FDI quandary

Foreign Direct Investment (FDI) has been the tough nut that successive governments have failed to crack. Hit by the Easter Sunday attacks and political uncertainty, Sri Lanka performed dismally in FDI last year attracting only $ 1.2 billion, according to the Central Bank Annual Report. 

FDI inflows in 2019 were less than the inflows of $ 2,139 million in 2018 ($ 1,457 million excluding the Hambantota port proceeds received by the Government) and $ 1,910 million in 2017. Persistent issues such as relatively low ranking in the Doing Business Index, high wage rates and utility costs compared to regional peers, high costs of land acquisition, rigidity in labour laws and Government procedures remain the main impediments in terms of attracting FDIs.

Despite repeated and prolonged efforts, Sri Lanka has only advanced one notch in the latest Ease of Doing Business rankings compiled by the World Bank, inching forward from 100th in 2018 to the 99th position in the latest edition. 

In contrast, India, which was placed 63rd in the Doing Business rankings, is the highest ranked economy in South Asia, followed by Bhutan (89) and Nepal (94). India, with four reforms, is among the top 10 improvers for the third consecutive year. Another top reformer, Pakistan, with six reforms, improved the most in the region during the past year, moving forward 28 places. 

Unfortunately, Sri Lanka finds itself among half of the South Asian region’s economies that failed to carry out any reforms in the past year. Afghanistan, Sri Lanka, Bhutan and the Maldives did not make any regulatory changes.

Sri Lanka, along with its neighbours, continues to underperform generally in enforcing contracts and registering property. A company needs around 108 days to register a transfer of property in South Asia, more than four times the OECD high-income average of 24 days. Resolving a commercial dispute takes around three years, almost twice as long as among OECD high-income economies.

Overall, the governments of 115 economies around the world launched 294 reforms over the past year to make doing business easier for their domestic private sector, paving the way for more jobs, expanded commercial activity and higher incomes for many, according to the World Bank Group’s Doing Business 2020 study. Sri Lanka, hamstrung by COVID-19 and institutional lethargy, is facing the danger of being left behind in the race to become a more competitive economy. 

Despite its social welfare indicators being on par with East Asian countries, when it comes to economic competitiveness, Sri Lanka stays true to its South Asian roots. Sri Lanka is not the only country regionally to have troublesome politics and policy inconsistency. Its neighbours deal with many of these challenges and more but there is still an effort to push through at least some reforms to improve their rank. 

The index has also been affected by the US-China trade war, with reforms being lower than previous years. But it is clear that key countries, including India, China and Singapore, continue to battle for better rankings and Sri Lanka is in danger of being outperformed in its own backyard.

It is therefore important for the administration of President Gotabaya Rajapaksa to also focus on how to turn this situation around and what policies can be implemented to ensure Sri Lanka does better. Transparency on investments is also important to ensure public interest and there is little hope for change unless reforms are done.