Doing Business in Sri Lanka: There’s a long way to go

Deputy Governor Nandalal Weerasinghe: Don’t rest on current laurels

The Central Bank’s Deputy Governor Dr. Nandalal Weerasinghe, at a seminar held in Colombo recently for clarifying Sri Lanka’s remarkable elevation in the global ranking by 15 notches from 96 in 2012 to 81 in 2013 in the World Bank (WB)/International Finance Corporation (IFC) prepared ‘Doing Business 2013,’ is reported to have remarked that though the country should be proud of its achievement, it should in no way be complacent about it.

As reported in the press, he has specifically said that “these are specially resounding victories for the country as a nation, but we cannot afford to rest on these laurels. We need to engage in special efforts to improve rankings further to make Sri Lanka a favoured investment destination and further drastic reforms are necessary to increase competitiveness”.

China’s humble approach

The reputed economist’s remarks remind this writer of the humble manner in which the Chinese authorities responded to the news that China has overtaken Japan as the world’s second largest economy in 2011.

When the whole world was in an unrestrained euphoria about the news, the Chinese authorities quickly downplayed it claiming that China is still a developing country with its raking at the 100th place in terms of per capita income and there are 99 countries ahead of it. They also admitted that China needed vast improvements in living conditions, healthcare and human capital development for it to be a nation of worth.

What Chinese authorities communicated in their humble message was that while China is happy about producing the second largest output in the world, it still faces daunting challenges in its march toward a developed nation. 

Dr. Weerasinghe’s message too has a similar humble tone though it is explicit with Central Bank team’s determination to work tirelessly till Sri Lanka improves its position to a level which the country can actually be proud of. That is the language the central bankers normally speak: Neither optimistic nor pessimistic but giving facts so that the market makes its own judgments.

What is this ‘Ease of Doing Business’?

The Ease of Doing Business Index, prepared by the World Bank and its private sector funding arm International Finance Corporation, is a benchmark indicator for investors and businessmen to judge how governmental regulations have made it easy or difficult for local small to medium size businesses to do business in a country.

It does not cover the large businesses on the presumption that, with their superior financial strength and well-established networks, they could bend to their advantage any obstructing governmental regulation or simply pass through them.

The index does not cover the other contributors to good business such as a low level of corruption, maintenance of law and order, observance of the Rule of Law and the protection of property rights. It also does not deal with macroeconomic issues that hamper business and entrepreneurship. It is simply about whether the government regulations are good or bad for small to medium size businesses.

However, the London based The Economist has found a curious relationship with Ease of Doing Business Index and the corruption perception levels as tabulated by Transparency International: If it is easy to do business in a country, its corruption perception levels are also low and vice versa.

The information for preparing the index is collected on ten important aspects of starting and running a small to medium size business by surveying a large number of identified persons in a country. They are drawn from professions relevant to business.

The Doing Business 2013 has given credit to 46 such information suppliers in Sri Lanka and all of them, with the exception of the Registrar General who is a government official, have been drawn from the private sector. Thus, the possibility for governmental authorities to manipulate the information flow to the compilers of the index in a bid to get a better ranking has been brought virtually to a zero level. 

Sri Lanka’s marginal gain in 2013

In Doing Business 2013, Sri Lanka is ranked at 81 out of 185 countries. As mentioned earlier, it is an elevation by 15 notches from its ranking in 2012 at 96. However, in that year, Sri Lanka’s ranking had slipped to 96 from 89 which it had in 2011. Hence, compared to 2011, Sri Lanka’s elevation is just by eight notches.

Given Sri Lanka’s current ranking just a little below the mid-level of 185 countries, there is a long way which Sri Lanka has to go in order to make it really a ‘small to medium business-friendly’ country. This is the reason for the humble tone expressed by Deputy Governor Nandalal Weerasinghe at the seminar on the index.

