Thu, Sep 17, 2015

Sri Lanka General Elections: Mandate for Stability and Pointers to Businesses

After decades of war, Sri Lanka has turned into one of the more peaceful investment destinations in the Indian subcontinent. While the country has had an eventful year with two major elections as well as numerous changes in political affiliations, the orderly manner in which Sri Lankans have responded and voted in the elections augurs well for a stable business climate for the island nation. In this article, we explore what will be the likely near-term political impact of recent developments and what this all means for investing firms and business.

Key players and agenda of august parliamentary elections

On August 17, 2015, Sri Lanka citizens voted for the second time this year, this time to elect the island nation’s parliamentarians; this follows the Sri Lanka Newfound Peace Leadership held in January 2015. The parliamentary election generated significant attention after the former president, Mahinda Rajapaksa, entered the fray in an attempt to become the prime minister. The changeover of the guard was peaceful despite the frenzied changes in political affiliations this year.

The parliamentary elections were dominated by two main political parties:

  • United National Party (UNP), headed by incumbent Prime Minister Ranil Wickremesinghe, and
  • United People’s Freedom Alliance (UPFA), headed by President Maithripala Sirisena.

UPFA is a political alliance of several parties, including the Sri Lanka Freedom Party (SLFP), of which both Sirisena and Rajapaksa are members. Despite Sirisena’s open reservations against Rajapaksa, Sirisena was pressured by Rajapaksa loyalists within the party to issue a UPFA party ticket to the former president. Another key political party in the parliamentary election was the Tamil National Alliance (TNA), which is an alliance of ethnic Tamil political parties.

The various political parties pursued different agendas during the election campaign:

  • UNP sought to introduce constitutional amendments to dilute presidential powers; devolve powers to the provinces (specifically to the Northern Province that houses the Tamil minority population); and focus on developing a knowledge-based economy and fighting corruption.
  • Although the UPFA’s official election manifesto essentially mirrored that of the UNP, the underpinning tenor of the UPFA during the election campaign was markedly different. According to a media article, Rajapaksa’s campaign was a communal campaign that harped on the war victory, propagated hate and instilled fears of the Liberation Tigers of Tamil Eelam (LTTE) re-emerging with a UNP government. (LTTE was a terrorist organization based in the northern region of Sri Lanka, which was engaged in a three-decade-long civil war with the state. Rajapaksa was the head of the state when the LTTE was defeated by Sri Lankan armed forces.)

What is the likely political impact in the near future?

In Sri Lanka, political combinations remain complex, and politicians prefer to choose compatible alliances that cut across party affiliations. For example, the United National Front for Good Governance (UNFGG) is a coalition of smaller parties led by UNP.

UNP emerged as the single largest party in the elections, winning 106 out of the 225 seats, falling short by a mere seven seats of securing the overall majority. Despite the lack of majority, Wickremesinghe is expected to form the government and continue as the prime minister with the help and support from other alliance partners and possibly, breakaway factions from SLFP. Sirisena is expected to support him as he did in January.

This is where the SLFP parliament members loyal to President Sirisena are expected to play a key role by accompanying him in crossing over to the ruling coalition. Rajapaksa’s second attempt this year to regain power through parliamentary elections, after a failed attempt at the presidency earlier this year, was unsuccessful as UNFP came in second with 95 seats, 50 seats fewer than in the 2010 parliamentary elections. According to a media article, Sri Lankan voters have rejected divisive politics for the second time this year and have chosen development and governance.

The UNP-led coalition will be expected to govern the country for the next five years, barring major differences arising among the constituents that form the government. The coming year will be crucial in establishing the stability of the government, and both domestic and international stakeholders are keenly following its progress. The domestic population will be interested in the government’s steps toward tackling corruption, the resolution of issues with the affected minority population (such as the Tamils) and controlling inflation. Meanwhile, international stakeholders are expecting “predictability” in government policies and key reforms toward simplifying the business environment in the country.

What does all this mean for investing firms and business?

By supporting each other in both of this year’s elections, Wickremesinghe and Sirisena have managed to keep their common opponent Rajapaksa out of power. Given Rajapaksa’s waning political prospects after two successive election losses, politicians and funders previously aligned with Rajapaksa could also cross over to join Sirisena’s group, further strengthening the government.

Wickremesinghe and Sirisena can now turn their attention to reforms and business. They understand that a post-war recovery, aided by sustained foreign investment to foster development, will eventually help Sirisena consolidate his authority over his party and help Wickremesinghe continue with his reform agenda. Equitable growth across war-ravaged areas will also help the government grow stronger politically in the island nation.

In this climate, investors have an opportunity in Sri Lanka to reap the advantages of a changing political economy that has the virtues of a stable democracy (despite political upheavals), low cost of business operations, a considerable pool of employable local labor, and growing market demand.

However, in view of Sri Lanka’s recent political history, companies would do well to determine the reputations and track records of their local partners to better understand their backgrounds, local practices and, if any, unsavory connections. Investors also need to be aware of newfound political issues stemming from a rise in Buddhist radicalism, which in recent years has opposed investments in sectors such as gaming and entertainment.

As Sri Lanka dusts off the troubled past and stands ready for development, business and growth, smarter firms with an ear to the ground will do better than others.

For more insight on political activity in the region and what it means for investors and business, view our other reports:

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Sri Lanka: How Newfound Peace and Leadership Affects Business

After a 30-year civil war ended in 2009 during the presidency of Mahinda Rajapaksa, Sri Lanka continued to be somewhat of an international outsider. However, with the election of Maithripala Sirisena as Sri Lanka’s new president in 2015, this report explores the potential impact on the nation as well as businesses contemplating new investments in the country.

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