Foreign Investment in Sri Lanka

by padraigcolman

This article appeared on Page 9 of the January 1 issue of Ceylon Today

 

Colman's Column3Why would a foreigner invest in Number 85 on the Forbes Best Countries for Business list when he could invest in number1?

Sri Lanka is keen to attract foreign investment to offset its heavy borrowing for infrastructure development. I recently received an e-mail from an exiled Sri Lankan who was trying to get a project going. This man is not an enemy of Sri Lanka; in fact, some accused him of being a government stooge. Nevertheless, he told me was shocked at the level of corruption he witnessed and said he had little hope for the future.

In October 2013, the World Bank published its 2014 Doing Business list of the most business-friendly places in the world. The places with the greatest number of positive ticks are Singapore and Hong Kong.

The survey shows a decade-long trend in which many countries are shortening the amount of time it takes to start a business. The report also finds a relationship between the degree of black market or “informal” business activity and the Doing Business ranking; the higher the degree of informality, the worse the score.

In the 1960s, Sri Lanka had a per capita income comparable to those of South Korea, Malaysia, and Thailand but failed to maintain its advantage. Foreign investment is still not enough to move the economy to higher levels of economic growth. The country has been unable to attract the kinds of investments that would have multiplier benefits to the economy.

Rankings on the Doing Business index depend on a number of indicators such as Starting a Business, Getting Electricity, Investor Protection, Enforcing Contracts. The gap is narrowing as countries such as Rwanda, Philippines, and the Russian Federation improve regulations to foster entrepreneurship and trade. Ireland remains at 15 in the ranking of 189 economies.  Sri Lanka has fallen four places to number 84.

Forbes magazine did its own survey by grading 145 nations on 11 different factors: property rights, innovation, taxes, technology, corruption, freedom (personal, trade and monetary), red tape, investor protection and stock market performance. Ireland came top in this index. In 2010, Ireland’s budget deficit reached 32.4% of GDP – the world’s largest deficit. Ireland achieved moderate growth of 1.4% in 2011 and cut the budget deficit to 9.1% of GDP. Although the recovery slowed in 2012, Dublin managed to trim the deficit to about 8.5% of GDP. Sri Lanka comes in at number 85. Forbes comments: “A large trade deficit remains a concern. Strong remittances from Sri Lankan workers abroad have helped to offset the trade deficit.”

A report by the American Chamber of Commerce in Ireland said that US investment into Ireland in 2012, at $22.8 billion, was of a similar scale to all of the investment by US companies last year into Asia. The level of foreign direct investment into Ireland increased during 2012, to €258 billion from €225 billion, with the main contributors to the increase being the Netherlands (€22 billion) and Asia (€5 billion).

The American chamber of commerce in Sri Lanka, through its president Vijaya Ratnayake, said the US wanted to increase FDI flows to Sri Lanka and see an increase in Sri Lankan exports to the US. However, the US State Department has some doubts about investment in Sri Lanka. “Sri Lanka can still be a difficult place to do business with an unpredictable policy environment, cumbersome bureaucracy, and a recent asset seizure bill that has created business uncertainty. Further, the government has increased control of the economy recently and is a concern for private investors… Some U.S. and other foreign investors have realized worthwhile returns on investment in Sri Lanka while others have tried and departed frustrated.”

IMF Resident Representative, Mr. Koshy Mathai said: “FDI has been very slow… $725 million for an economy of Sri Lanka’s size is still quite a low figure…Look at countries like Vietnam, where FDI is many times what it is in Sri Lanka. Clearly there is a lot of room to grow, and I think that’s why the government has been focusing so much on all these things like the softer factors, improving the business environment, and why we also think that keeping the macroeconomic environment stable to attract those investors is going to be a key thing.”

Sri Lanka is indeed making efforts. Although Canada boycotted CHOGM, a separate delegation took part in a business forum. According to the Board of Investment, a group of 540 foreign business delegations took part and including 138 from Britain, 85 Chinese and 77 Indians. The BOI claims that potential investors were interested in the advantages derived from the free-trade agreements Sri Lanka has with India and Pakistan, where a wide range of goods produced in Sri Lanka can be exported duty-free to those large markets. In early 2014, there should be a similar agreement with China. In 2013 China has been Sri Lanka’s leading foreign direct investor, accounting for 24 percent of the total $870 million in FDI from January to September, followed by Hong Kong and Singapore.

The editor of the English Catholic magazine The Tablet noted the contrast between David Cameron’s behaviour in Sri Lanka and in China. “He made it plain for all to see that China’s indifference to most of the values that define a civilised society was of little or no interest to him, provided the British economy benefited from an increase in trade and investment.” There has been great amusement over a deal Cameron struck to export pig semen to China.

Even before the LTTE had been comprehensively defeated, there was much hopeful talk of how the peace dividend might encourage members of the Tamil diaspora to invest their money in Sri Lanka rather than in death. In August 2008, Jane’s Intelligence estimated the annual income of the LTTE as between 200 and 300 million US Dollars.  It would be most beneficial to the reconstruction and development of the Northern and Eastern provinces if some of the LTTE’s ill-gotten and ill-used wealth could be diverted to more benign investment than the purchase of arms.

K Godage wrote in the Island newspaper on 27 September 2009:   “We are today fortunate that Raj Rajaratnam has set an example which we hope would be followed by other members of the Diaspora to whom, whether they accept it or not, this is also their land”.

LMD had a cover feature on Rajaratnam. This fell short of the accolade of LMD Sri Lankan of the Year  but being on the cover did imply some kind of imprimatur for Rajaratnam’s activities. To be fair, Godage and LMD were bestowing their approval before Rajaratnam went to prison. One grants an absolution to those who came to praise him in ignorance of his insider trading. That absolution must be somewhat tempered by the suspicion that a successful business magazine which claims to campaign against corruption should have had some inkling of what he was up to.

Many diaspora organisations claiming to be working for Sri Lankan Tamils are calling for donations. Where are the diaspora Warren Buffets or Bill Gateses  who are prepared to put in their own money? LMD was optimistic about Raj Rajaratnam but he ended up in the slammer.

There are also members of the Tamil diaspora actively trying to prevent investment. The U.S. based activist youth group, PEARL, urged Microsoft to reconsider investments in Sri Lanka. Constant criticism of Sri Lanka from abroad orchestrated by pro-LTTE elements of the Tamil diaspora do not create an inviting environment for potential Tamil investors. Governor of the Central Bank, Ajith Nivard Cabraal told an interviewer:  “My message to them is; without grumbling come and invest and improve their conditions here. This is the best service they can do for them, unless they want to indirectly make them suffer further.”

Canada boycotted CHOGM because of human rights. GSP+ ended because of human rights. Cabraal said “On every bond issue I handle I’ve had to confront this problem” He believes that he has convinced investors that it is safe to put their money into Sri Lanka. “I believe the world will understand the true picture behind these lies.”

Well, up to a point, governor. Perhaps more of an obstacle than human rights is corruption. I read  in a newspaper paper that a senior official at the Board of Investment is being investigated in relation to a serious allegation of bribery. I turn to another paper for the same date and see a report that the Commission to Investigate Allegations of Bribery or Corruption has received complaints against 111 politicians including nine ministers. A third paper reports that the chairman of that very Commission is himself being investigated about corruptly receiving a car. On another page of that same paper, an article reports that Sri Lanka has slid 12 places to 91st position on the Transparency International Global Corruption Perception Index. The writer of the article thinks the Index is bogus. Try to tell that to people who have money to invest here.

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