Their return to power is seen as a positive sign by many in the nation’s real estate industry. The controversial clan, though, have more than their share of doubters
Sri Lanka’s new president has wasted no time in doing what many people voted for him to do: get down to business.
Just over a month in office, the government of Gotabaya Rajapaksa gave the green light in December to a USD250m real estate project—an auspicious start to what many predict will be a new era of pro-business reforms.
But with the project already running into controversy, fresh questions have been posed regarding the return to power of the Rajapaksa family and whether the country is in line for a brighter or more fraught future.
Gota, as he is widely known, sailed to victory in November’s vote on a ticket of law and order and economic revival after bombings in April shattered people’s confidence in authorities and the tourism industry.
His plans to slash taxes and end half a decade of declining economic growth resonated with the voting public, as last year the Sri Lankan economy was well on its way to plummeting to an 18-year-low of 2.7 percent due to the Easter bombings.
The VAT rate has been cut from 15 to 8 percent, and taxes were scrapped, including a two percent nation-building tax intended to finance infrastructure after the civil war ended in 2009. There is also talk of getting rid of capital gains tax.
Many property watchers expect the sector will rebound after some sluggish years, with the appointment of Mahinda Rajapaksa—Gota’s brother and the nation’s former president—as prime minister seen as a stabilising force. “There is a very firm sense of direction now,” says KPMG’s principal for deal advisory Shiluka Goonawaraden. “All that cash in the system, all those tax cuts, should lead to better prices and higher velocity in the real estate market.”
But the bright end to last year with the announcement of the real estate project as the first foreign investment in the country under the new government has been overshadowed by corruption allegations.
The development, initially proposed in 2014 by Mahinda but stalled under the previous government, will be built by Perennial Real Estate Holdings on a state-owned plot of land near Beira Lake in Colombo. It will consist of a 30-storey commercial tower with 700 apartments, a hotel, shopping complex, and food shops.
Opposition politicians claim the deal has been conducted opaquely, bearing the dirty fingerprints the Rajapaksas were frequently accused of leaving on the country when they were ousted.
There is a very firm sense of direction now. All that cash in the system, all those tax cuts, should lead to better prices and higher velocity in the real estate market
UNP MP Thalatha Atukorale says the deal was reminiscent of the Hambantota port—a scandal that has dogged the brothers since they left office and become a cautionary tale for small nations cosying up to China. The port was one of several mega infrastructure projects launched under Mahinda’s government in return for huge loans from China. Crippled by the debt from this period, former president Maithripala Sirisena was forced to formally hand over the port to China on a 99-year lease.
Gota made clear ahead of the election that he wants to restore relations with China if he wins. But Brahma Chellaney, a professor at Center for Policy Research in New Delhi, says while Sri Lanka remains a key ally to helping China gain strategic supremacy in the Indo-Pacific, the brothers will proceed with caution this time around.
“The Rajapaksas will be more careful this time in dealing with China because of the debt trap Sri Lanka faces,” surmises Chellaney, adding he expects the economy to do well “because of their centralised style of governance, which brooks no obstruction or delay.”
Roshan Madawela, founding director of consulting firm Real Estate Intelligence Unit, feels the Prime Minister is “boxing clever” by balancing geopolitical relations with his first trip as president to India in November. The meeting saw Prime Minister Narendra Modi offer USD450m to Sri Lanka for infrastructure and security.
“Due to Sri Lanka’s strategic location, the government has to strike a balancing act between China, India, and the West—telling India, ‘you have to put some money in if you want a foothold in Sri Lanka’, or risk losing out to China,” says Roshan.
Getting western governments and investors interested in Sri Lanka might prove harder. The brothers stand accused of human rights abuses and war crimes in their brutal defeat of Tamil Tiger separatists in 2009, an issue that strained relations with the west and pushed the country towards China.
While the brothers have made no effort to seek justice for those victims, western governments are unlikely to force the point for fear of pushing them closer to China.
For Sri Lanka, any fall into further debt would be dangerous and could derail its plans to revitalize the economy. With debt already at USD73bn, about 82 percent of GDP, its recent tax breaks will slice revenues even thinner. Because of this, the economic relief that may be experienced under the new government may be short-lived, say some financial analysts, with the debt just getting rolled over, after which further pain will follow.
In January, S&P Global Ratings and Fitch Ratings revised down Sri Lanka’s sovereign outlook to “negative”, from “stable”, on the premise that new tax cuts undermine the country’s fiscal and debt sustainability.
Yet with tourism still down on pre-2019 levels and the real estate market in desperate need of foreign investment to reduce the oversupply, particularly of luxury units, the tax breaks might be a gamble but they’re one of the few available options to jumpstarting the economy.
Investors, however, will need confidence the brothers have learnt from their previous failings, and that transparency and the law will be upheld. The Perennial deal will, in time, either prove or refute that.
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