Sri Lanka experienced the worst microeconomic crisis in its history, which severely impacted its investment landscape. To this end, the IFC’s Country Manager for Sri Lanka and Maldives Alejandro Alvarez de la Campa acknowledged that “investment prospects are perhaps the bleakest we’ve seen in the last few years,” in a recent LMDtv interview.

He noted that although foreign direct investments (FDI) in the region have dropped, the effect has been much more pronounced in Sri Lanka.

“Even though we’ve had some positive signs of recovery since the crisis last year and many macroeconomic indicators are looking much better, Sri Lanka needs to continue working on the reforms agreed with the IMF and some of the structural reforms it’s undertaking to rebuild confidence among investors,” he explained.

In the short run, Alvarez de la Campa recommends that Sri Lanka completes its external debt restructuring while in the long term, it’s essential to continue with the structural reforms in place.

Continuing to work on trade liberalisation is key, he emphasised, as is creating a more competitive environment for foreign investors: “It’s essential that Sri Lanka looks at potential public-private partnerships (PPPs) to develop key infrastructure in the country. This will require the support of the private sector.”

“Another important area is the transition to a green economy,” he stressed, mentioning the need for investors to invest in renewable energy.

Alvarez de la Campa added: “Other important reforms will be around the digital economy – digitalising government services, payments and other aspects would create a more transparent economy, giving investors additional confidence.”

He also shared his views on the plight of SMEs in Sri Lanka and the way forward for these businesses.

“SMEs make up about 75 percent of the total number of enterprises [in Sri Lanka]. They also contribute to around 20 percent of exports, employ 45 percent of the labour force and account for about 50 percent of GDP,” he pointed out.

But he noted that “unfortunately, the successive crises that we have seen from COVID-19 to the Easter [Sunday] bombings and then the microeconomic crisis have caused the SME sector to be disproportionately impacted.”

The International Finance Corporation’s Country Manager for Sri Lanka and Maldives listed several reasons for this, beginning with limited access to finance.

“They haven’t been able to access finance as easily as large corporates because interest rates in the last year or so have been quite high,” he said, adding that this has resulted in SMEs not being able to service their debts. In addition to the decline in overall consumer demand for products and services – which has affected SMEs – the lack of access to technology and innovation has been another reason for the sector’s contraction.

“When you don’t have access to technology and innovation, you tend to not perform as well as large corporates that have access to them,” Alvarez de la Campa asserted.

The lack of skills in technology and innovation is another key constraint for the SME sector to overcome. “From the policy side, there are some reforms that Sri Lanka could undertake that could help [narrow] the skill gap,” he said.

As for recommendations, he stated: “One is to reform the technical and vocational training sector, by incorporating tech jobs and activities.”

“In addition to the traditional jobs and technical expertise that people gain in traditional spaces of construction, electricity and a few other areas, we could very well consider areas that are related to technology like programming and software development,” he added.

Summing up, Alvarez de la Campa said: “Likewise, the education system in Sri Lanka would benefit from allowing more private sector investments in education – so that you can expand the range of potential education outlets that could go into more specialisations in specific areas.”