Reposition Sri Lanka: Attracting more FDI
There is no doubt that we have to strengthen our industries. In a globalized economy, Sri Lanka cannot survive in a closed economy. Thus, we have to open our economy selectively. There is a requirement to export products and value added raw material to attract foreign currency. We need to improve the production and value additions in areas where Sri Lanka has a national competitive advantage. In order to achieve this and minimise unemployment of the country, Sri Lanka needs to attract Foreign Direct Investment (FDI).
File picture of the Hambantota Port.
The post COVID-19 era will result in all the investing nations re-evaluating investment destinations. If Sri Lanka could improve in rank in the Ease of Doing Business (World Bank Group), Sri Lanka could be a visible destination for the investors to consider. In preparing the report by World Bank Group they have considered 190 economies. There are 12 areas a new business has to go through, that is being examined in their report. They are; starting a business, dealing with construction permits related to construction of a warehouse, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency, employing workers and contracting with the government.
More than half the economies from the top 20 in Doing Business 2020 are from OECD countries. Top 20 also include Singapore, Hong Kong, South Korea, Malaysia and the UAE. Developing economies are also catching up, though the gap remains wide. The Doing Business 2020 report acknowledges that, best performing economies have carried out a total of 464 regulatory changes since 2003/04. Ease of Doing Business is a valuable tool Sri Lanka can use to design regulatory policies and implement them to be on par with benchmarked economies.
Though the Ease of Doing Business Rank is not meant to be an investment guide it is an eye opener for the investing nations to identify the investment destination. Potential investors look at other factors such as overall quality of the economy, national competitiveness, macroeconomic stability, and development of the financial system, proximity to attractive markets, law and order, quality of the labour force.
Jordan and Kuwait are recognized as the new additions to the top 10 most improved economies, Nigeria appears as one of the 10 improvers for the second time where India is in the list for the third year. Gulf economies have reformed steadily in the past as per the past publications, where the UAE served as an inspiration for the Gulf region. In 2020 among Gulf countries, Saudi Arabia is the most improved economy. Pakistan too has appointed a steering committee under the Prime Minister to drive required reforms to improve the ranking in the Ease of Doing Business. Prime Minister of India Narendra Modi launched a campaign called “Make in India” which aims at enhancing the country’s overall competitiveness and commitment to reform. India had been able to upgrade its rank from 130th in 2016 to 63rd in 2020.
In successful economies which have done well the underlying driving force for successful reforms has been both political and economic. The leadership has to come from political vision as seen in India and Saudi Arabia.
Researchers in 144 economies over the period 1995 to 2006 have found the most important factor in transformation is their geographical and cultural proximities. Also, the mass media coverage affects political decisions. India going from 130th to 63rd position in four years is a remarkable change. Sri Lanka must have had the spillover effect of these reforms and improvement. But in contrast, the reality is a bit different. In 2012 Sri Lanka was at 83rd position in its rank and in 2014 we have gone to a level of 113th and in 2020 we are in the position of 99th.
The world FDI inflow into different economies in 2019 had been US$ billion 1540 and Asia had FDI inflow of $474 billion which is 31per cent of the world inflow while South Asia had an inflow of $57 billion which is 4 per cent of the world FDI inflow and 12 per cent of Asia’s inflow. India ranked 63rd position in Ease of Doing Business had been able to attract $50 billion in 2019. Sri Lanka at 99th position has attracted only $758 million in 2019. India is a more attractive destination of investment considering the market size for investors to consider. Considering per capita FDI inflow, India had $37 whereas Sri Lanka has $35. Among other comparable economies, Vietnam is ranked at 70th position and attracted per capita FDI of $169 in 2019. UAE attracted $1432 while Saudi Arabia attracted a per capita FDI of $135. Securing a better position in the Ease of Doing Business is an important indicator to be visible to potential investors.
As against any other economy Sri Lanka has been blessed thrice naturally. Firstly, it is an island nation in the Indian Ocean which accounts for 50 per cent of the world trade. Secondly, it is situated just next to the East West sea lane. Thirdly, Sri Lanka is the gateway to South Asia. Considering the strategic position of Sri Lanka it is not fair to benchmark Sri Lanka against India, though there is huge space to be bridged to reach that level currently. Sri Lanka needs to be benchmarked against Singapore and accelerate to bring in and implement reforms rapidly.
In order to get rapid growth, Sri Lanka has to adopt a two-pronged approach to elevate its economic position. One is to identify the distinctive core national competencies the country has. Capitalize on the strategic position and direct investment into core and complementary industries where there is a competency. Secondly, in order to attract FDIs, Sri Lanka needs to have a target to get into the first 50 Ease of Doing Business index, at least in the next three years’ time and get into the first 20 at least within the next five years. Also, we must target to be among the first 50 least corrupted countries in the Corruption Perception Index (Transparency International) in the next five years and target to come among first 20 in seven to eight years.
In order to achieve this target, political will to bring in reforms, developing a plan, building awareness among citizens of the country and fast track implementation of the plan are necessary.