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US says SL tough place to do business 

22 Jul 2021

 
  • Corruption significant challenge for US firms in SL
  • Says Govt. utilises ‘interventionist’ policies
  • Import regime ‘one of the most protectionist’
  Releasing the 2021 Investment Climate Statements, the US Department of State yesterday (22) termed Sri Lanka as a challenging place to do business, with high transaction costs aggravated by an unpredictable economic policy environment, inefficient delivery of government services, and opaque government procurement practices.   It added that investors noted concerns over the potential for contract repudiation, cronyism, and de facto or de jure expropriation.   “Public sector corruption is a significant challenge for US firms operating in Sri Lanka, and a constraint on foreign investment.  While the country generally has adequate laws and regulations to combat corruption, enforcement is weak, inconsistent, and selective. US stakeholders and potential investors expressed particular concern about corruption in large infrastructure projects and in government procurement. The government pledged to address these issues, but the Covid-19 response remains its primary concern. Historically, the main political parties do not pursue corruption cases against each other after gaining or losing political positions.” However, it noted that while Sri Lanka is a challenging place for businesses to operate, investors report that starting a business in Sri Lanka is relatively simple and quick, especially when compared to other lower middle-income markets.   Nevertheless, scalability is a problem due to the lack of skilled labour, a relatively small talent pool, and constraints on land ownership and use. Investors note that employee retention is generally good in Sri Lanka, but numerous public holidays, a reluctance of employees to work at night, a lack of labour mobility, and difficulty recruiting women decrease efficiency and increase start-up times.  A leading international consulting firm claims the primary issue affecting investment is lack of policy consistency. According to the US Department of State, while the incumbent government largely promoted pro-business positions, including announcing tax benefits for new investments to attract FDI, the government also made interventionist policies to arrest the ongoing economic fallout from Covid-19.  This in turn has altered the field of foreign direct investment towards manufacturing intended to the domestic market. It added that Sri Lanka’s import regime is one of the most complex and protectionist in the world. US stakeholders have raised concerns the government does not adequately consult with the private sector prior to implementing new taxes or regulations – citing the severe import restrictions imposed as a reaction to Covid-19 as an example.   “These restrictions, quickly imposed without consulting the private sector, further complicated Sri Lanka’s import regime. Similarly, stakeholders have raised concerns that the government does not allow adequate time to implement new regulations. Additionally, the Sri Lankan government has banned the importation of several ‘non-essential’ items since April 2020 in an attempt to curtail foreign exchange outflow as the Sri Lankan rupee depreciated around 5% year-to-date in 2021, and is expected to come under further pressure.”

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