Policy consistency and economic diplomacy: Rebuilding trust and gaining markets, the way forward
By Asiri Fernando
Poor policymaking, slow progress on trade relations, and the lack of consistency and engagement with foreign investors have eroded international trust in Sri Lanka, experts told The Sunday Morning.
The status quo is not one Sri Lanka can afford anymore, as the country continues to slide towards greater crisis.
“Economic diplomacy” is a key element of a nation’s diplomatic strategy, designed to improve the country’s competitiveness, promote economic partnerships, and step up the promotion of local exports, investment opportunities, and services to international investors.
Given the current economic climate of the country, a review of its current economic, diplomatic, and government policies will help in improving investor confidence in Sri Lanka, which may lay the foundation for recovery and growth.
“There has been very little engagement with international entities. Foreign investors are not pleased with Sri Lanka, are they?” Shippers’ Academy Colombo (SAC) Chief Executive Officer (CEO) Rohan Masakorala questioned, when reached by The Sunday Morning. He pointed out the established economic diplomacy models had failed in recent times.
“We have not been engaging with the West much – mind you, most of our markets are there. The country is in a desperate situation. I feel that our engagement is forced or reactionary. If you look at the situation regarding the EU’s (European Union) GSP+ (Generalised Scheme of Preferences-Plus), when it is investigated, we engage with them. Why have we not been proactive?” Masakorala questioned.
Speaking from an industry perspective, Masakorala pointed out that sudden policy reversals and failures to uphold international commitments had eroded trust in Sri Lanka.
“We (Sri Lanka) annoy key investor countries like India and Japan by reversing projects like the LRT (light rail transit) and East Colombo (Container) Terminal. Then, we begin to engage them. That is not diplomacy, it is crisis management. Ad hoc decisions by the Government on committed projects will help no one,” he opined.
Responding to a query, former Foreign Secretary H.M.G.S. Palihakkara said that economic diplomacy by the Foreign Ministry alone cannot deliver results that Sri Lanka is in need of.
“Economic diplomacy is significant because Sri Lanka’s economic outlook is facing multiple challenges from external players. In brief, economic diplomacy cannot deliver results on its own. It must be anchored in sound governance practices with a visible commitment to the rule of law in the country,” Palihakkara stated.
When questioned about the Government’s criticism of international rating agencies and reluctance to seek assistance of international financial institutions, Palihakkara pointed out that blaming them for crises borne out of local decisions was futile.
“It is a mistake to blame international rating agencies who are giving various ratings. Obviously, some ratings may be unfair, but the answer to that is not to blame them. We need to address the underlying causes,” the former diplomat explained, pointing out that in order for economic diplomacy to work, it needs to be anchored in predictable, practical, and efficient governance.
According to the Foreign Ministry, Sri Lanka identifies increasing exports, attracting foreign direct investments (FDIs), qualitative and quantitative expansion of foreign employment abroad for Sri Lankan citizens, and promoting tourism as policy priorities for economic diplomacy.
When questioned about what the Foreign Ministry had enacted as key economic diplomacy initiatives, the Ministry said that its Economic Affairs Division had created a Joint Task Force, which brings the Export Development Board (EDB) and the Board of Investments (BOI) together to increase export revenue through investments. The Division also promotes Sri Lanka as a tourism destination through its overseas missions, among other initiatives.
“The Ministry will continue persistent efforts, collaborating with Sri Lanka missions and line agencies, to attract FDI in various sectors. The Ministry co-ordinates several investor forums overseas in this regard, focusing and lobbying with potential investors,” the Foreign Ministry said in response to a question on what it is doing to attract investment to Sri Lanka.
“Navigating through these uncertain times and conditions has created a new normal for the country where export opportunities with regard to the present pandemic situation are being explored. This was done by the timely identification of new opportunities with the assistance of missions overseas and making quick responses to market alerts and creating buyer-seller linkages,” the Ministry further explained.
