Counting the cost of Sri Lanka’s violence

ExtremistConcern about the worst bout of communal fighting to hit Sri Lanka’s since the end of its civil war in 2009 deepened on Tuesday, after a second evening of clashes between Muslims and Buddhist groups resulted in at least one further death, despite an overnight curfew.

But while daylight appeared to bring relative calm to the streets of two southern towns that endured the worst of this weekend’s disturbances, any further upsurge in ethnic tensions is likely to have broader implications for one of Asia’s most vibrant frontier markets.

Sri Lanka’s growth has been impressive of late. Some analysts fret in private that that the government of President Mahinda Rajapaksa has a habit of inflating its gross domestic product data. Even so, something like 7 per cent is likely this year, as Capital Economics noted earlier this week:

Sunday’s violence, which began when a march led by monks from a right wing Buddhist group entered a predominantly Muslim neighbourhood, is unlikely to change that, assuming Tuesday’s lull continues.

The island’s $2bn tourism economy is also largely unaffected. This weekend’s clashes took place a few miles from Bentota, a popular western beach resort, but June is the off-season, meaning that nearby international hotels were largely empty of foreign visitors.

Much the same is true for the roughly $4bn garment export trade: one small Muslim-owned garment factory was burned on Sunday night, but there has been no sign of trouble affecting companies like MAS Holdings or Brandix, which manufacture high-end garments, including underwear for companies like Marks & Spencer of the UK.

That said, growing tensions between Sri Lanka’s Buddhist majority Sinhalese population — who form the political base of Rajapaksa’s family-dominated government — and its minority Muslims are likely to affect the country’s business climate in at least two ways.

First, Muslims are among Sri Lanka’s most successful commercial communities, in contrast to countries like India. Many prominent companies, including Brandix, are owned by Muslim families.

The sight of Buddhist mobs attacking Muslim-owned homes and businesses has proved understandably alarming, as one prominent Muslim business-owner told beyondbrics today, speaking on condition of anonymity.

“This used to be a very cosmopolitan country, but I have never sensed a mood like this before, and the Muslim community is worried,” he explained. “Muslims here have always been relatively well to do for historical reasons, and the fact businesses are being targeted like this is a big cause for concern.”

In particular, recent days have deepened worries among Muslim business leaders that their government — and in particular the President’s powerful brother Gotabaya Rajapaksa, who controls the army — has quietly encouraged the growth of hardline Buddhist groups, as means of deepening support among its core Sinhala voters.

Second, any rise in ethnic violence could also dent attempts to attract inward investment, according to Harsha Da Silva, an economist and member of parliament for the country’s main opposition party.

“We are desperately trying to bring in FDI (foreign direct investment), with a target to attract $2.5bn this year, but we fell way short of what we wanted last year,” he explains, referencing a government objective for inward investment projects this year. “This violence on the streets is not something that will boost confidence in foreign investors.”

Rajapaksa’s government pledged a series of investigations to identify the culprits of Sunday’s violence. Much now depends how effectively these investigations are conducted, and whether the army can stop further nights of unrest. In the aftermath of more than twenty years of civil war, Sri Lanka’s politicians like to talk about the island’s peace dividend. After this week, that peace looks shaky at best. (FT)

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