SL’S FOREIGN DIRECT INVESTMENT CONUNDRUM

Sri Lanka is dollar hungry. As a country with an export income of little over US $ 11 billion and debt obligations of US $ 4 billion on average for the next few years, Sri Lanka’s prime focus should be towards bringing in more dollars into the country. The best two ways to do this is to increase exports and get foreigners to invest in the country.

Sri Lanka took 17 years to double its exports from US $ 5.5 billion in 2000 to US $ 11 billion in 2017. But the imports during the same period rose almost three times to US $ 21 billion. As very correctly pointed out by Economic Reforms and Public Distribution Minister Dr. Harsha de Silva, at a recent gathering in Colombo, Sri Lanka should move from “simple to complex” with regards to its exports.

What he meant was the transformation Sri Lanka needs to undertake to produce and export products that are technologically advanced, which can fetch higher prices in the world markets, instead of simple products, which many other countries in the world could also produce.

Sri Lanka has a very shallow export basket and apparel and tea make most of it. Hence, going forward, export diversification towards more technologically advanced exports remains imperative for Sri Lanka to raise the required dollars.

The major economics topic in Sri Lanka for the last couple of years has been the country’s unsustainable external debt pile. That is because of Sri Lanka’s reliance on debt in the absence of enough exports and FDI. The country is borrowing more to settle its previous debts, which as anybody could guess, is not sustainable to say the least. But at the moment, Sri Lanka has no other option.

Due to the precarious situation the country’s economy is in, the borrowing costs have also gone up significantly, rubbing salt into the wound. The recent rating downgrades on debt servicing risks due to the heightened political uncertainty are also not helping Sri Lanka’s case.

Attracting more FDI requires several simple ingredients. But getting those simple ingredients right may not always be an easy task. Political stability, policy predictability, ensuring of property rights, a reasonable tax regime and less corruption would be some of those key ingredients.

Cheap labour and tax holidays are not considered major FDI enticers anymore as automation is increasingly making cheap labour irrelevant while tax incentives are as good as when they are directed to attract certain types of investment rather than to increase the overall investment flows into a country.

Sri Lanka achieved record FDI in 2017 and 2018. According to International Trade and Development Strategies Minister Malik Samarawickrama, Sri Lanka is estimated to have crossed the illusive US $ 2 billion mark in 2018. Following this, the minister has set an ambitious target to achieve US $ 3 billion FDI this year.

Although on surface Sri Lanka’s FDI numbers look encouraging, it is important to keep in mind that most of the moneys have come in for infrastructure projects. Ideally Sri Lanka should try and attract more FDI into manufacturing and services sectors, which will improve the country’s tradable sector and help the country to increase its exports while creating more jobs in the economy and equipping the locals with technological know-how.

Besides, the current FDI number only accounts for little over 1.5 percent of Sri Lanka’s GDP, whereas FDI accounts for over 5 percent of the GDP of Vietnam, a country which opened its economy gradually since mid1980s. As a result, Vietnam relies less on going to capital markets and raising debt to balance its budgets.

Sri Lanka jumping 11 places on the World Bank’s Ease of Doing Business Index in 2019 will be a major stepping stone for the country to attract more FDI. Further effort is put into gaining more ground, according to the government. We believe it is equally important to reiterate the message that Sri Lanka is ready for business. Sri Lanka is known all over the world for its crispy beaches and not for business. That’s the sad reality.

When we were the fastest growing Asian economy after the war, we were on the radar of many foreign investors. But now with unimpressive 3.5 percent growth, Sri Lanka has the second lowest growth in the entire Asian region. Hence, it is doubtful whether Sri Lanka enjoys the same investor confidence as it used to wear.

Reforming Sri Lanka’s labour laws to match the modern world is another key area Sri Lanka needs to pay its immediate attention to, to get the FDI flowing. Enabling more women into the country’s workforce, flexible working hours and hiring and firing policies are few areas immediate attention is due.

Last but not least, Sri Lanka needs a comprehensive database, including all the required information about the sectors the country is seeking FDI for. Currently the Board of Investment website has some vague details about the areas they are promoting FDI but that is nothing but primitive. The input of the country’s private sector will become vital in creating this database.