Sri Lanka is set to sign a major trade deal with India later this year, which it hopes will be the first step towards the island becoming a financial and business hub in the region. But the government of Ranil Wickremesinghe, prime minister, will have to work harder to win over domestic opponents of the Economic and Technological Cooperation Agreement (ETCA) who fear it will result in the country’s exploitation by Indian businesses.
Earlier this month Mr Wickremesinghe announced that the ETCA would be signed by the end of December. Sri Lanka has two other free trade agreements in the pipeline, with Singapore and China. The government began negotiations on the former in June and is expected to complete the latter by March 2017.
The country is viewed in Asia as an attractive trading partner for two reasons: its geographic location at the crossroads of major international shipping routes and its good relations with key regional players such as China, India, Pakistan and Singapore, who hope to use Sri Lanka to access each other’s markets. Amid rising tensions between India and its rivals Pakistan and China, such a role could become increasingly important.
Sri Lanka’s ambition to become an important economic hub in the region hinges on the successful implementation of the ETCA. The trade deal would create a mechanism to boost post-war development in Sri Lanka through increased Indian investment and give Sri Lanka access to markets in India’s southern states, which have a combined economy of $500bn.
Indian manufacturers would, in turn, benefit by setting up factories in Sri Lanka, enabling their goods to be exported to Pakistan and China whose sour relations with India make direct trade problematic.
It all sounds promising in theory but the omens are not good. For the last decade or so, the South Asian neighbours have struggled to expand an earlier free trade agreement largely due to anti-Indian sentiment in Sri Lanka, stoked by then president Mahinda Rajapaksa.
The election of Mr Wickremesinghe in August 2015 eased the tensions between Delhi and Colombo and prepared the ground for the ETCA. But substantial Sri Lankan opposition to such a comprehensive trading agreement remains, primarily from local businesses, trade unions and medical and technology sector employees. A demonstration in February drew over 10,000 protesters.
The ETCA’s detractors argue that an influx of Indian companies and workers will drive local firms out of business and fuel unemployment, while exposure to international competition will depress wages.
They also warn that the deal will swell Sri Lanka’s trade imbalance with India which runs to several billion dollars.
The Colombo government has sought to defend the ETCA by arguing that free trade arrangements over the last 25 years have seen exports to India increase 13-fold to just over $640m. The authorities have also attempted to downplay concerns over a possible flood of Indian workers, stressing that India will only send those with IT and shipbuilding skills, which are in great demand.
But this has failed to quieten opposition to the ETCA, which Mr Rajapaksa is pushing in an effort to revive his political fortunes. A longstanding critic of India, he would prefer Sri Lanka to look almost solely to China for economic support and cooperation.
The former president has warned that unless the government takes a phased approach to the new agreement, Sri Lanka’s economic problems, largely inherited from his administration, will deepen. With the government’s own handling of the economy under growing scrutiny, there is a risk of Mr Rajapaksa exploiting fears over the ETCA to mount a leadership challenge.
If he managed to return to power, Delhi’s relations with Colombo would likely cool, putting the trade deal under severe strain, and hinder Sri Lanka’s ambition to become a regional business and financial centre.
The reason for this is that India, along with the international community, holds Mr Rajapaksa responsible for launching the final bloody assault of the Sri Lankan civil war. Although it effectively ended Tamil Tiger resistance, the military operation led to numerous atrocities against Tamil civilians, causing deep resentment in the south of India, which has a large and influential Tamil population.
While the prospect of Mr Rajapaksa being voted back into office is currently slim, the government cannot afford to be complacent about the concerns that have been raised over the ETCA. Officials should not rush negotiations in their eagerness to have it signed by December.
Talks need to be transparent, while criticisms of the trade deal should be more forcefully challenged and its potential benefits communicated more effectively. In short, the government’s ability to turn its regional ambitions into reality will depend on whether it can persuade many sceptical Sri Lankans to share its vision.
Isabel Stoker is an analyst at Alaco, a business intelligence consultancy.