FDI FUNDAMENTALS ARE KEY

Janaka Perera says investment is critical for Sri Lanka’s economic progress

The story of attracting foreign investors to Sri Lanka is not a happy one and the blame lies with successive governments rather than any foreigners.

A lack of consistency in policy and sociopolitical instability, resulting in frequent strikes and agitation by trade unions, are the main reasons for foreign direct investments (FDI) not reaching our coffers.

Specific instances include cancellation of the Japan funded light rail project and an agreement reached with Adani Group on investing in Colombo Port’s East Container Terminal.

Some 40 percent of FDI flowed to Asia in 2021; but due to our government’s unilateral abrogation of agreements with global entities, Sri Lanka failed to secure vital foreign investment.

So why has the island failed to attract foreign investors compared to other countries in South and Southeast Asia, including India, Bangladesh, Indonesia and Vietnam?

One reason is the inflexible attitude of successive governments over the past three decades or so.  This has not a created a positive image of Sri Lanka in the eyes of foreign investors. It is high time that our government instituted policy changes to attract more FDI to the country.

In 2018, Sri Lanka’s programme leader at the World Bank Tatiana Nenova said foreign investments in the island were a ‘hit-and-miss story’ – although this was not always the case.

Before 1983, businesses such as Motorola and Harris Corporation had plans to establish plants in the island’s export processing zones. Others including Marubeni, Sony, Sanyo, the Bank of Tokyo and Chase Manhattan Bank had investments in the pipeline in the early 1980s.

But all this changed when a civil war convulsed the country and derailed its growth. Businesses left and took their FDI with them.

The situation now is quite different with an apparently favourable climate for foreign direct investment, which is critical for developing and emerging market countries.

We need to make a concerted effort to retain and increase FDI flows by addressing gaps, and playing to our strengths. Sri Lanka can improve FDI by creating a more hospitable environment for investments. This is essential for domestic investment as well.

Our government and others concerned with national progress should realise that one of the chief problems facing undeveloped countries is the lack of capital. To that end, experts have suggested ways to attract foreign direct investment.

More trade will help diversify the economy and exports, and alleviate the burden on the private sector to drive growth. It can also actively promote technology absorption, skills upgrading and competitiveness; and workers, consumers, producers and the state will benefit in the long run as a result.

Sri Lanka can leverage its unique geolocation and trade agreements to overcome diseconomies on a small scale. The Colombo Port, which already sees 80 percent of its volumes from transhipment cargo, is poised to grow. However, we can’t take this position for granted given the high growth in other ports in Pakistan and India. Another way to compete is through speed and cost of trade processing.

Promoting investments and instituting enabling regulations while avoiding policy uncertainty is vital. It is also necessary to encourage Sri Lankans domiciled abroad to become partners in the development of their motherland.

First and foremost, a national policy should be formulated to boost the country’s economy – no political party should be given authority to change it when they seize power.

Second, eliminate the growing level of corruption and enforce tough laws. Corrupt politicians and their family members should be jailed and banned from entering politics again in their lifetime. Accountability, rule of law and transparency are vital for building up investor confidence, both local and foreign.

According to New York-based GAN Integrity, a moderately high risk of corruption exists in Sri Lanka at different levels – in the public service; police, land, tax and customs departments; and even the judiciary.

Sri Lanka is reported to have been ‘more corrupt’ last year than in 2021, according to the 2022 Corruption Perceptions Index (CPI). The index released by Transparency International shows that the country’s score dropped by one point in 2022 from the previous year. The CPI has ranked Sri Lanka at 101 among 180 countries with a score of 36.

Law enforcement remains constrained by a lack of resources and technical expertise, and powerful political elites involved in corruption often go unpunished. Entities such as the Committee On Public Enterprises (COPE) have no legal teeth.

However, there are pros and cons to FDI. Many developing countries – especially those with a history of colonialism – worry that foreign direct investment will result in some kind of modern-day economic colonialism, leaving them vulnerable to exploitation by foreign entities. Multinationals have also been criticised for poor working conditions in foreign factories.