Sri Lankan President Mahinda Rajapaksa’s ruling alliance swept local government elections in late July, but the former Tamil Tiger political proxy won handily in the old war zone, exposing the still-deep ethnic divide despite two years of peace.
Following are the key political risks to watch:
TAMIL-SINHALA POLITICAL DIVIDE
Rajapaksa and his United People’s Freedom Alliance (UPFA) campaigned hard in former Tamil Tiger territory in northern Sri Lanka for local government polls held on July 23 but went away disappointed.
The Tamil National Alliance (TNA), which was the Tigers’ political front, won 18 of 26 seats in the north and east, areas the separatist group had fought to create as a Tamil-only nation. The TNA has the explicit backing of the United States and India when it comes to political reconciliation.
Though it is easy to overstate the ethnic division, Tamils were clearly unimpressed with the government’s massive development efforts. More importantly, they were frustrated with intimidation by the military and a pro-government Tamil party.
The root of the island nation’s 25-year war was a long post-independence history of political sidelining, violence and disenfranchisement of the Tamil minority.
So Rajapaksa has a lot of collective distrust to overcome, and a militant diaspora that still advocates the separatism he led the war to stamp out.
What to watch:
— Whether the government’s talks with the TNA gain any traction. So far, they have produced little, and India and the United States have urged the president to move faster.
— The risk of a return to conflict in the near term is low, given the heavy military presence and the fact that almost anyone in Sri Lanka with the stomach for a fight is either dead or in prison. But failure to address the issue will fuel the militant diaspora, and may give room for a future insurgency.
THE WAR’S SHADOW
The best leverage any interested party has on the government is a U.N. advisory panel’s report that says there is "credible evidence" the Sri Lankan military and Tamil Tigers both committed war crimes at the end of the conflict in 2009.
Since the Tigers have been wiped out, that leaves only the government to possibly face justice, should an investigation prove atrocities were committed. Sri Lanka has insisted its soldiers committed no crimes and it is investigating itself.
The pro-Tiger wing of the Tamil diaspora wants an international investigation and it has sympathetic ears in some media outlets, Washington, London and other Western capitals wary of Sri Lanka’s closeness with Beijing.
The U.N. report is hotly contested, as it echoes many accounts originally emanating from pro-Tiger sources and it also says tens of thousands of civilians may have been killed.
There has been no clear accounting of non-combatants killed at the end of the war, and the United Nations has disavowed an unofficial tally of about 7,000 during the final months that made it into the press.
That said, the government is on the back foot fending off the push for a probe, and has not helped its case by insisting that no civilian was killed — a near impossibility in any war.
What to watch:
— Whether Sri Lanka lands on the busy agenda of the U.N. Human Rights Council in September. The U.N. High Commissioner for Human Rights, Navi Pillay, has demanded an international probe.
— If it does, can Sri Lanka line up enough international support to beat back any efforts to start a probe?
— Any credible steps Sri Lanka will take to probe war crime evidence, at least to defuse mounting international pressure.
— Further down the line, will there be an independent investigation and sanctions?
INVESTMENT CLIMATE
Post-war investments have been picking up with first-quarter foreign direct investment hitting a record high, thanks primarily to the tourism boom. .
Large investments in ports have mainly come from China, the main actor in Sri Lanka’s post-war redevelopment.
That said, the deals tend to be shrouded in mystery and swaddled with political clout, so rumours of corruption abound. Many big investors from multi-national companies have shied away, while Indian companies have been aggressive in moving in.
Sri Lanka is doing well on its macroeconomic fundamentals, as evidenced by the appetite for its fourth eurobond, which priced in July.
Inflation spiked in July but the central bank says it is not concerned and demand-driven inflation has not appeared in force yet, as once feared.
The Colombo Stock Exchange dipped into negative territory on the year for the first time since 2008, and big investors are grumbling about regulations designed to bring it in line with world markets.
What to watch:
— The real economic effects of the big-ticket investments, and whether they will trickle down and boost Sri Lanka’s per-capita income.
— Whether the ease and transparency of doing business in Sri Lanka gets better, hampered as it still is with capital controls, difficult bureaucracy and the space for graft.
— Whether foreign investors come into Sri Lanka’s share market, and if the regulator, the Securities and Exchange Commission, gives in to broker pressure to relax new enforcement standards designed to give comfort to offshore players.
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