Perhaps as a result of over-confidence in its ability to obtain Western economic assistance, the newly elected government adopted a negative stance towards Chinese investments in the country, which had done much to transform the physical landscape. The government took the position that many of the Chinese projects were economically unviable in their existing state, and froze them for over a year. Chief amongst these projects that got stalled were the controversial Port City and Hambantota Port projects which had both negative cost and geopolitical implications for the country. However, when the economic resources anticipated from the Western countries failed to show up, the government had no option but to recommence the Chinese projects and also absorb the losses due to the delays.
There were at least two reasons why the anticipated Western economic assistance failed to materialize on the scale that was hoped for. The fact that Sri Lanka had progressed to being a middle income country, albeit at the lower end, meant that the country was no longer eligible for concessional aid flows on purely economic criteria. In addition, Western governments do not usually engage in large scale economic development activities and instead leave that to the private sector. Sri Lanka has faced, and continues to face a major difficulty as its labour laws and protection of private property are not as positive for business investors as are the legal systems in competitor countries, such as Vietnam which is a preferred location for foreign investment.
Today, with elections on the horizon, one of the strongest criticisms of the government has been that it failed to boost economic growth and bring development and prosperity to the country in the manner that South East Asian countries such as Thailand and Malaysia have become transformed. Even before the Easter Sunday attacks, economic growth in the country was relatively slow. Now in the post-Easter Sunday context, economic growth has taken a further plunge with the total disruption of the tourist industry for the past four months. Although tourist arrivals have been picking up in the past few weeks, foreign investors continue to be wary of potential instability in the country. The coming election period adds to this uncertainty.
In this gloomy economic context, in which economic resources for development purposes are unavailable, the failure of the government to take the USD 480 million grant offered by the US government is another indicator of its weakness. This grant provides economic resources in two key areas where substantial upgrading is needed. These are transport and administration of land. Unfortunately, this Millennium Challenge Corporation (MCC) grant has been seen part of a package together with two military agreements with the United States. These are the Acquisition and Cross Services Agreement (ACSA) and Status of Forces (SOFA) agreements which are about the US military having access to Sri Lanka. These military agreements are not special to Sri Lanka as the United States has them with about 100 other countries too, and in fact, the US military has had access to Sri Lankan territory since 1995 with another similar agreement being signed in 2007 by previous governments. The more recent agreements which have caught the attention of the general public, and which are being criticized on political platforms seeks to extend these agreements to more areas and in a more general way.
Extending the scope of these military agreements is to be decided from the perspective of national security interests. On the other hand, the MCC grant is about economic interests. The failure to utilize the MCC grant would be an economic loss to the country. It is about improving the country’s transport system and land registration system. The transport project will upgrade physical roadway networks, modernize traffic systems in the Western, Central, Sabaragamuwa and Uva Provinces. These investments will reduce severe traffic bottlenecks, create safer, more reliable public transportation, and lower the transport costs required to connect people and goods with markets.
Land activities will help the Government create an inventory of state lands, modernize methods of valuing lands, strengthen tenure security for smallholders, women, and firms, and digitize deeds records so that they are less vulnerable to damage, theft, and loss. This has nothing to do with whether the US military can use Sri Lanka as a supply hub or whether US troops can enter the country without visas. If Sri Lanka does not want that it can refuse to sign the ACSA and SOFA agreements or get out of them. The MCC agreement is not tied to Sri Lanka’s acceptance of the military agreements or extending and strengthening them.
There has been a great deal of fake news regarding the MCC grant. One story is that there will be a Colombo to Trincomalee electrified train railway line that will be an “Economic Corridor” effectively partitioning the country into a northern segment and southern segment, with the Americans taking over the northern segment. This story of the electrified railway line is based on the false story that a map of ports, airports, railroads, and expressways that was prepared by the National Physical Planning Department before MCC came on the scene. The map has no relation to the projects the government proposed for MCC funding. Another exaggerated fear is that if the land registration system is improved, poor farmers will sell their land and this will be bought up by multinational corporations that will exploit the people and the land to the detriment of Sri Lanka’s national interests.
President Maithripala Sirisena has stated that he will not sign the MCC grant until the presidential election is held. The problem with this handing over of responsibility to the next president is that the grant may lapse and be lost to the country. This is because Sri Lanka is no longer a lower middle income country and is an upper middle income country (which means that it has a per capita income of more than USD 3900 per year). Upper middle income countries are not eligible for MCC grants. If Sri Lanka does not meet the deadline for signing the grant it may be lost, which would mean that USD 480 million that could be used for development purposes would be lost. According to MCC data, so far 29 countries have been awarded 37 such grants and not one of them has changed its mind and turned such a grant down after requesting it. Sri Lanka could score a first, but for the wrong.