FDIs and connectivity

Attracting foreign investment has received more attention this week with Cabinet approving a new high level Investment Management Committee to fast track projects. Pakistan Prime Minister Imran Khan has also called for stronger trade relations so Sri Lanka can expand its connectivity all the way to Central Asia via the China Pakistan Economic Corridor (CPEC). Nonetheless, previous attempts to establish ‘one stop shops,’ ‘single investment windows’ and integrated committees, to fast track FDI has yielded limited results and the Government clearly needs a larger policy level strategy. 

Sri Lanka has traditionally struggled to attract substantial amounts of FDI, with the situation becoming more challenging following the Easter attacks and COVID-19. In 2019 the country attracted $ 793 million, which dipped to $ 548 million last year largely due to virus impact, data released by the Central Bank showed. 

ICRA Lanka, a subsidiary of Moody’s Investment Services, releasing their Economic Highlights report on Monday predicted FDI could slip to as low as $ 200 million in 2021 as global recovery continues to impact international investment. 

However, the Government has projected FDI for 2021 at $ 2 billion with the possibility of Port City lease sales bringing in an additional $ 1 billion. Sri Lanka is strongly focused on attracting investment to bolster reserves and help meet an estimated $ 6 billion in outflows for this year. Of this amount about $ 4.3 billion has been earmarked for debt repayments. Sri Lanka has to repay an average of $ 4 billion in debt for the next few years and requires better performance from investments and exports. 

Persistent issues, such as relatively low ranking in the Doing Business Index, high wage rates and utility costs compared to regional peers, high costs of land acquisition, rigidity in labour laws and Government procedures remain the main impediments in terms of attracting FDIs. Sri Lanka has also been cagey about striking trade deals with other countries, despite plenty of evidence that this is a positive way to become connected to global value chains. 

Despite repeated and prolonged efforts, Sri Lanka has only advanced one notch in the latest Ease of Doing Business rankings compiled by the World Bank, inching forward from 100th in 2018 to the 99th position in the latest edition. 

In contrast, India, which was placed 63rd in the Doing Business rankings, is the highest-ranked economy in South Asia, followed by Bhutan (89) and Nepal (94). India, with four reforms, is among the top 10 improvers for the third consecutive year. Another top reformer, Pakistan, with six reforms, improved the most in the region during the past year, moving forward 28 places. 

Sri Lanka, along with its neighbours, continues to underperform generally in enforcing contracts and registering property. A company needs around 108 days to register a transfer of property in South Asia, more than four times the OECD high-income average of 24 days. Resolving a commercial dispute takes around three years, almost twice as long as among OECD high-income economies.

Overall, the governments of 115 economies around the world launched 294 reforms over the past year to make doing business easier for their domestic private sector, paving the way for more jobs, expanded commercial activity and higher incomes for many, according to the World Bank Group’s Doing Business 2020 study. Sri Lanka, hamstrung by COVID-19 and institutional lethargy, is facing the danger of being left behind in the race to become a more competitive economy.