Event

One week after the deadliest terror attacks made on its soil on Easter Sunday (21 April), Sri Lanka remains under shock and on high alert. The first IS attacks by suicide bombers (national Muslims) on the island cost the life of more than 250 people – many of them Christians – and injured hundreds in churches across the country and in luxury hotels in the capital Colombo. Dozens of suspects linked to a small local Islamist group (NTJ) have been arrested and more could follow. Meanwhile, a national state of emergency has been declared. Heads of intelligence services have been fired after it appeared they had been alerted by Indian and US counterparts of imminent terror attacks the week before but failed to communicate it to the government.

Impact

These unexpected terror attacks took place after a somewhat peaceful period that followed the end of the civil war in 2009. Although ethnic reconciliation is slow, historical tensions predominantly between the Tamils and the majority Sinhalese community had significantly eased as Tamils were essentially aiming to reach more political devolution in a peaceful way. Now, this major IS attack against Christians and Western targets opened a new potential source of tensions. This is not to say that cohabitation between the Muslim community and Buddhists was free of tensions as violent clashes in Kandy showed in spring 2018. However, relations so far had been good between Muslims and Christian minorities. Therefore, this terror attack could have multiple impacts for the country. First, domestic stability could suffer from potentially rising communal tensions, resentment and violence against Muslims. The attack indeed occurred in a climate of already rising Buddhist nationalism. There is a risk of rising communal tensions as the country – like many others in the region – has appeared to be a target of international jihadism. With the IS defeat in Syria and Iraq, national returnees could represent a risk. Sri Lanka could thus become the theatre of a new threat beyond the traditional ethnic and religious lines characterising this multi-ethnic country.

The second impact will be political as the country is heading towards uncertain presidential and legislative elections at the end of 2019 and in 2020 respectively. President Sirisena and PM Wickremesinghe being at the centre of last year’s political crisis – which highlighted their political infighting – might play in favour of the third man, namely opposition leader and former president Mahinda Rajapakse. He is indeed likely to capitalise on the seeming intelligence failure related to the IS attack, on his large victory at local elections in early 2018 fuelled by his nationalist and pro-Sinhalese stance, and on the likelihood of national security and anti-Muslim rhetoric becoming central election themes. His success in ending the civil war underpins the image of him being the strongman, defender of the nation and Sinhalese majority. He would probably tighten security if he becomes PM next year as he is legally barred to serve a third presidential mandate. He might, however, leave the presidential seat to one of his sons. This would restore the reins of power to his influential family dynasty.

The third potential impact for the country – which has recently been awarded an extra year’s extension of an IMF programme – is of economic nature. If Rajapakse returns to power, macroeconomic fundamentals could be affected by populist and fiscal slippages as seen during his presidency. This would come at a bad time given Sri Lanka’s higher debt servicing in the coming years when global financial conditions are less favourable. Under Rajapakse’s rule, relations with the international community and trade partners could also deteriorate to the benefit of China which would win from a change of government. A big short-term risk is obviously the negative impact of the attack and potentially rising religious tensions on the successful tourism industry, a major source (15%) of export revenues and jobs. This adds to the downward trend in Chinese tourists – exacerbated by the economic slowdown – since 2017 and to infrastructure bottlenecks.

Of course, it remains to be seen whether all those perceived risks will materialise in the future. Still, it is safe to say that the short-term risk outlook is negative and will be challenging for the country. It will take time to heal the wounds of a terror attack of such a scale for Sri Lankans and to restore tourist confidence. At this stage, Credendo’s risk ratings remain unchanged.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com