Sri Lanka’s Silva lining!

Finance Asia: In the year since Sri Lanka’s strongman President Mahinda Rajapaksa was ousted from power, a new Coalition Government has tried to form a national economic and political consensus. One of its leading lights is Dr. Harsha de Silva, a former economist and politician who was an outspoken critic of the previous regime.

De Silva is regarded as one of the country’s foremost up-and-coming politicians. He is also part of a generation of educated Sri Lankans who have started entering politics en masse for the first time.

With the three-decade long civil war finally at an end, these newly-minted MPs share a belief that Sri Lanka has a historic opportunity to finally put itself on a sustainable development path. 

Here de Silva discusses the challenges and opportunities facing the new Government as it revives key infrastructure projects established by the Rajapaksa clan. 

Readers can find out more about investing in Sri Lanka at FA’s Sri Lanka Investment Summit in March.

Q: Sri Lanka has undergone some fairly seismic changes over the past year. What would you say tops the list?

A: Our major achievement was reintegrating with the rest of the world. We’re now seen as a credible nation again. Up until that point, we’d been classified with a group of pariah countries and constantly pulled up in front of the UN Human Rights Council because of the way the civil war ended in 2009.

But the election of Maithripala Sirisena as President and Ranil Wickremesinghe as prime minister in January last year started to change all that. We’ve been able to repair our relationship with the West and continue our friendships with India and China.

We’ve come a long way in the space of a year. Right now, we’re in the process of drafting a new constitution. This is being structured to achieve reconciliation with the Tamil minority in the north so all the different peoples who live in Sri Lanka can do so in harmony.

Q: One of the Coalition Government’s first big steps was suspending more than 30 projects initiated by the previous Government on the grounds they were not won through open tenders and huge bribes were paid to the family of [former President] Mahinda Rajapaksa. Many of these contracts were with Chinese firms. Did this harm Sri Lanka’s relationship with China and how successful have you been in trying to restructure them?

A: The past year has given us space to re-evaluate all the outstanding contracts and by and large many of the issues have been resolved to the benefit of both China and Sri Lanka. The biggest project, which got suspended, was the $1.4 billion Port City development in Colombo.

This was being financed with Chinese money. The Government ordered an environmental impact assessment and after that was released, there were a number of public discussions, which led to a raft of revisions. It now looks like the project will go ahead with an announcement expected shortly, possibly before the beginning of March.  

Our discussions with the Chinese concerning the various infrastructure projects have enabled us to cement the relationship between our two countries. Where we could, we were able re-negotiate and restructure the contracts to bring the overall costs down.

Our major concern was the lack of transparency with the way they were originally awarded.

Q: So have all the stalled projects 

been re-started?

A: No not all of them. There are still some concerns. The Northern Expressway project from Colombo has not been re-started, for example. This is a very important project because the expressway will form a backbone up the country from Colombo to Jaffna in the north with an extension to Kandy, our second largest city.

When we were in opposition we’d been led to believe it was all set for implementation. But that was not the case at all and there are multiple issues, which remain to be sorted out.  

Q: What about the Southern Expressway from Colombo to Mahinda Rajapaksa’s 

hometown of Hambantota on the other 

side of the country?

A: The Government announced this project would re-start in January. It was already about three-quarters complete and now there is only one final 96-kilometre stretch left to finish.

The big challenge we have in the Hambantota area is what to do with the white elephants which were built there. We spent $1.3 billion on a port and $220 million on an airport that no one uses.

Q: I thought the port was being used 

and that a Chinese company might put in a 

ship repair yard there?

A: No, that’s not the case. The ports minister is going to call for fresh proposals to find new tenants for the port at the very least. That is a viable project.

Q: What are the Government’s main 

objectives for 2016?

A: The overriding objective is to make sure the new constitution is written. It’s essential because it will bind all the different ethnic groups together and build a national identity we can all be proud of.  When we do that Sri Lanka will become a place that investors want to come to and it will help us to meet our development objectives.

Q: Isn’t there a danger that by focusing so heavily on constitutional change the Government will not give the economy the priority it needs?

A: Yes that’s a challenge we’ll need to meet. But by putting a new constitution in place we will do much to address issues relating to corruption and governance that have held back investment in the past.

Under the previous government exports fell heavily as a percentage of GDP from about 35% to 15%. At the same time our commercial debt grew rapidly.

Before Rajapaksa’s time in office, Sri Lanka was funded through soft loans and concessionary loans.  But that changed and he took on short-terms loans and built investment projects like the ones I mentioned in Hambantota, which do not generate the revenues needed to service the loans.

Q: Economists frequently say Sri Lanka needs to do more to improve tax collection to manage its budget deficit. What’s your view?

A: Yes they are correct. At 12% of GDP our tax revenues are among the lowest in the world. That is a structural problem that needs to change.  

Q: The other criticism levelled at the Government concerns a lack of focus. While the Government has been widely praised for its desire to listen and take on board many different opinions, some commentators worry that it will not be able to formulate or execute a coherent strategy.

A: I have every confidence in the Government. Our Prime Minister has come up with a very detailed medium-term strategy for the country. He has very clearly articulated the steps Sri Lanka needs to take to become a global player and position itself at the heart of the Indian Ocean by turning itself into a logistics hub, etc.

If you look at what we’ve done in 2015 then you’ll see we have delivered already. When the two coalition parties came together everyone was very surprised and sceptical. They thought we’d never be able to work together or make it last, but we have forged a national consensus. That’s a remarkable achievement in itself.

On the economic front, it will take some time to turn things round. These changes don’t happen overnight, but we are moving in the right direction now. There are multiple external challenges to deal with including the state of the global economy, which we cannot control.

But are very clear about the issues we need to address internally and committed to achieving them.