Ethnic Divisions Create Persistent Risk of Conflict

As Sri Lanka approaches the three-year anniversary of the end of its long civil war, the political dominance of President Mahinda Rajapaksa and his SLFP is uncontested.

The extension of the prison term of Rajapaksa’s main political rival, former armed forces commander Sareth Fonseka, means he will not be released until after the next scheduled presidential election, which must be held by January 2016.

In the meantime, a campaign of intimidation against members of the press will have a dampening effect on media criticism of the administration, a prospect that in combination with a generally favorable medium-term outlook for the economy makes it likely that Rajapaksa and the SLFP-led UPFA will win re-election when their current mandates expire. Even so, the risk of renewed instability cannot be ruled out.

Although the president continues to pay lip service to national reconciliation, the government is tightening military control over the northern and eastern areas in which the minority Tamil population is concentrated, and there are reports that the government is promoting the migration of Sinhalese into Tamil strongholds with the aim of weakening the demographic basis for demands for regional autonomy. Both of these strategies are designed to neutralize the threat posed by the persistence of ethnic tensions, but could have the opposite result.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST

REGIMES & PROBABILITIES SLFP-led Coalition 85% Divided Government 10% SLFP-UNP
5%
RISK FACTORS CURRENT
Turmoil Moderate Same SLIGHTLY MORE Same
Investment
  Equity Moderate Same Same SLIGHTLY LESS
  Operations High SLIGHTLY MORE SLIGHTLY MORE Same
  Taxation Moderate Same Same Same
  Repatriation Low Same Same Same
  Exchange Low SLIGHTLY LESS SLIGHTLY MORE SLIGHTLY MORE
Trade
  Tariffs Moderate SLIGHTLY LESS Same SLIGHTLY LESS
  Other Barriers High SLIGHTLY MORE SLIGHTLY MORE Same
  Payment Delays High Same Same Same
Economic Policy
  Expansion Very High Same SLIGHTLY MORE SLIGHTLY LESS
  Labor Costs Moderate SLIGHTLY MORE SLIGHTLY MORE Same
  Foreign Debt Moderate SLIGHTLY MORE MORE SLIGHTLY MORE

SUMMARY OF FIVE-YEAR FORECAST

REGIMES & PROBABILITIES SLFP-led Coalition 80% Divided Government 15% SLFP-UNP
5%
RISK FACTORS BASE  
Turmoil Moderate Same SLIGHTLY MORE SLIGHTLY LESS
Restrictions
   Investment Moderate Same Same SLIGHTLY LESS
   Trade Moderate SLIGHTLY LESS SLIGHTLY LESS SLIGHTLY LESS
Economic Problems
   Domestic High Same Same SLIGHTLY LESS
   International High SLIGHTLY MORE SLIGHTLY MORE Same
   * When present, indicates forecast of a new regime

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