Sri Lanka is not only refusing to bring about reconciliation in the north of the island, where tens of thousands of civilians were killed in the last phase of the war against ethnic Tamil rebels in 2009, it is also fast descending towards dictatorship. A key question surrounding the country’s future is whether its two main trading partners, the United States and India, have the leverage to deter Colombo, or can it resist international pressure with China’s help? Three years after the war ended, the government of President Mahinda Rajapaksa has deployed military personnel in large numbers in Sri Lanka’s north and east, formerly under the control of the Liberation Tigers of Tamil Eelam (LTTE). “The construction of large and permanent military cantonments, the seizure of private and state land, and the military-led cultural and demographic changes – all threaten Sri Lanka’s fragile peace,” Alan Keenan, International Crisis Group’s senior analyst, said in a recent report. “Instead of giving way to a process of inclusive, accountable development, the military is increasing its economic role, controlling land and seemingly establishing itself as a permanent presence.” The overall atmosphere of the country is also gloomy, affecting all, including the Sinhalese people in the south. The media, the civil society, the judiciary and the opposition have all been rendered powerless. ” … Human rights groups and opposition leaders warn that the country is descending toward dictatorship, with dissent brutally crushed, the media cowed and the minority Tamils, whose insurrection caused the war in the first place, still treated like second-class citizens,” writer Simon Denyer noted in an article in The Washington Post on July 13. After the war, the president appeared to be extremely insecure, anticipating – correctly – that he would lose office if genuine democracy remained. People in the north and the east were never part of his vote bank, and now the southerners weren’t too happy as the huge financial strain of the war hit the country’s economy. The regime had sought to justify the war with the promise that it would lead to peace and economic development. On the contrary, demands for higher salaries and protests over price hike took place despite the government’s heavy-handed response. The only way Rajapaksa can secure his position, and perhaps life, is by remaining in power with an iron hand. But masses cannot be expected to tolerate authoritarianism for very long in the absence of economic wellbeing, perhaps the biggest postwar challenge for Rajapaksa. This makes the United States and India indispensable. However, the US and India appear cautious in dealing with Colombo, fearing they might push Sri Lanka even closer to China if they fail to balance the stick with the carrot. For example, the UN Human Rights Council in March adopted a US-backed resolution – and India voted for it – urging Sri Lanka to investigate alleged abuses during the final phase of war with Tamil Tigers. But in June, the United States Trade Representative decided to continue trade benefits granted for Sri Lanka, which were facing possible suspension because of labor concerns. In July, India and the US agreed to provide enhanced training facilities for Sri Lankan military personnel to “strengthen the security of sea lanes in the Indian Ocean”. The fear of India and the US is based on the high strategic importance of the Indian Ocean Region, where China has managed to have an edge over them. China has been eyeing the Indian Ocean as a future sphere of influence, said Commodore R S Vasan IN (Retd), Head of Strategy and Security Studies at Center for Asia Studies in Chennai, India. China has used the issue of piracy in the west Arabian Sea and in Somali waters to legitimize its presence in the Indian Ocean, he said. “Beijing has maintained a presence of its navy units in the Gulf of Aden on anti-piracy missions to protect its own shipping that carries vital supplies to China.” While India dilly-dallied in taking up the offer to help build the Hambantota water port in Sri Lanka, China grabbed the opportunity to have an outpost at the southern most tip of the island. “On the surface, it is a commercial investment with soft loans and assistance,” Vasan said. “Deep underneath, that would provide leverages to China to use the facilities when the situation so demands.” From the Chinese point of view, deep sea ports – whether in Gwadar in Pakistan, Hambantota in Sri Lanka or others in Bangladesh and Myanmar – would provide options for the turn-round of ships and also to have monitoring posts to build up intelligence/database on the activities in the region, he said. India is concerned about the advances of China, which appears to be encircling India. “India enjoys a geographical advantage with its reach and location,” Vasan said. The Indian Navy’s recent commissioning of new air station INS Baaz in Campbell Bay in Andaman and Nicobar Islands (see India extends Malacca Strait reach, Asia Times Online, August 8, 2012), along with the existing surveillance architecture under the control of the Tri Services command, can ensure that no traffic, including Chinese vessels, leaves or enters the Indian Ocean through the Malacca Straits. “The Indian Navy is more than capable of looking after its interests [but only] as long as the nuclear thresholds are not crossed.” For the US, the recent emphasis on the pivot to Asia Pacific brings in renewed interest of the superpower in the island, Vasan said. The administration of President Barack Obama plans to reorient US military policy towards the region as the conflicts post 9/11 bogged down military resources in the Muslim world. Asia is likely to be the focus of US foreign policy given the massive economic growth in the region, where China’s military presence is