Sri Lanka has not fared well in all

Of the 10 aspects which WB/IFC has chosen as important for easing the regulatory atmosphere for doing a small to medium size business, Sri Lanka has not done well in all of them. In some, it has done well, in some only marginally well and in the rest, it has slipped from the previous year’s levels.

Gains in starting a business 

As shown in Table, Sri Lanka has made a significant improvement in the sub aspect, ‘Starting a Business’, by elevating itself from 71 in 2012 to 33 in 2013, an improvement by 38 notches in the current year. The reasons for this improvement have been the automation of two registrations: A company at the Registrar of Companies and an employer at both EPF and ETF making it easier, according to WB/IFC, for businesses to start up their work.

Though this is a significant improvement from the previous manual registrations which Sri Lanka had, it still takes five days for a company to be registered at the Registrar of Companies and one day at EPF/ETF. With modern interactive information and communication technology in which a Gmail account or a Facebook account can be opened within minutes, this appears to be that Sri Lanka is still riding on a steam-powered locomotive when the rest of the world is moving on high speed bullet trains.

Property registration too has improved

Registering Property is the next largest gainer by 21 notches from 164 in 2012 to 143 in 2013. Doing Business 2013 attributes this to the digital registration of titles at the Land Registry, but this facility is still under construction and not available on an island-wide basis. 

Once the digital registration is fully implemented, which may take another five years going by the current speed of the project, there will be a significant improvement in registering and transferring property titles. The banks too will be able to check on the veracity of titles on-line, making it easier for small to medium size businesses to raise loans from banks.

Sri Lanka, adopting eight different steps of registering property at present, takes 60 days for completing a transaction, which is a gain over its slow-moving South Asian partners who take on average 100 days to do the same. But Sri Lanka’s achievement is much longer than the 26 day period taken in developed countries which are rated as the friendliest nations for doing business.

Improvements in CRIB have improved ‘getting credit’ too 

Sri Lanka has improved its ranking by 10 notches from 80 in 2012 to 70 in 2013 in making it easier for Getting Credit for small to medium size businesses. This improvement is exclusively due to improvements in the coverage and the data content of credit information in Sri Lanka and therefore represents a facilitating aspect of getting credit by these enterprises. 

Since the Ease of Doing Business is on the friendly or unfriendly governmental regulations relating to private businesses, it has not covered the efficiency or the economic aspects of getting credit from formal banking institutions. Nor has it taken into account the potential impediment for credit to flow to small to medium size businesses due to the quantitative credit controls imposed by the Central Bank in a bid to tighten monetary policy measures earlier in 2012. Perhaps this would have been due to the fact that the index, though for 2013, presents the mid-2012 position and the information suppliers or the compilers of the index being unaware of the impact of this measure on the small to medium size businesses.

Taxes are really a hassle

Though ease of paying taxes has recorded a marginal gain of six notches from 175 in 2012 to 169 in 2013, the tax parameters are an area where Sri Lanka needs comprehensive simplification given its ranking in this area toward the end of the list of countries numbering 185. 

According to the Index, Sri Lankan businesses have to pay taxes 61 times a year spending some 254 hours and paying a little over a half of the profits as taxes of numerous designations. These hassles certainly inhibit incentives to pay taxes and that may be the reason for almost all small businesses and a large majority of medium size businesses in Sri Lanka not to pay taxes at all. 

In that sense, the difficulty in paying taxes is not an effective bottleneck for the type of businesses to do business in the country. However, since these difficulties are to be faced by the large businesses as well, there is a case for simplifying the tax environment in the country.

Don’t count on CEB electricity

On dealing with construction permits, enforcing contracts and getting electricity connections, Sri Lanka has recorded only very marginal gains during the year. In fact, all these parameters have been ranked well below the country’s national ranking of 81 in 2013: Enforcing contracts at 133, dealing in construction permits at 112 and getting electricity at 103.

To get a construction permit, it takes 216 days after following 17 different procedural steps and spending an amount equal to some 35 per cent of per capita income or $ 980 at current income levels. To enforce a contract, it takes whopping 1318 days or three-and-a-half years but after spending a little over a fifth of the claim for that purpose. 

