by Daniel Ten Kate and Anusha Ondaatjie Courtesy Adaderana

Most central bankers would relish an office with an unobstructed view of the Indian Ocean’s sparkling waters. Sri Lanka Governor Arjuna Mahendran finds it dull.

He would rather see skyscrapers dotting the horizon as cargo vessels deposit containers into Colombo’s ports. Right now, piles of sand and stones remind him daily of a stalled China-backed $1.4 billion plan to build a city on reclaimed land that may attract even more investment dollars.

I’m hopeful that they will actually recommence this project,” Mahendran said from the 15th floor of the central bank on the eve of parliamentary elections. It will be transformative in many ways for the Sri Lankan economy.”
The comments reflect a change in tone since President Maithripala Sirisena vowed to pivot away from China when he ended Mahinda Rajapaksa’s 10-year rule in January. Even though Rajapaksa failed in a bid to become prime minister in parliamentary elections on Monday, China appears resurgent — mostly because Sirisena needs its cash to jump start growth.

Results showed Prime Minister Ranil Wickremesinghe’s United National Party, which backed Sirisena, winning 106 seats in the 225-person parliament — just short of a majority. Rajapaksa’s party came in second. Sirisena is expected to appoint Wickremesinghe for another term as early as Wednesday.

The Colombo port city is now likely to go ahead even as Sri Lanka boosts ties with Western nations and India, according to Razeen Sally, an associate professor at the National University of Singapore. The project has a pretty strong commercial logic” and China has ample funds, he said.

Rice for Rubber

There was hostility among those in government now to the Chinese because they were so identified with the Rajapaksa regime,” Sally said. Realism has set in.”

Strong ties between the nations date back to the 1950s, when Sri Lanka traded rubber to China in exchange for rice. The move in the wake of the Korean War prompted the U.S. government to sanction Sri Lanka for selling strategic materials to a Communist nation.

Decades later under Rajapaksa, China became Sri Lanka’s top investor, biggest government lender and second-largest trade partner. Security ties also grew: A Chinese submarine docked twice in Colombo last year, raising alarm bells in India.

After taking power, Sirisena moved to meet a campaign pledge to reduce Sri Lanka’s dependence on China. He opened an investigation into the Colombo port city project, prompting sea reclamation and other activities to stop.

Different Tone

Now his administration is changing its approach. With an economy more than 100 times smaller than China’s, Sri Lanka has little choice but to play nice.

Last month, the chairman of Sri Lanka’s Board of Investment said the port city project was definitely not off” and work will soon be restarted after environmental issues are addressed.

For its part, China is also mending fences. Beijing’s leaders want to complete a free-trade deal with Sri Lanka by year’s end, Chinese Ambassador Yi Xianliang said in Colombo on July 29 as he announced more than $350 million in aid money.

Perhaps more damaging than Rajapaksa’s close ties with China was his antagonism toward the West. The U.S., Europe and India accounted for about 60 percent of Sri Lanka’s exports in 2014, compared with about 2 percent for China, according to data compiled by Bloomberg.

Sri Lanka’s shipments of textiles and garments floundered after 2010, when the European Union denied preferential trade access for exports because the country failed to improve its human rights record. Wickremesinghe last week assured Sri Lankan garment exporters that his government would work toward regaining those concessions by next year.

Friends Needed

Mahendran, Sri Lanka’s central bank governor, said the shift in foreign policy was one of the main differences between Sirisena and Rajapaksa. Even as the government improves relations with the U.S. and Europe, the notion that Sri Lanka is moving away from China was really overblown,” he said.

This is a pretty small economy and foreign policy has a big impact on how the economy works,” he said. We can’t afford not to have friendly relations with our largest markets.”

In his office, he looked out over a stretch of coastline that ran from Colombo’s harbor to the international airport about 35 kilometers (22 miles) away. In between, he said, the government would push for industrial parks, housing developments and other infrastructure that would transform Colombo into the most liveable city in South Asia.

China’s ability to attract capital is crucial for Sri Lanka to take advantage of its geographical position near the world’s fastest growing populations in Asia and Africa, Mahendran said – – even if it means losing his peaceful ocean view.

We need a little bit of busyness in Sri Lanka to be honest,” Mahendran said. It’s not busy enough.”

bloomberg