In recent years, the Sri Lankan economy has been increasingly looking towards the East. This policy trend first became evident during the height of the war in 2007 as the 'international community' called upon the government of Sri Lanka to show restraint and be sensitive to the predicament of civilians. At the time, Sri Lankan officials raised the question of exactly who constitutes this 'international community'. Indeed, in 2005 itself, President Mahinda Rajapakse, in his election manifesto before his first term, had signalled very clearly his turn Eastward, away from the strong economic and geopolitical ties of previous governments with Western powers. Following on this, over the last five years there has been considerable economic engagement with the Eastern powers, particularly China, India and Iran. Beijing is now Sri Lanka's largest donor.
For the moment, President Rajapakse has managed to neutralise the Western powers with the economic strength of the emerging Eastern powers. Furthermore, over the last five years he has also sought to balance the export sector of the economy with an emphasis on agriculture and the rural economy. Both steps were seen as a shift away from the foreign and economic policies of the previous regimes.
Over the year and a half that has passed since the end of the war, however, there has been another major shift in what seems to be a contradictory direction. Sri Lanka is quickly being integrated within the structures of global capital, as financial liberalisation moves along at a much quicker pace with the post-war economic boom. In other words, Sri Lanka's external sector of the economy was moving beyond the foreign direct investment of Western and Eastern powers alike, towards international financiers seeking returns in the emerging markets. Sri Lanka's financial press is abuzz with news of the booming stock market; and the Securities and Exchange Commission (SEC) is now attempting to transform Sri Lanka's economy. Indeed, the main thrust of President Rajapakse's 2011 budget speech was about tax reform and financial liberalisation, reducing both the income taxes of the wealthy as well as facilitating the flow of capital into the country.
There are four main areas where the Rajapakse government is relying on investment to expand the economy: reconstruction efforts in the north and east after the war; investment in infrastructure, particularly roads, ports and power plants; business investment in the stock market and corporate debt as companies seek to expand amidst rapid economic growth; and increasing investment in real estate. The last two are gaining far more importance with the liberalisation of the financial sector and the integration into the global capital markets. In early January, the SEC chairperson, Udayasri Kariyawasam, made a statement that the Commission wants to substantially expand the value of capital markets, now equivalent to 40 percent of Sri Lanka's gross domestic product of SLR 5.5 trillion (USD 49.6 billion). Plans are to increase market capitalisation of the Colombo Stock Exchange from current levels of SLR 2 trillion to SLR 3 trillion in 2011. Two Chinese investors have also unveiled plans to purchase prime real estate in Colombo worth USD 250 million.