Improving ease of business

Exports- and investment-led growth supported by strong fiscal stability is the only way out of Sri Lanka’s hefty debt situation. But attracting investment depends on economic management and the latest Ease of Doing Business rankings released on Tuesday by the World Economic Forum (WEF) show Sri Lanka is stagnating and runs the danger of being left behind in the global race for growth.   

In terms of the most problematic factors for doing business, the WEF Executive Opinion Survey 2016 listed policy instability as the biggest concern followed by access to financing and inefficient Government bureaucracy and tax rates. This will come as no surprise to Sri Lanka’s private sector, which has been screaming itself hoarse trying to get the Government to stick to consistent policies but largely failing. 

Bureaucratic reform has been largely eschewed for alternative systems that bypass existing systems because the view of the Government is deeper reform would be too time consuming and cumbersome. Key policy implementation is herded into the National Policies and Economic Affairs Ministry, Finance Ministry and others along with new branches such as the soon to be rolled out Megapolis Authority that could create bottlenecks in implementation because other arms of Government have to wait on the approval of these key institutions.  

Trimming the public service, fast-tracking digitisation and upgrading the legal system to reduce red tape are all on the waiting list with little indication of when they will be allowed to have ground impact. The long awaited policy declaration of the Prime Minister along with wide ranging investment legislation expected in parliament months ago have failed to materialise, leaving economic policy in tatters.          

Last week the International Monetary Fund (IMF) strove to put policy expectations in perspective by recommending that a high quality tax policy would have to encompass a greater quota of direct taxes and the overall structure would have to include more transparency. The large number of exemptions given to private and public corporations and limitations on income tax have to be relooked at and a policy to systematically increase direct taxes will have to be started with this Budget.

Focusing on the region, the report said South Asia continues its upward trend and competitiveness improves in most economies in the region, which is experiencing positive economic momentum, and in 2016 is set to grow more quickly than China for the first time in more than 20 years. Over the past decade, the subcontinent has focused on improving overall health and primary education levels and upgrading infrastructure, areas of particular importance for future diversification and preparedness given the resource-driven nature of the regional economies. 

However, India skipping up the rankings to 39th place, largely on tax reform, would have limited impact of other South Asian economies as the region remains poorly integrated and momentum is unlikely to filter into neighbouring countries unless, like Sri Lanka, focus shifts to stronger trade agreements and trade liberalisation measures. 

Given Sri Lanka’s strong need for investment the only silver lining at the moment is its push for greater integration with global economies but as economic challenges deepen the Government will have to work harder and faster to get results.