Investment drought?

THE United Nations’ Economic and Social Commission for Asia and the Pacific (ESCAP) recently stated that it was hopeful over Sri Lanka’s economic outlook, predicting a 7.5% growth in 2015 while inflation was expected to drop to 3%. However, ESCAP also cautioned Sri Lanka and other countries which were dependant on external funding that they may face policy challenges in the future.

Presenting its Economic and Social Survey of Asia and the Pacific 2015 Report, ESCAP stated that the expected increase in US interest rates due to the monetary policy normalisation may drive investments out of the Asia Pacific region. Nevertheless, the short-term picture remains positive with growth rates expected to improve even further in 2016.

The Government is actively working on boosting Sri Lanka’s image in the eyes of foreign investors with the current regime focussing heavily on FDI-led development. The Board of Investments of Sri Lanka has promoted Sri Lanka as an investment destination that provides the best of terms in comparison to competitor nations.

Highlighting the fact that a significant portion of Sri Lanka’s fiscal shortfall was funded through foreign backing, ESCAP stated that Sri Lanka’s comparatively high external debt to GDP ratio made the country more vulnerable to rising global interest rates than other countries in the region.ESCAP Economic Affairs Officer Shuvojit Banerjee stated that Sri Lanka will face problems with reducing interest rates due to the declining inflation in a bid to support growth while also balancing the need to preserve capital flows.

Furthermore, between 2010 and 2014, the country’s current account deficit stood close to 5% of GDP per year which reflected the investment rate of around 30% of the GDP and low domestic savings rates. Therefore, the spotlight was shone on the role of FDI in the economy, in order to raise exports and productivity. The budget deficit amounting to about 6% of the GDP per year during this same period was also problematic.

The good news is that Sri Lanka has several options at its disposal in terms of the road it takes to development, as the Government aims to create a highly competitive social market economy. The country’s ultimate aim should be to reduce its overall dependence on donor funding; attracting investments from Sri Lankans abroad and creating an inviting investment environment in which the Sri Lankan Diaspora can feel safe and comfortable in reinvesting.

This would mean significant changes in terms of the political stability, a continued focus on good governance and transparency on top of changes to policy and legal framework. The Government’s commitment to addressing national issues, left on the backburner by the previous regimes, and its anti-corruption drive are key factors. 

Sri Lanka also has the potential to develop a hub economy, considering its strategic location in South Asia, which was recently named the fastest growing region in the world. Promoting Sri Lanka as the gateway to the region and exploiting its FTA with India would mean attracting multinational corporations and particularly foreign manufacturing operations, which would in turn help create jobs and stem the flow of labour out of the country.

The cause for concern in the present climate would be Sri Lanka’s over-dependence on foreign funding and the previous regime’s economic policy of channelling foreign funds almost exclusively into infrastructure development and construction. Although, a vital facet of development, the policies of the previous Government have painted a misleadingly rosy picture in terms of Sri Lanka’s growth numbers.

Borrowed money being invested in infrastructure and construction naturally created growth spikes but this development did not necessarily seep down to the public. In the wake of these policies, sustainable and meaningful growth has become a national issue. Investments in education, healthcare and social security have taken a backseat although they are the pillars of sustainable economic and social development.