Sri Lanka Bombings Threaten Long-Term Damage to the Economy

Via The Wall Street Journal, a report on the devastating impact the recent bombings could have upon  foreign direct investment, trade, and tourism in Sri Lanka:

The aftershocks of Sri Lanka’s deadly Easter bombings could damage its fragile economy for years by sapping it of dollars and confidence just when the island nation needs them most.

Sri Lankan authorities said this week that they have rounded up almost all the people connected to the April 21 attacks on churches and hotels. The death toll from the bombings—the work of Islamist radicals—exceeded 250. The long-term damage to the economy will be harder to tally.

Tourist arrivals, which had been running ahead of last year’s pace, were down 60% from the year before in early May, according to tourism officials. They could be years away from returning to 2018 levels. The government forecasts a 30% plunge for the year, meaning $1.5 billion less in foreign currency coming in—a big hit for country with a gross domestic product of $89 billion.

While expatriate Sri Lankans are likely to partly offset that by sending more money home to help their families, the economy could experience a second wave of damage from the blasts as security concerns damp foreign direct investment and trade.

“It is certainly a significant setback,” said Nishan de Mel, executive director of Verité Research, a Colombo think tank. “The attacks were attempts to counter the confidence-building narrative of Sri Lanka as a safe haven and ideal location from which to do business.”

The country was already struggling, with economic growth in 2018 at a 17-year low of 3.2%. This year it had to scramble to raise dollars to meet record foreign-debt payments. A political crisis late last year led to a downgrade in the country’s sovereign-debt rating, pushing up borrowing costs. The currency plunged and foreign-exchange reserves shrank to less than $6 billion, not even enough to cover four months of imports.

Sri Lanka got an initial agreement from the International Monetary Fund to extend loans, and raised money from a $2.4 billion bond issue—though attracting buyers required interest rates in excess of 7%. Net external debt burden has climbed to 53% of GDP, according to Fitch Ratings, with $20 billion due in the next few years.

Ten years after the end of a decadeslong civil war that made it off limits to many investors, companies and tourists, Sri Lanka has been seeking to rebrand itself as a South Asian trade hub—secure and stable, with easy access to India’s huge, fast-growing market.

The attacks and the uncertain security situation since may make Sri Lanka more dependent on China, said Brahma Chellaney, a professor of strategic studies at the Centre for Policy Research, a New Delhi think tank.

“In effect this increases China’s leverage over Sri Lanka,” he said. “At a minimum it means they cannot lessen their dependence on China but it could also mean that they will have to find other ways to make payments to Beijing.”

China is already an important partner for Sri Lanka, providing equipment, expertise and financing as it ratcheted up spending on its infrastructure. China’s $1.4 billion in direct investment over the past three years has made it by far the biggest investor in the small economy, and it also now accounts for about 13% of Sri Lanka’s bilateral loans.

Sri Lanka has borrowed far more from international markets and countries like Japan over the years, but the sudden surge in its debt to China has triggered concerns among some economists and geopolitical analysts.

The country has been one of the biggest participants in China’s Belt and Road Initiative, which aims to build ports, pipelines and roads around the world—and which some critics call a debt trap meant to give Beijing greater access to participating countries’ infrastructure and sway over their policies.

Sri Lanka’s struggle with one project illustrates the danger, critics say. Unable to repay a Chinese loan for a southern port China helped build, it granted a Chinese state company a 99-year lease on the facility. Beijing says it has no hidden motives and that the projects benefit all sides by promoting development.

Sri Lankan officials say Colombo is no more trapped by loans from China than it has been by loans from Japan. In a hurry to raise its profile with the end of the civil war, the country has welcomed China’s expertise and usually accommodative financing.

This entry was posted on Saturday, May 11th, 2019 at 7:12 am and is filed under Sri Lanka.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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