Sri Lanka presented its long-awaited 2010 budget in late June, aiming to cut its deficit and position its perennially underperforming economy to take maximum advantage of post-war optimism and opportunity.
The International Monetary Fund (IMF) gave its blessing to the plans to boost revenue and cut expenditure, releasing a $408 million loan tranche held back until the budget was presented.
Following is a summary of key risks to watch in Sri Lanka:
* FISCAL REFORM
Although the IMF gave an encouraging nod to the budget, its deficit target of 8 percent of gross domestic product is more than the 7 percent the IMF wants. It had a 9.9 percent deficit last year, also well outside the IMF target. So Sri Lanka is under pressure to deliver on its plans to boost revenue, rationalise a byzantine, costly tax code and above all, maintain fiscal discipline.
What to watch:
— Whether President Mahinda Rajapaksa’s administration gives into the classic temptation of all Sri Lankan leaders: dipping into public coffers to boost subsidies or dole out state jobs.
— Whether the government takes concrete steps to make state-run entities revenue earners. Much of its deficit reduction plan hinges on boosting revenue from those sources.
— The recommendations of a presidential tax reform commission, expected in April.
* STATE SECTOR LABOUR UNREST
Missing from the budget was a promised pay hike for Sri Lanka’s state employees, which Rajapaksa delayed for years by appealing to workers to hold off so he could pay for the war against the Tamil Tiger separatists.
But since the war ended in May 2009, public sector trade unions have been demanding the pay hike. The government says it will come in 2011, and is banking on increased efficiency and reform in state enterprises to help pay for it.
What to watch:
— More strikes are likely as the cost of staple goods continues to rise.
— Will trade unions drop their support for Rajapaksa and drift back toward the now-rudderless opposition? Union members in Sri Lanka have traditionally been quick to lose fealty to leaders they view as doing too little for them.
* THE RAJAPAKSA FACTOR
Three of the president’s brothers occupy key positions.
One is the parliament speaker and another runs the state security apparatus with a special brief to develop prime state-owned property in Colombo. A third runs a new ministry overseeing tourism, nation building and investment promotion, which encompasses just about all the lucrative post-war investment and development areas. The president is also the finance minister, so in short, any big investment decision needs the blessing of the Rajapaksas.
What to watch:
— Whether Rajapaksa and his family show evenhandedness in the development of public-private investment partnerships.
— Whether Rajapaksa can shake off concerns among wealthy local investors that his government will interfere with investments to settle political scores, or for coercion.
* CONSTITUTIONAL CHANGES
The president’s ruling alliance has 144 seats in the 225-member parliament, just six shy of the two-thirds majority he needs to change the constitution. He has now made clear he aims to change the charter to allow himself a third term and do away with the problem-plagued preferential voting system.
Sri Lanka has had a relatively disastrous history of changes wrought by constitution and many Sri Lankans are watching to see whether Rajapaksa follows a more virtuous path.
What to watch:
— The parliamentary deals Rajapaksa engineers to give himself the two-thirds majority. There is talk he will not do this until he takes his oath for his second term in November.
— Whether Rajapaksa abandons his previously stated plans to trim the presidency’s sweeping powers. There is speculation he may try vest the prime minister’s job with executive powers, thereby paving the way for himself to assume the role.
* WAR CRIMES PROBE
Despite Sri Lanka’s protests, U.N. Secretary-General Ban Ki-moon in June appointed a three-member panel to advise him on accountability issues related to the end of the war last year.
Thousands of civilians died, and there have been allegations by rights watchdogs, Sri Lanka’s opposition and members of the Tamil diaspora that surrendering Tamil Tigers were gunned down.
Sri Lanka insists its own presidential commission can probe any war crimes, but the country has a dismal record of investigating rights violations over the last four decades.
What to watch:
— The panel’s recommendations, and whether those lead to the start of an international probe, demanded by rights watchdogs.
— Chinese and Russian pronouncements on the matter, given their past support for Sri Lanka against the charges.
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