Sri Lanka near to US$ 500 million FDI milestone

by Susiri Gurusinghe

With an economy of USD 86.07 billion GDP (2005), a per capita GDP of about USD 1,324 and average growth rate of 6.0 % over the past few years, Sri Lanka has recorded significant growth rates of Foreign Direct Investment (FDI) in 2006. Sri Lanka began to shift away from a socialist orientation in 1977 and since then, the governments have been deregulating, privatizing, and opening the economy to international competition. Three decades of civil war has no doubt slowed economic growth, uprising of youth frustration in late 1980s, also caused extensive damage to economy, but Sri Lanka is very near to a milestone of USD 500 Million FDI in 2006.

The FDI achievements in 2006 are excellent compared with previous year of USD 60.34 Million. Table shows the FDI growth over the last four years, the remarkable achievements in 2006 is almost eight fold increment than 2005. Up to the month of November 2006 the FDI is USD 453.66, and it is certainly Sri Lanka will achieve USD 500 Million milestone or very near to the USD 500 Million target.

Continuation of War and USD 1 Billion predictions of government

This 755% per cent increase in FDI inflows was achieved in the backdrop of decreasing risen terrorist activities in Country. Despite efforts since 1987 by successive governments, and India, to resolve Sri Lanka's ethnic conflict, an enduring peace settlement with the LTTE remains elusive. However government's target was to achieve USD 1 Billion in 2006. If the peace process succeeds, the target would have been achieved very easily in 2006. The increased terrorist activities by LTTE in mid 2006 after three years of cease fire agreement, certainly made uncertainty over the investor minds, but achievements to half of target which can be said a remarkable. Despite the enormous efforts to bring peace by the present and successive governments has not still evident to the investor minds a positive signals of FDI.

The peace is vital factor for investment decisions and FDI. Foreign Investors will see Sri Lanka as feasible only in a peace environment. No investor will want to take risk for their money by investing in a conflict situation. Therefore, a long lasting peace is essential to Sri Lanka, to seek more and more foreign investments. Despite the uncertainty in peace, the investor community has placed their good faith on Sri Lanka which is the secret behind this millstone. The continuation of private-sector led economic activity and better investor friendly policies of the government, together with effective contributions form private sector, have had the desired effect of achieving a significant rise in foreign investment. President Mahinda Rajapaksa and his cabinet especially investment related ministers have personally dedicated to sending a positive message to investors.

Improving infrastructure is a good signal

Infrastructure covers many dimensions, ranging from roads, ports, railways and telecommunication systems to institutional development. Success in China reveal that the extent of transport facilities and the proximity to major ports as having a significant positive effect on the location of FDI within the country. Poor infrastructure can be seen, however, as both an obstacle and an opportunity for foreign investment. Recent evidence seems to indicate that, although telecommunications and airlines have attracted FDI flows (e.g. to India and Pakistan), other more basic infrastructure such as road-building remains unattractive, reflecting both the low returns and high political risks of such investments.

Improving basic infrastructure is an immediate priority. Good roads and a reliable power supply are critical especially for investments in the outstations. Roads and power projects must be expedited in order to encourage more investors to fan out to inland areas, instead of basing their projects in Colombo. The government is aiming to shift infrastructure development to rural areas. Government has taken initiatives to construct a new airport at Weerawila, a southern express way, outer circular expresses way around the township areas and most importantly plans to overcome power crises. Ihala Kotmale hydro power project and proposed coal power plants at Puttalam and Trincomalee, These developments not only improve infrastructure of the country but also it brings valuable contributions to the FDI into the country.

Labour issues recorded lowest

Labour issues also pose difficulties for foreign investors accustomed to more flexible employment laws in their countries. As a former experience labour minister, President Mahinda Rajapaksa has managed to maintain lowest labour disputes during the year. His government shows ability to maintain lowest labour disputes while not curtailing any rights of the workers.

The labour costs significant, particularly for foreign investment in labour-intensive industries and for export- oriented subsidiaries. Sri Lanka's labour cost is relatively high especially in the formal sector to promote investment opportunities. The recent FDI success in China, for example, has been heavily influenced by the prevailing low wage rate. The rapid growth in FDI to Vietnam has also been attributed primarily to the availability of low-cost labour. This high labour cost certainly detrimental to the FDI Sri Lanka.

Even though the labour cost of Sri Lanka is significantly high, the problem can overcome by productivity improvements. The skills of the labour force are expected to have an impact on decisions about FDI location. If Sri Lanka can be triggering the most productivity levels in the region, is good signal to potential foreign investors. On the other hand Sri Lanka has very strong workforce with highly qualified workers enhance the productivity levels.

Privatization - backbone to FDI

Though privatisation has attracted some foreign investment flows in recent years progress is still slow in the Sri Lanka mainly because bad impression of the selling national assets. To some extent this is correct because of the improper privatization procedures which made some doubts over the minds of the people. The privatization has the divestment of state assets is a highly political issue. In India, for example, organised labour has fiercely resisted privatisation or other moves which threaten existing jobs and workers' rights. At a regional level, 1994 figures show 15% of FDI flows to Latin America as derived from privatisation, but only 8.8% in sub-Saharan Africa and 1.1% in South Asia. If Mahinda Rajapaksa's government can overcome some of structural problems that are constraining the process of privatization and bringing good parts of the privatization, achieving USD 1 Billion target is not an issue.

The characteristics of inefficiencies, lack of depth and transparency and the absence of regulatory procedures are some reasons to privatisation of the estate owned enterprises. The continuity of dominated by government activity and are often protected from competition.

Financial markets in most low- income countries are slow to become competitive but Sri Lanka well ahead of this. Well developed financial market is greatest opportunity to investors to Sri Lanka. Stock markets (Colombo stock exchange) are broadly developed securitised debt and it virtually good opportunity to Sri Lankan FDI.

Natural resources

Still achievements are fraction compared with rest of the world. However this FDI achievement is still fraction of the rest of the world even with south Asian region. The nearest and largest trading partner India has recorded USD 26.84 Billion while Pakistan has recorded USD 18.8 Billion during the year 2006 and Bangladesh already achieved USD 1.55 Billion in 2005. Sri Lanka is left far behind compared with rest of the world. Over the last 25 years, FDI in low-income countries has been highly concentrated in three countries, China, Nigeria, and India. Large market size, low labour costs and high returns in natural resources are amongst the major determinants in the decision to invest in these countries.

New major destinations for FDI flows in the recent past include Vietnam, Ghana and Bangladesh. Given the easier access to their markets, motives for investment in these economies are mainly determined by the low cost of labour and the availability of natural resources. Sri Lanka is going well behind than other countries but showing positive signals remains some expectations. But Sri Lanka is rich with natural resources and government attitudes are positive. Long lasting peace is key, will no doubt more FDI brings to Sri Lanka A valuable efforts of the government to bring LTTE in to the peace talks table and resolving the issue by negotiating settlement would definitely save not only huge amount of security expenditure but importantly encourage the investors to bring more and more FDI to country.

Sri Lanka should not wait further 5 years to double the FDI, it should target and achieved within next year.

FDI growth

Year FDI in Sri Lanka (USD Mn) No. of projects

2003 16.05 10

2004 32.00 11

2005 60.34 12

2006 453.66 10

(Up to Nov. 06)