Colombo, May 27: Sri Lanka’s newly appointed Foreign Minister Ravi Karunanayake, who was previously Finance Minister, has said that Sri Lanka’s diplomacy from now on will be “commercial” with the aim of shoring up the economy and getting the system and the people to deliver.
More specifically, the aim will be to get Foreign Direct Investment (FDI) and to increase exports, sectors which have been doing very badly in the past two years.
Karunanayake, who only recently bagged an international award for being the “Best Finance Minister in Asia”, told the media on taking over on Thursday, that the Sri Lankan Foreign Service will be re-oriented to deliver the goods in the economic and commercial fields.
The shift in the emphasis is not only because Karunanayake is essentially a finance man, but because human rights and reconciliation issues which used to engage the Foreign Ministry fully earlier, have lost their importance. The tormentors, namely, the Western governments and the UN Human Rights Council (UNHRC), have considerably softened their hard line on Sri Lanka’s rights record during the war and after.
The main reason for the softening is the exit of the abrasively anti-West and anti-UN Mahinda Rajapaksa from the Presidency in January 2015 and his defeat in the August 2015 parliamentary elections.
The UNHRC recently gave Sri Lanka two more years to implement the UNHRC resolution it co-sponsored. On May 19, Sri Lanka got the European Union’s GSP-Plus trade concessions back on the grounds that the human rights situation has improved.
Economy on Decline
But the Sri Lankan economy is in a bad shape, and on the decline. It is worse than it was when Rajapaksa was in power. The country is in heavy debt and repayment is becoming more challenging by the year. Exports are falling while imports are increasing. Foreign Direct Investment (FDI) has dipped and is abysmally low.
As Finance Minister, it had been Karunanayake’s endeavor to borrow less from abroad and get more FDIs. But he had no success, partly because of deep rooted inertia in the Sri Lankan business sector and a general fear of a foreign “economic invasion.” Sri Lankan entrepreneurs do not even want to be part of the international production chain for fear of being dominated by people of another nationality.
In 2016, FDI slumped by 54% to reach a level ‘extremely low by any standard’ as Development Strategy Minister Malik Samarawickrame put it. FDI dived to $ 445 million, compared with $ 1161 million in the previous year.
Again in 2016, government faced a debt and balance-of-payments’ crisis. It also had to change its tax policies announced in the 2016 budget due to protests.
“It is a lot to do with policy inconsistency on some of the key criteria like taxes and land ownership,” commented Shiran Fernando, an analyst at Frontier Research.
The government also faced legal battles in raising the Value Added Tax (VAT) from 4% to 15%. There was a loss of SLR 100 billion (US$ 654 million) due to a six-month delay in the implementation of the new tax.
In February 2017, earnings from exports (US$ 868 million), had come down by 2.7% from US$ 892 million in February 2016. This was mainly due to lower industrial exports.
Earnings from industrial exports, which represent about 76% of total exports, declined by 6.5 % year-on-year, to US dollars 659 million in February 2017.
A considerable widening in the trade deficit was observed, with a decline in exports amidst increased imports mainly due to higher imports of fuel and rice. Earnings from tourism had dipped. The growth in workers’ remittances was below the expected level.
Further, the financial account was adversely affected by significant outflows from the government securities market.
But since February, the pressure on the external account has eased somewhat thanks to a better export performance; a reversal of capital outflows with investments in the stock exchange; and inflows to the government securities as well as proceeds from the International Sovereign Bond of US$ 1.5 billion and a syndicated loan of US$ 450 million.
(The featured image at the top is that of Sri Lanka’s new Foreign Minister Ravi Karunanayake)