FDIs: where have we gone wrong?

23 May 2021

FDIs: where have we gone wrong?

23 May 2021

By Zahida Rizvi Sri Lanka’s Foreign Direct Investment (FDI) amounted to $ 758 million in 2019 which was a steep decline of a 53.03% decline from $ 1.6 billion in 2018. In 2017, FDIs into Sri Lanka grew by a 53.03% increase from 2016 to $1.37 billion from the $ 801 million achieved the previous year by way of foreign loans received by companies registered with the Board of Investment (BOI). Foreign Direct Investments plays a vital role in developing the economic growth of developing countries like Sri Lanka. In Sri Lanka attracting FDIs has been dependent on the general policy of the country, political environment and stability of the country, macroeconomic policies, the quality of its infrastructure networks, availability of skilled labour force and taxation policies in place. The Sunday Morning Business contacted Economist and Professor at the University of Colombo, Sirimal Abeyrathne who told us that, Sri Lanka, as an emerging market in the global hemisphere requires to adapt policies imposed by countries such as China and Singapore, since, currently they in the lead as hubs for attracting a high inflow of FDIs. “Sri Lanka to have a global market and input and labour supply has to be global and the limitations that are imposed on preventing Sri Lanka from becoming a global market. Thereby, overcoming the limitations with policy reforms and regulatory reforms will carry Sri Lanka towards attracting FDIs,” he stated. Investors actively seeking to invest in countries specifically overlook the status of the business and competitiveness index, logistics performance index and corruption performance of any country. However, Sri Lanka has been struggling to meet the benchmark globally since Fitch Ratings had downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC’ from ‘B-’. Speaking at the press briefing of an investment forum organised by Asia Securities, last year, State Minister for Finance and Capital Markets Ajith Nivard Cabraal stated that Sri Lanka is targeting $ 2.5 billion in foreign direct investments in 2021. “Sri Lanka anticipates to obtain approximately about a billion dollars of investments for the Colombo Port City. Additionally, $ 300 million is anticipated to be drawn in for the Hambantota tyre factor of which $ 175 million is to flow in next year (2021). Furthermore, the establishment of the pharmaceutical zone is expected to get another $ 200 million,” he had said. However, according to the Central Bank of Sri Lanka (CBSL), official data released earlier this year, it claims that Foreign Direct Investments (FDIs) to Sri Lanka have fallen to $ 528 million up to the third quarter of 2020. According to CBSL’s external sector performance report, it states; “Foreign investment in the government securities market recorded a marginal net outflow of foreign investment amounting to US dollars Rs. 2 million which has reduced the cumulative net inflow to around $ 1 million during the period from January to February 2021,” The report further claimed that the total outstanding exposure of foreign investment in the rupee-denominated Government securities market remained low at $ 36 million by end February 2021. Additionally one of the key contributors for foreign investment into the country is the tourism sector which declined steeply following the outbreak of the pandemic. As the border resumed opening in Sri Lanka the tourism sector commenced recovering slowly recording tourist arrivals at 3,366 in February 2021 recorded, compared to 1,682 arrivals recorded in January 2021. However, arrivals in February 2021 were 98.4% lower than the arrivals of 207,507 recorded in February 2020 due to the global outbreak of Covid-19. In a nutshell, the total tourist arrivals recorded at 5,048 during the period from January-February 2021 dropped massively in comparison to 435,941 arrivals in the same period of 2020. Accordingly CBSL claims that the cumulative earnings from tourism are estimated at around $ 7 million during the period of January-February 2021. The main source countries of tourist arrivals during February 2021 were Kazakhstan, Ukraine and Germany. Earnings from tourism, which are estimated based on tourist arrivals, amounted to $ 5 million in February 2021, compared to $ 279 million in the corresponding month of 2020. What are the best strategies for Sri Lanka to attract FDIs? Thereby, Sri Lanka has been licking its wounds trying to revive itself from the heavy economic disruption caused by the pandemic which had impacted foreign investments immensely. The inflow of FDIs helped boost economic growth in the past, and coupled with further investment inflows will bring good jobs and higher wages for Sri Lankan workers, technology exchange and innovation and increase productivity, and therefore make the economy more competitive. Crucial elements to boost FDI inflows into the country is dependent on reworking the trade policies, improving logistics whilst facilitating trade, improving on macroeconomic and taxation policies and quality of its infrastructure networks and skill levels of its labour force. According to the United Nations Conference on Trade and Development (UNCTAD), Investment Policy Review of Sri Lanka report, it states; “The statistic is that national investor participation in joint ventures is high in Sri Lanka's whilst comparing it to the country’s low per capita income. Therefore, Sri Lanka has a preference for joint ventures in foreign investment policy and in some privatisations,” the report stated. Privatisation has been an important channel of FDI into Sri Lanka since the local private sector has the technical and financial capability to provide strong partnerships with foreign investors. The report further claims that 11 largest privatisation transactions between 1990 and 2000 accounted for $ 609 million of the $ 1,791 million in FDIs during the period. Sri Lanka’s regulatory environment should be facilitated to incorporate modern FDI entry principles and procedures. Exposure to limitations ranging from enterprise ownership restrictions imposed on foreign entrants can discourage investments coming in, therefore, there is a necessity to develop a new legal framework for administering FDI entry and formulating related policy. Importance of FDIs for developing countries FDIs play a significant role in emerging markets and developing countries by transforming economies through innovation, enhancing productivity, and creating better-paying and more stable jobs in host countries, in sectors attracting FDIs as well as in the supportive industries. FDIs are a sole contributor to Sri Lanka’s GDP, although the country is still behind its regional peers in terms of FDI as a share of GDP. In 2017 FDI inflows comprised 1.6% of Sri Lanka’s GDP, compared to India at 2% of GDP, the Philippines (2.7%), Myanmar (5.2%) and Vietnam (6.1%). Only Bangladesh was lower, with 1.1% of GDP. FDI in Sri Lanka is dominated by seven countries, which contributes to 36% of projects and about 80% of investment by value invested. Singapore leads the pack as the largest investor, with the involvement of investment activities in a variety of sectors in the country. The UK is the second largest investor in garments, construction and IT. The other major investors are Japan, the Republic of Korea, China and Australia. Additionally, India has over time become a key investor to Sri Lanka with principal sectors of investment ranging from steel, cement, rubber products, tourism, computer software, IT training and other professional services. For Sri Lanka to achieve its goal of becoming a regional trade and investment hub, there are significant gaps that need to be improved ranging from an unstable domestic political and economic landscape, regulatory framework which fails to utilise foreign investments completely, necessity to improve the FDI liberalisation and underutilisation of the well-established national private sector. The Global Investment Competitiveness (GIC) survey was commissioned by the World Bank Group, and it states; “The importance of factors in investing in a developing country is dependent over investment policy factors which could change the company’s decision about whether to invest or not in a country”. The report further claimed that more than three-quarters of investors surveyed in this report encountered some type of political risk in their investment projects in developing countries. Factors that determine investors’ decision making by raising their risk calculations would be the political stability and a business-friendly regulatory environment, macroeconomic, political, and regulatory risks. Thereby, de-risking, or reducing project or country risk, can lead to the right investor return profile and additionally attract private investment. Nevertheless, the Government plays a vital role in reducing the risks to private investors through a policy and institutional framework that supports an enabling business climate and ensures good governance. Since reliable regulations and institutions are key to de-risking private investment at the country level, they are an increasingly important element on the maximising Finance for Development agenda.

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FDIs: where have we gone wrong?

FDIs: where have we gone wrong?

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