Sri Lanka, though a small island state, lies at the tip of the South Asian subcontinent and at the center of the Indian Ocean. In a vastly interconnected world, the sweeping effects of globalisation; China’s economic downturn; growing discontent and de-stabilisation in the West; and India’s enhanced involvement in the region as an emerging power, have all been major thrusts of global politics in 2016. Sri Lanka remains at the center of it all, enjoying great geo-strategic importance, owing to its deep harbours and trade-friendly location.  A review of 2016 suggests that in the coming year Sri Lanka’s domestic and foreign policy decisions will likely continue to have an increasing impact on the broader dynamics of Southern Asia as a whole.

Dancing with the Dragon

Perhaps the most significant decision taken by Sri Lanka in 2016 was in relation to recommencing construction of the Chinese-funded, Colombo port city. The port city project, initially halted after the change in regime, after several protracted negotiations, is now back on. Envisioned as a $1.4 billion financial centre of skyscrapers, luxury hotels, shopping malls, and a marina, it gives China a lease on 110 hectares of the port city for 99 years (2/5 of the project area), and attempts to fill the gap of a financial hub between Dubai and Singapore. It will also function as a quasi extra-territorial zone with its own laws and authority to offer favourable trade, investment, and tax policies. These port cities have become indispensable as logistical centers to handle greater volumes of people, cargo, and trade than ever before. Moreover, they are expected to attract volumes of tourism and create new employment opportunities across different sectors.

Moreover, just earlier last month, an agreement was made in principle to sell an 80% stake of the Hambantota deep-water port to a Chinese state-owned company. This port is located to the south of Sri Lanka, and lies close to one of the world’s busiest sea-lanes. The deal has however been met with a great deal of resistance locally, resulting in protests as recent as last week.

Within the region, India has been growingly concerned about an increasing Chinese presence in Sri Lanka, including the re-commencement of the port city, and the projected sale of stakes in another port, along with the docking of two Chinese submarines during the recent past. As this relationship continues to grow between Sri Lanka and China, we can only assume what ramifications it will have on geopolitical balances in the region, and the geo-strategic interests of the multiple powers interested in the Indian Ocean region. Simultaneously, it is critical to remember that China remains one of India’s greatest trade partners.

Embarking on the Road to Transitional Justice

In 2015, Sri Lanka co-sponsored a resolution at the United Nations Human Rights Council, committing itself to promoting reconciliation, accountability, and human rights post-conflict. Several domestic policies, mechanisms, and developments have manifested in the past year to implement this commitment. The passage of legislation for setting up the Office of Missing Persons and wide public consultations on constitutional reform and reconciliation mechanisms were key developments in 2016. Another milestone was the passing of the Right to Information Act, the result of a two-decade long campaign of civil society and media activists, ensuring that the right to information has finally come into fruition all across South Asia! Though open to critique for their respective shortcomings, these changes have contributed positively towards Sri Lanka’s image globally.

Most recently, the Millennium Challenge Corporation (MCC), an independent U.S. Government agency, selected Sri Lanka in December for a new MCC compact (five-year grant) to encourage economic growth and reduce poverty. The criteria for the above grant calls for the demonstration of “a commitment to just and democratic governance, investments in its people, and economic freedom.” Similarly, the inaugural U.S.-Sri Lanka Partnership Dialogue, held in February 2016, again indicates a commitment to democracy, rule of law, and shared prosperity, between the two countries and implies a positive shift in Sri Lanka’s relations with the West. The multiplier effect of this, on the rest of South Asia, relates to the aforementioned improvement in trade and investment. In a globalised word, cooperation like this contributes towards a greater collective shared prosperity for the region.

Trade and Limits to Regional Connectivity

Despite shared interest in regional economic development, however, regional cooperation and the role of the South Asian Association for Regional Cooperation (SAARC) continues to falter due to various deep-seated conflicts and tensions.  Despite the existence of the South Asian Preferential Trade Agreement (SAPTA) and South Asian Free Trade Agreement (SAFTA) inter regional trade remains as low as 5% in South Asia.

The recent indefinite postponement of the 19th SAARC Summit, speaks to this. A boycott of the Summit to be held in Pakistan, initiated by India, was endorsed first by Bangladesh and Afghanistan. Sri Lanka became the fifth nation to endorse the postponement, echoing the idea that until a more conducive environment is fostered, the pursuit of regional cooperation will be limited. The question therefore remains what implications these decisions, in the broader global context, will have on the future of SAARC and the region.

2016 was also marked by negotiations regarding the Indo-Sri Lanka Economic And Technology Cooperation Framework Agreement (ETCA). Although the agreement has not yet been finalised, first being targeted to be finalised by mid-2016, and then the end of the year, it remains widely controversial in Sri Lanka. The still incomplete agreement promises to impact services in the IT and shipyards sector, enabling the movement of professionals back and forth. This has implications both in terms of providing job opportunities and in augmenting competition. It remains to be seen whether this agreement will truly stimulate growth and trade for the region.

Finally, in 2016 Sri Lanka, after the temporary suspension of the Generalised Scheme of Preferences (GSP) Plus in early 2010, following the end of the civil war, negotiations to regain GSP Plus status recommenced. Nearly 30% of Sri Lanka’s exports are with the European Union (EU). The EU accounts for 43% of Sri Lanka’s apparel exports and is a leading market for fishery products, coconut products, cut flowers and foliage. Meanwhile, both Pakistan and Bangladesh, who are direct competitors with Sri Lanka, particularly in terms of apparel, currently benefit from the EU’s special concessions and incentive plan.

The possibility of regaining GSP Plus from the EU is closely linked to the advancements and shift in Sri Lanka’s foreign/domestic policy. While confidence is strong that increased growth for Sri Lanka will have positive effects on the rest of the region, the question of competition may also prompt cause for apprehension, particularly in light of growing concerns over economic instability and regional competition. More than ever, it is apparent that whilst maintaining its strategic interests, for the shared prosperity of the region, Sri Lanka’s policies and decisions need to be articulated in a manner, which transcends boundaries and fittingly balances the multiple actors and interests circling our waters.

Sumudhu Jayasinghe is currently a Research Officer at the Regional Centre for Strategic Studies. This is an edited version of an article first posted on South Asian Voices on 04 January, 2017 and thereafter reposted on the London School of Economics International Development blog on 06 January, 2017. The views expressed in this post are her own, and do not necessarily reflect that of the Centre.