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Japan Builds Sri Lanka Ties With Visit as China Clout Grows

May 2 (Bloomberg) -- Japan and Sri Lanka held their second high-level talks in less than two months as the East Asian nation seeks to safeguard ties and counter China’s growing influence on an island lying on key maritime routes.

Finance Minister Taro Aso had a breakfast meeting with the island’s President Mahinda Rajapaksa today, Sri Lanka’s information department said in a text message. He also visited Sri Lanka’s main port in Colombo, which has been expanded with $800 million of Japanese assistance.

Rajapaksa has lured investment from China, Japan and India as he capitalizes on the end of a 26-year civil war to build a trade gateway to emerging markets. China has tightened its embrace by committing at least $3.7 billion since 2005 for projects from ports to a power plant in Sri Lanka, which has attracted the world’s dominant nations since the 16th century for its access to pivotal sea links.

“Japan may be trying to counter China’s influence on Asia, while also diversifying its investments,” said Bimanee Meepagala, an analyst at NDB Aviva Wealth Management Ltd. in Colombo, the country’s largest private fund. “For Sri Lanka, it’s new sources for tapping funds, and who it can align itself with.”

Rajapaksa met Prime Minister Shinzo Abe in March in Japan. Sri Lanka has the potential to be a regional maritime hub and would play a “crucial” international role, the leaders said in their joint statement then.

Economic Growth

Abe also thanked the president for welcoming port calls by Japan’s maritime self-defense force vessels engaged in anti-piracy operations, according to the statement.

Sri Lanka is seeking growth of 7.5 percent this year, after expansion cooled to 6.4 percent in 2012 as a faltering global economy sapped demand for the island’s tea and textiles.

“Considering that Sri Lanka keeps on this growth trajectory, given that security and peace would be maintained in this country, then Japan is in a position to support Sri Lanka,” Aso told reporters in Colombo, speaking through a translator. “Yen loans provided to Sri Lanka are one of the major measures under Abenomics,” he said.

Abenomics refer to the economic-stimulus policies introduced by Prime Minister Abe.

Sri Lanka secured gross receipts for project financing of 48 billion rupees ($378 million) from Japan in 2012, compared with foreign loans worth 66 billion rupees from China, the Central Bank of Sri Lanka said in its latest annual report.

Recent Loans

Japan’s recent financing to Sri Lanka includes a Japan International Cooperation Agency loan of 15.9 billion yen for electricity transmission and 12.4 billion yen to build bridges. Sri Lanka also signed an agreement in January for a 29 billion yen loan for the development of the nation’s main Katunayake international airport.

The central bank has for four months held its reverse repurchase rate at 9.5 percent and the repurchase rate at 7.5 percent to aid domestic spending and support economic growth, while containing inflation at mid-single digits.

Rajapaksa, whose armed forces defeated separatist rebels in May 2009, is seeking to take advantage of Sri Lanka’s position 31 kilometers (19 miles) off India’s southern coast. There lie the main shipping lanes connecting the Far East, West Asia, Africa and Europe.

The tropical nation’s strategic location led to colonization by the Portuguese, Dutch and British until independence in 1948.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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