To get electricity connections is really a hassle in Sri Lanka. After following four different procedural steps, it will take 132 days for a business to get an electricity connection. Even then, it is at some unimaginable cost of 1,258 per cent of per capita income or $ 32,450 or closer to Rs. 4 million. The bulk of the cost, amounting to Rs 3.9 million, according to WB/IFC, is in connection with providing a supply connection by CEB and if the costs reported by Doing Business are wrong, certainly CEB can dispute them. But, if true, this cost is certainly not within the resources of a start-up small or a medium size business.

Protecting investors 

In three other areas, namely, protecting investors, trading across borders and resolving insolvency, Sri Lanka has slightly slipped from the previous year’s ranking levels. Protecting investors in the doing business index relates to the rules and regulations on governance and disclosure principles applicable to businesses and does not go as far as involuntary expropriations by governments or parties connected to political powers, a formidable threat to businesses in many developing countries. If there is a good regulatory structure in this area in place, then, a country would be ranked at a higher level. 

Three parameters that are taken into account are the extent of directors’ disclosure, their liability and the ability of shareholders to sue the directors in the event of an irregularity. Out of a total of 10 marks that could be scored, Sri Lanka has scored six marks, which is almost equal to the score of developed countries. However, the slight slippage in the ranking is due to the non-disclosure of many transactions within a company to its small shareholders who are at the mercy of majority shareholders. 

Trade regulations should be simplified

External trade regulations are a little friendlier to businesses in Sri Lanka than other countries in South Asia. Though the number of documents has been reduced to six in both imports and exports, the preparation of documents takes some 12 days, making it necessary to spend 20 days to give effect to an export and 19 days in the case of an import.

The cost, including local transportation, has been more than $ 700 per container which is in fact prohibitive in goods that command very thin margins. This is really a hurdle to Sri Lanka’s small and medium size businesses to become effective partners of export trading which the authorities are now promoting among this category of businesses.

Resolve bankrupt businesses quickly

Resolving insolvency too is a hazardous activity in Sri Lanka where it takes nearly two years to complete an insolvency case. The recovery rate after insolvency has been completed has been around 44 per cent of the totals claimed by various creditors. In comparison, in developed countries, it is 71 per cent.

FDIs and Ease of Doing Business are related

So, Sri Lanka’s marginal gain in moving up in the ranking in 2013 is commendable but not worth of being complacent. Though this index is relating to small and medium size local private businesses, it is widely used as a benchmark when foreign investors choose a country for channelling their investments.

This is because the rankings in the Ease of Doing Business index by WB/IFC have a direct positive relationship with the global competitiveness index of the World Economic Forum: If a country is friendly to business, it is more competitive and if it is less friendly, it is less competitive.

Hence, the flows of foreign direct investments, as reported in Doing Business 2013, have a similar positive relationship with the rankings in the Ease of Doing Business: The easier ones get more FDIs and less easy ones, less FDIs. This is not surprising because once a country is ranked according to its score of Ease of Doing Business, such score is relevant to any enterprise whether it is big or small and local or foreign.

The long forward march with reforms

Sri Lanka has a long way to go in improving its ranking from the current level of 81 to a significantly valuable ranking that in a true sense makes doing-business easy for small to medium size businesses.

Doing Business marks this path as the distance to the frontier, the best position which a country can attain in the index at 100. Sri Lanka which has improved from 54 in 2006 to 60 in 2013 has a path distance of 40 to cross before it reaches the state of a business friendly nation. This requires the country to adopt a wide range of economic reforms across the economy on a priority basis and until then, as Deputy Governor Weerasinghe has remarked, the country cannot rest on the current laurels it has been showered with.

Hence, to make Sri Lanka a truly business friendly nation, there is a long way to go.

(W.A. Wijewardena can be reached at [email protected].)