increasing and the threat of a nuclear-armed North Korea is looming. “With the growing military and economic potential, China is omnipresent and – while not necessarily in a position to displace the US as the largest economy and a superpower – can cause headaches in many parts of the world, notably in South China Sea,” Vasan said. The US would increasingly look at India to engage Sri Lanka. However, there are impediments to India normalizing relations as long as the Tamil issue keeps simmering. So the ethnic issue takes center stage in the US and India’s engagement with Sri Lanka. To influence Sri Lanka domestically, Washington must not underestimate the leverage it has in terms of its economic importance to Colombo. For, while China may have become politically indispensable to Sri Lanka, Colombo may find it difficult to replace the US economically. “Chinese financing to Sri Lanka is less concessionary, and more commercial, than financing from the US, and other Western countries. However, financing – concessionary or not – is not a significant point of leverage on the Sri Lankan government,” said Nishan de Mel, director of Verite Research, a think-tank that tracks the economic and political pulse of the country through macro data and analysis of vernacular press reportage in Sri Lanka. “As long as the International Monetary Fund engagement continues, Sri Lanka will be able to borrow at affordable commercial rates on the international markets,” de Mel said. “Not long ago, Chinese lending was also at around 6%, around the same rate as the recent US$1 billion bond Sri Lanka raised in the international market. This means that Chinese funding can also be substituted.” The International Monetary Fund (IMF) on July 20 released the final installment of a $2.6 billion bailout agreed in July 2009, two months after Colombo defeated Tamil rebels and when the nation’s foreign reserves had dropped to $1 billion, just enough to support imports for a few weeks. The bailout is the longest engagement Sri Lanka has had with the IMF. “Sri Lankan authorities now look forward to the continued close engagement with the IMF and intend to discuss the possibility of financial support for its economic development agenda”, the Central Bank of Sri Lanka said in a statement. The US and India are probably more concerned about the strategic implications of the Chinese presence, and that has no necessary connection to economic partnerships, even though they are usually negotiated together. The regime could, for instance, try to barter strategic advantages to China, simply for support at the UN Security Council, and other international fora, where it feels under pressure from Western calls for accountability with regard to human rights abuses and war crimes. “However, when it comes to economic pressures, while China has been heavily investing in infrastructure in Sri Lanka, as it has been in many other countries, the determining factor of the current trajectory of the Sri Lankan economy is the capital markets, where finance capital particularly from the US has been critical to prop up a fragile financialized economy,” said Colombo-based political analyst Ahilan Kadirgamar. Kadirgamar added that any future crisis in the Sri Lankan economy was more susceptible to market forces affecting its balance of payments rather than political and economic engagement by the global and regional powers. The leverage the US has, and India can have, would be through trade, agreed de Mel. “Withdrawals of concessions, or positive barriers to entry to the US market, can hurt Sri Lanka and its economy significantly.” Given that the political economy of Sri Lanka is considerably internationalized, it is susceptible to trade and capital flows, and it would be significantly affected by barriers from any of its major trading partners, added Kadirgamar. However, if such instruments were used without adequate explanation and justification, the pressure on the regime could be countered somewhat by presenting it as unfair action targeting the country – and whipping up nationalist sentiment in defense, de Mel cautioned. “India does not have that leverage at present, because exports to India are still low, but the business community in Sri Lanka is looking at India as the growth area for trade in the future, so that carrot, if made tangible and dangled, will have leverage,” de Mel said. Even so, “the direct pressure on the regime through human rights and war crimes investigations remains the single strongest point of leverage.” Such efforts are targeted very specifically at regime actors, and do not affect the population in general. Besides, even the southern population is getting fed up of the dysfunction in law and order, and as a result are now less enthusiastic about the idea that human rights investigations against particular regime actors are an affront to the nation. Furthermore, for the regime, being able to travel and function internationally in the long term is crucial, and it will be willing to compromise a lot to avoid jeopardizing its personal fortunes and futures. Another point of leverage, not yet tried, is with regard to corruption, de Mel suggested. Investigations and freezing of bank accounts of the regime where corrupt gains may have been held in foreign accounts or assets is an extremely strong point of leverage that the US can have, especially since regime actors have significant assets in the US. Sri Lankan society does not legitimize corruption, though it is tolerated, and there can be no nationalistic sympathy for the freezing of ill-gotten gains. It’s time Washington and New Delhi re-evaluated their paranoia over Beijing’s ability to marginalize them, and began to flex their diplomatic muscles with Colombo, provided they truly believe in promoting democracy and civil rights in the world.