COLOMBO (Reuters) - Sri Lankan President Mahinda Rajapaksa this week signed off on a 30-month prison term against his erstwhile army commander and political arch-rival, in a case critics say shows the president is becoming more authoritarian.

Following is a summary of key risks to watch in Sri Lanka:


The International Monetary Fund released the fifth tranche of Sri Lanka's $2.6 billion loan in September and said the country's economic reform plans would boost its fiscal position and growth potential. But the crucial caveat was that it must execute the reforms as planned.


So the country is under pressure to deliver on plans to boost revenue, rationalise a byzantine, costly tax code and above all, tighten fiscal discipline. Credit rating agencies have said adherence to the IMF programme is integral to maintaining the upgraded outlooks and ratings they have given Sri Lanka.

What to watch:

-- Whether Rajapaksa gives in to the classic temptation of all Sri Lankan leaders: dipping into public coffers to boost subsidies or dole out state jobs.

-- Concrete steps to make state-run entities revenue earners. Most of the deficit reduction plan hinges on turning around loss-making state ventures hampered by subsidy schemes, mismanagement and an infamously intractable corps of bureaucrats.

-- The recommendations of a presidential tax reform commission, which were due in August and still are not out.



Rajapaksa rushed a constitutional amendment through the parliament, which his ruling alliance controls, that removed the last vestiges of any checks on a presidency that was already barely checked. It also removed his two-term limit in office, even before his second six-year term has begun.

The weakened opposition predictably lambasted the move as a slide toward constitutional dictatorship, and the United States criticised the changes as well.

All that has led to continually negative international press for Sri Lanka and Rajapaksa's government, which has kept up the defiant stance it took when fighting off intervention as it neared victory over the Tamil Tigers in a quarter-century war.

It has hired British public relations firm Bell Pottinger to help boost its reputation, but continued strident, inconsistent government statements will undermine Sri Lanka's efforts to pitch itself as a sound investment destination, especially in the West.

What to watch:

-- A shift in the tone of the government


Rajapaksa has yet to make good on a promised pay hike for Sri Lanka's state employees. He kept the pressure off since his election in 2005 by appealing to workers to wait so he could pay for the war against the Tamil Tiger separatists.

But since the war ended in May 2009, public employees have been demanding he deliver. The government says the rise will come in the 2011 budget due in November but impatience is growing.

Already, university students have held strikes, which traditionally presage labour unrest. A handful of state workers have held token strikes.

What to watch:

-- The tenor and frequency of student and labour strikes. If they rise above token acts, that's a clear sign of more to come.

-- Whether trade unions drop their support for Rajapaksa and drift back toward the now-rudderless opposition. Union members in Sri Lanka have traditionally been quick to lose fealty to leaders they view as doing too little for them.

-- Any overt action by the Marxist JVP, a party that set off 1971 and 1988-89 insurrections that led to more than 100,000 deaths, to channel dissatisfaction into public support


The president and his family together have direct control of nearly 70 percent of this year's budget through the portfolios they hold. Three brothers occupy key positions, and his eldest son is a lawmaker who is being groomed for a bigger role in the family business of politics.

One presidential brother is the parliament speaker and another -- the only one of the three not publicly elected -- runs the state security apparatus with a special brief to develop prime state-owned property in Colombo.

A third runs a new ministry overseeing tourism, nation building and investment promotion, which encompasses just about all the lucrative post-war investment and development areas.

The president is also the finance minister, so in short, any big investment decision needs a Rajapaksa blessing.


What to watch:

-- Whether Rajapaksa can shake off concerns among wealthy local investors that his government will interfere with investments to settle political scores, or for coercion.

-- Can the Rajapaksa family turn around a growing external impression that government policy is aimed at entrenching their influence more than serving national goals?


Sri Lanka's pitch that it is a growing investment destination has certainly found traction in terms of infrastructure development and tourism since the end of the war. It has also found a lot of takers for government securities, which offer relatively high yields.

But some potential investors have expressed frustration at inconsistency in terms of inward investment policy, and there are many stories of political interference or extortion in foreign projects.

The government has said it is changing the existing Board of Investment, but has not been clear about how except to say it will be under the economic development ministry run by Basil Rajapaksa, a legislator and the president's brother.

Since foreign direct investment has actually been slowing down since the end of the war, there is a risk that Sri Lanka may find fewer takers than it hopes.

What to watch:

-- Any growing clarity on foreign investment policies.

-- Concrete evidence that the government is making promised reforms to make foreign investment easier.

(Editing by Andrew Marshall)