THE SRI LANKA STORY
POSTWAR OPPORTUNITY LOST?
Tharindra Gooneratne rues the lack of tangible FDI inflows
In 2009, legendary investor Jim Rogers was asked on CNBC to name his second favourite emerging market after China. His answer was Sri Lanka. When he was pressed to say why, his response was simple: “If you go into a country after a 30 year war, there are astonishing opportunities.”
Yet today, such optimism has failed to translate into tangible results. For example, total foreign direct investment (FDI) in Sri Lanka was approximately US$ 1.6 billion in 2017; the comparative figures for Singapore and Vietnam are 58 billion dollars and US$ 36 billion respectively.
Throughout the past decade, FDI has contributed less than two percent to Sri Lanka’s GDP while the economies of Malaysia, Vietnam and Singapore enjoyed a contribution of five percent, six percent and 21 percent respectively in 2016.
As a small country, it is impossible for Sri Lanka to reach the economic heights achieved by role models such as Singapore without the express confidence of external investors. So how can Sri Lanka convince the world that it is an attractive investment destination?
Sri Lanka can begin by providing more support for global investors to set up shop on its shores. In 2009, the World Bank’s Doing Business index ranked Sri Lanka 29th in the world for starting a business; by 2018, it was ranked 77th. In 2009, starting a business in Sri Lanka involved four procedures; by 2018, this number had risen to seven.
In addition to reducing the regulatory burden involved in setting up a business, Sri Lanka also needs to reevaluate its policies related to providing work authorisation for foreign citizens. Today, it is estimated that 80 percent of online applications for work visas in Singapore are processed within seven working days. A typical employment pass is valid for two years in Singapore compared to only 12 months in Sri Lanka.
When developing a national strategy to attract FDI, Sri Lanka needs to keep in mind its limitations, the most significant of which is the fact that it is a small country compared to many regional peers.
Therefore, the island’s attractiveness to foreign investors lies not in its domestic market but in its position as a gateway to the rest of the world. This is where trade agreements and double taxation treaties become extremely useful. Today, Sri Lanka has Double Tax Agreements (DTAs) with only 44 countries compared to Singapore’s 80 plus DTAs.
We also need to take steps to reduce perceived risks associated with FDI in Sri Lanka. First, Sri Lanka needs to amend its outdated labour laws, which provide excessive protection to employees. For example, the Termination of Employment of Workmen Act – created almost 50 years ago – is far too rigid for Sri Lanka to remain competitive in the global arena today; it is in urgent need of revision.
An important step was taken in this regard last year when the Ministry of Development Strategies and International Trade worked with the United States Agency for International Development (USAID) to introduce reforms to existing labour laws. But as expected, these reforms met with stiff opposition, culminating in the labour minister himself stating that any changes to labour laws needed to be worker friendly.
Apart from reforming archaic labour regulations, Sri Lanka needs to ensure political stability. This is obviously no mean feat. However, attracting substantial FDI will be a pipe dream unless there is a modicum of political stability. In addition, a strong rule of law is vital especially in enforcing contracts, settling legal disputes and protecting minority rights.
FDI remains a critical element in Sri Lanka’s path towards economic prosperity. With a proper strategy in place, it may be able to convince Rogers to put his money where his mouth is.