’s economy remains resilient. Stocks here gained an average of five percent in 2013, and did even better during the first quarter of this year. The exchange is now working to attract a greater number of international investors. With government support initiatives – such as requiring companies to make more shares available, and developing a strong brokering infrastructure and regulation – have been introduced. “It’s the growth story,” Rajeeva Bankaranaike, CEO of the Colombo Stock Exchange told CNBC. “Some of these sectors are trading at deep discounts. Particularly in the Sri Lankan economy, we have some of the growth sectors very well represented and these are trading at deep discounts to the market price-to-earnings ratio.”

So while the outlook remains positive, and there is certainly growth potential, the international investment community remains sceptical. The failure to attract much-coveted FDI is worrying, and consumer spending remains slow, but development of the local market and industry is promising. It is still too early to declare the Sri Lankan recovery an out-and-out success story, but five years clear of war, and with robust growth, the island’s future is looking good.