However, the Government’s tendency to seek loans for short-term relief from the ongoing debt crisis and to keep the state apparatus afloat amidst shrinking revenue streams, will likely contribute to worsening the long-term debt serviceability.
The proposed budget allocations for 2022 were an indication of what the Government views as priority issues. The decision to increase defence expenditure and cut funds of the health services, while the country is still trying to contain the Covid-19 outbreak, drew strong criticism from many, including the Opposition. The move by the Government also highlights why economic diplomacy alone will not deliver investor confidence and enhance trade; policy prioritisation needs to reflect that Sri Lanka is serious about economic recovery and building partnerships.
Proactive measures crucial
Commenting on what can be done in terms of economic diplomacy in the coming months, economist and a National University of Singapore Non-Resident Senior Fellow Dr. Ganeshan Wignaraja stressed the need for non-debt-creating forex inflows and to revisit existing economic diplomacy models in operation.
“Sri Lanka needs to generate significant non-debt-creating foreign exchange (from exports, investment, and tourism) to help to overcome the problems created by the pandemic. Having such foreign exchange will enable the country to repay external debt in a timely manner and to mitigate the hardships of the poor,” Dr. Wignaraja stated.
He opined: “Tackling macroeconomic imbalances in the economy, reducing the anti-export bias in the trade regime, and strengthening efforts towards economic diplomacy are key for unlocking the potential of non-debt-generating foreign exchange in Sri Lanka. To advance economic diplomacy, the Foreign Ministry and the Ministry of Trade can take a fresh look at the role of free trade agreements (FTAs) with major regional economies to provide predictable regional rules-based trade and help insure against the rising tide of protectionism globally. This is one of the strategies deployed by successful economies in East Asia.”
Diplomatic missions should be proactive in seeking economic opportunities for Sri Lanka and assist local and foreign entrepreneurs to network to help Sri Lanka recover and to improve ease of doing business on the island.
“Ideally, the Embassy should conduct market feasibility studies on trade, tourism, and investment, and create links for both ends. Trade is always a two-way street. So bilateral trade and multilateral trade can be promoted through the Ministry of Trade wherein possible cases trade agreements would be beneficial. Especially at a time like this, where Sri Lanka is looking to finance our debt through bilateral loans, the role of our diplomatic missions is critical,” policy think tank Advocata Institute Chief Operating Officer (COO) Dhananath Fernando told The Sunday Morning.
“My view is that people do business with people. No country does business with other countries. So, our missions have to be active in connecting people with each other and connecting with each other for better connections,” he added.
Commenting on the need to utilise trade agreements to exploit preferential markets, former Central Bank of Sri Lanka (CBSL) Governor Dr. Indrajit Coomaraswamy pointed out that like many regional countries, Sri Lanka needs to fast-track trade agreements with key countries.
“Just about every country is entering into trade agreements. They are extending the preferential markets available to them. We have been extremely slow in that respect. It is a shame that the Singapore-Sri Lanka FTA has fallen off by the wayside. It sends a negative signal about our capacity to stick to our commitments,” Dr. Coomaraswamy opined.
“Now, I think we really need to reconsider what our trade policy is going to be. Are we going to give exporters of other countries an advantage over ours? We need to expand the size of the market available to us on a preferential basis,” he pointed out, adding that Sri Lanka ought to move quickly to close the proposed FTAs with China and India. He commended the Government’s actions to retain the GSP+ concessions.
“If we are able to complete those agreements (India and China FTAs) and also retain GSP+, I don’t think there will be any other country in the world that would have preferential access to India, China, and the EU. If we want to attract foreign investment, we can market the access to attract them. I think it is important that economic diplomacy is geared up in terms of these trade agreements so that we don’t fall behind and open up preferential markets for our exports,” the former Central Bank Governor said.
Dr. Coomaraswamy noted that economic diplomacy should be strengthened to better support BOI initiatives, adding: “Our diplomatic missions should strongly support the BOI’s effort; I think it is happening, but we need to look at where we can improve them.”