Why we can’t attract more foreign investments
The insufficient and decreasing inflow of foreign direct investments (FDIs) is most disappointing. FDIs have been declining from US$ 1070 million in 2014 to US$ 970 million in 2015 and it was only US$ 445 million in the first nine months of last year. Furthermore, most FDIs have been in property development and the hospitality industry rather than into export manufacturing.
Sustained economic growth of 8 percent or more that would double per capita incomes in about ten years can be achieved only if annual investment is increased to at least 35 percent of GDP from the current level of about 28 percent. With cash strapped public finances most of this higher investment would need to come from domestic and foreign private investment.
While the quantum of foreign investment is important, the nature and type of FDI determines the long-term development of the country. A paramount need is investments in hi-tech export-oriented manufacturing.
Significance of foreign investment
FDI not only fills the savings-investment gap, it is a significant driver of economic development, as FDIs bring with them advanced technology and management practices and access to international markets. They also contribute to improving work ethics, skills and knowledge of workers. In due course there would be a transfer of technology that would increase the country’s economic efficiency and capability.
It is the realisation of these economic benefits that has made former communist countries such as China, Vietnam and formerly inward-looking India to actively seek foreign investments. These three countries attract a large amount of foreign investment, with China leading the world as the largest recipient of foreign investment.
India obtains FDI of about 2.1 percent of its GDP, while Bangladesh gets 1.7 percent of GDP and Vietnam 6.3 percent of GDP. China attracts as much as 2.3 percent of its huge GDP.
Despite the Government of Sri Lanka’s proud boast to the contrary during requests to renew the EU GSP Plus trade facility and at numerous United Nations briefings, revisions made to the draft Counter-Terror Act (CTA) fail to address major Rule of Law concerns in substance.
Dangerously vague and overbroad definitions of what constitutes terrorism and terrorism-related offences are left intact. Indisputably this remains a law drafted for the protection of a Government in power, not to protect Sri Lanka itself from threats of terrorism. The distinction thereof must be made very clear.
Potential dangers to right of expression
As analysed in these column spaces previously when the original draft CTA was first leaked to the public by this newspaper, that version was riddled with the lack of conceptual clarity in regard to definitions of terrorism and terrorism related offences. One would have thought that this key concern in the draft may have been addressed when the Government furiously back-pedalled in damage control mode. However many of these offences continue to overlap and replicate each other even in the revised document when examined.
To add insult to injury, the revisions also include a new offence numbered as (vi) under ‘terrorist offences’ which punishes ‘any person who intentionally and unlawfully distributes or otherwise makes available a message to the public with the intent to incite the commission of a terrorist offence.’ This is so regardless of whether or not that conduct expressly advocates terrorist offences. It will suffice if it causes danger that one of more of such offences may be committed.
Punishment is imprisonment upon conviction by the High Court for up to fifteen years. This clause and other clauses that were used against journalists and activists for advocating critically under the Prevention of Terrorism Act (PTA) in the revised draft potentially pose the gravest danger to freedom of speech and expression.
The inflow of foreign investment to Sri Lanka is particularly low when compared to what other countries have been able to attract. It is only 0.8 percent of GDP.
Recognised importance
Recognising the importance of FDI, the Government has taken several measures to attract it. Investor forums, visits of the President and Prime Minister to investor countries and meeting political leaders and business leaders, welcoming foreign investors to the country and business enterprise development symposia are manifestations of the government’s enthusiasm for enhancing investment.
Many investors have expressed their satisfaction about the conditions in the country and articulated the view that Sri Lanka was now a good location for investment. The latest such pronouncement was from a Canadian business delegation. Yet these have not borne any tangible results so far as the figures demonstrate. Hopefully they would enhance FDI in due course.
Careful advocating for international assistance Reasons for low FDI
The reasons for the low FDI are manifold. Foreign investment is influenced by an overall assessment of political and economic conditions, political and macroeconomic stability, certainty in economic policies, tax and other incentives, labour regulations, work ethics, social and economic infrastructure, costs of production, potential domestic market, ease of doing business and absence of bribery and corruption. For one or more of these reasons, the international investment community does not appear to consider Sri Lanka a favourable destination for investment.
Politics
The political situation is stable in the sense that the President and the Government are secure to rule for another two and a half years and have a large majority in parliament. However, international investors consider other features in the polity such as the violent protests of the Joint Opposition as destabilising.
Macroeconomic conditions
Among the macroeconomic conditions that may be dissuading investors are high fiscal deficits, a large foreign debt of about 75 percent of GDP, debt-servicing costs that
One improvement is that the earlier (quite ridiculous) inclusion of advocating a change in policy as amounting to one component of an offence of terrorism has been removed which is occasion for some relief. Regardless, the draft continues to create a raft of new and vague offences that would envelop all Sri Lankans in an iron grip if this is passed into law.
It is now commonly known that the Law Commission’s draft to bring the Prevention of Terrorism Act (PTA) more in line with international standards had been unceremoniously tossed out in favour of this monstrous draft CTA. Despite their aggrieved protestations, UN agencies played a regrettably short sighted and illjudged role in that process. In Myanmar last week for work connected to that country’s justice systems, I made one point very clear. This was that international assistance must always be strategized in a manner that provides constructive help rather than result in destructive impact with the ‘copying and pasting’ of international models with no idea of local conditions or the ‘lived-in’ state of the law.
Indeed, we saw this in regard to the 20012003 ‘peace caravan’ and in respect of the 2015 ‘transitional justice’ carnival. The sudden burgeoning of local ‘research’ outfits, some run by husband and wife combos absorb more than the government’s revenue, external debt-servicing cost of about 25 percent of export earnings, potential inflation and instability in currency value. There is uncertainty regarding government policies on foreign private investment.
There are fears that inflation may rise owing to the weaknesses in economic fundamentals. The low foreign reserves and large trade deficit and foreign borrowing cast doubts about the external finances of the country.
Production costs
Costs of production play an important role in investor determination of investment locations. Sri Lanka is no longer a cheap labour country. There are other countries such as Vietnam and Bangladesh where labour productivity is probably higher and wages cheaper. Several other production costs too are high; this is especially so with respect to energy costs that is deemed one of the highest. These factors make it rather unattractive to foreigners to invest here.
Labour laws
Sri Lanka’s Labour regulations also affect investment. Sri Lanka is perceived as a country where labour regulations do not permit labour discontinu-
In 2015 for example, palpable hysteria on the part of some was evidenced when favourite ‘legislative projects’ such as the Office of Missing Persons (OMP) Bill was subjected to robust local critiques. Regardless to say, cheers which rang so deafeningly at the time seem particularly ludicrous when the activation of the OMP is on hold more than eight months after the Bill was passed into law.
To give the devil its due, the Wickremesinghe Government deserves a wry compliment, as back-handed as it may be. This is for playing the game exceedingly well in the sense of entrancingly entrapping Colombo’s exuberant caravan followers as well as the diplomatic community into such a deceptive sense of collective well being that all other concerns of substantive justice were pushed aside. Now that the play for time that the Government wanted from the United Nations Human Rights Council has been won, we can get used to the comforting but scarcely believable rhetoric of justice a little while longer. Rest assured however that the ultimate pickings will be miserably small.
Alive to the inevitable electoral repercussions that this will attract, this is perhaps why the Tami National Alliance and its mouthpieces have been increasingly getting more strident in their criticisms of the Government. This ‘strutting and fretting’ upon the stage would have been amusing if it was not for the tragic consequences that are visited upon human beings. ance either owing to changing market conditions or on disciplinary grounds.
Domestic market
Further the possibility of selling in the domestic market is limited. Large countries like India and China offer good prospects of local sales. This is why reputed manufacturers of cars such as Mercedes Benz and BMW have manufacturing plants in India and China.
Since Sri Lanka is a location for export manufacture, the uncertainty in western countries offers poor prospects for exports. The exception to this trend of low foreign investment is the recent purchase of land in prime property areas for construction of large international hotels.
Conclusion
Factors determining foreign investment are many. Whatever be the precise reasons for tardy foreign investment, the Government must look into the reasons and provide a climate for enhanced foreign direct investment. Without a larger inflow of foreign investment, sustained economic growth of 8 per cent or more is unrealistic.
Foremost among the prerequisites to attract FDI is certainty in economic policies. A consensus on economic policies and certainty in their implementation are prerequisites to inspire confidence among foreign investors.
The chaotic political environment and policy uncertainty are underlying causes for the lack of investor confidence. The political environment of opposition to nearly every policy of the government, the protests and road demonstrations causing huge traffic problems are serious impediments to attracting foreign investment. The opposition to Chinese investments in Hambantota is a clear instance where politics has hampered an important foreign investment. One can hardly expect foreign investors to invest in a country where people protest violently to foreign investments.