The previous article applied idioms taken from the biography of a successful Sri Lankan entrepreneur T. S. Jinasena, and applied them as a lens to filter post- Independent Sri Lanka.
Today’s column sets out to explore the choices we have in terms of achieving sustainable economic development.
The point about ‘beggars can’t be choosers, is that we need the help of a friendly nation, or a conglomerate of friendly nations to recover from our economic crisis. However, in exploring these relationships, we must understand that we are approaching these nations from a point of weakness and the deals we cut will need this factored in.
Where is Sri Lanka today?
See Table
For the purpose of this article, let’s accept the position that Sri Lanka is not at the top of the list of the average investor.
Whilst we are at the bottom of the Table, we could easily be at the top. The benefits we have to leverage are;
• Geo-positioning – located within a five-hour flight of a market of three billion people
• Geopolitics – friendly relationships with all Asian nations
• Trainable workforce – A strong system of education and inherent aptitude makes Sri Lankan labour easy and cheap to train, and this can be showcased by case studies of global manufacturers located in Sri Lanka
• A great place to live – a soft sell that has played a part in many regional investment decisions.
On the other side of the coin the negative characteristics of Sri Lanka are;
• Inconsistent economic policy
• Political instability
• Rampant endemic corruption
• Low on ‘Ease of Doing Business’ rating
• Very high direct tax
If Sri Lanka is to attract investment, the above issues will need to be addressed. Until these issues are addressed, investments into Sri Lanka will need to be driven by bilateral G2G negotiations and discounting.
Investment Partners
India, who came to our assistance when the nation was at its knees, with no dollars to pay for fuel and medicine, is a potential investor in Sri Lanka. The Adani group has already invested in the Colombo Western Container Terminal. More investment from them on renewable energy is imminent.
Actively pursuing Indian, Japanese and American Investment could be an effective strategy. However, this strategy would create some strain in concluding an agreement with our main creditor China. This again would need to be overcome through bilateral negotiations. Investment in the areas of energy, aviation, transport and logistics, digitisation should be pursued.
Sri Lanka has a close economic relationship with China in terms of the Southern Harbour and the Colombo Port City in addition to a close trading relationship. Investment from China around these, must also be pursued.
An Outward Orientation
Sri Lankan nationalists must realise that Sri Lanka needs investment for us to survive. Our economic survival of recent times is based on significant humanitarian assistance from India and our debt default. As it stands, our debt is unsustainable. The taxation we plan to raise could be ambitious, and we may not achieve the set target. We need dollars to start settling our debts and paying for our imports.
Discounted Investment
We urgently need investment in terms of FDI. The initial investments we attract may have to be discounted based on the risk factors identified. But these investments will help our foreign exchange crisis and fuel economic growth and development. We must embrace this investment and not pontificate about foreigners owning our country. Sri Lanka tried insular solutions and failed.
Sell SOE’s
We must look at selling SOE’s. Not just loss making SOE’s but profitable ones as well. The PLC’s like SLT, SLI could be the first ones to sell. This needs to be an ongoing programme that gains the buy in of all political parties, so one party does not try to disrupt the process midway.
Attract Fresh Equity to Distressed companies
All banks are dealing with their portfolio of Non-Performing Loans (NPL’s). It is unlikely that the NPL customers will be able to service their loans and recover at current interest rates.
Though the Governor of the CBSL is trying to induce lower interest rates, the Governments need for funds may not allow this initiative to succeed. Fresh equity from foreign investors could keep these companies afloat and protect employment and even give them a fresh start.
Sign FTA’s
Vietnam has 15 FTA’s that are signed and a further 12 under negotiation. Sri Lanka in comparison has six signed and nine under negotiation. Some of these FTA’s have been under negotiation for many years. The India Sri Lanka Free Trade Agreement was signed in 2015 but again Sri Lankan businessmen were apprehensive about being swallowed up by larger Indian enterprises and didn’t exploit the potential of the agreement. FTAs are a means of attracting FDI, and something that the country needs to execute efficiently.
Export
Through increased FDI and FTA’s Sri Lanka must double her exports. Our exports are currently between US$ 10-12 billion compared to imports of around US$ 20-22 billion. We should aim for a positive trade balance, that is an increase in exports of US$ 10 billion. The Government should assist the private sector in attracting targeted industrial export-oriented FDI.
The reason for concentrating on industrial manufacture is that it brings the ability to diversify production. To quote the example of Loadstar, a leading Sri Lankan exporter of industrial tires, their diversification went from solid tires to pneumatic tires, to rims, axels, and tracks. One of the partners in the company diversified into building yachts’. This breath of diversification is only possible through industrial manufacture.
Being Patriotic
Paying Taxes and Competitiveness
Whilst Sri Lankan businesses and individuals are highly distressed about the recent hike in taxes the total number of tax files in Sri Lanka is very low. Many businesses and individuals operate outside of or on the periphery of the tax net. On the other hand, Sri Lankan’s have enjoyed free education, subsidised fuel and energy for the past decade and more. Farmers have enjoyed subsidised fertiliser. If everyone paid their taxes, the tax incidence on the individual taxpayer can reduce because the load is shared. If on the other hand, Sri Lankan’s moved their businesses offshore as a means of avoiding taxes, those who do pay taxes will have to continue to bear a heavy load.
Whilst the offshore option seems to have merit on the surface, that option adds on many costs, and when computed, the cost saving may be less than anticipated.
Bring Dollar Earnings in
Many surveys that cite billions of dollars being siphoned out of Sri Lanka are circulating. One study by Global Financial Integrity, a US NGO quotes a sum of US$ 47 billion as being their estimation of the loss to Sri Lanka over the past nine years.
Holding cash abroad is something that most exporters do, as a matter of process. By doing this, they have less money available for investment. This could be a reason why total exports as a percentage of GDP has not been declining over the past decade.
The Government should engage the exporters in a dialogue to understand why they don’t have the confidence to bring their money back. If the government could give exporters the confidence to bring their money back and increase their investment in Sri Lanka, it would fast track Sri Lanka’s economic recovery.
Political Consensus driven by Chambers and Business Leaders
If Sri Lanka is to achieve economic revival, politicians must arrive at consensus on an economic strategy and agree on an economic policy that will be pursued over the next decade. This policy should be of national importance and not brought into the realm of politics. This is a process that could be driven by Chambers, Think Tanks and Business Leaders.
Arriving at consensus decisions on asset declarations and election expenditure will help drive a new political culture.
Depoliticization of religious leaders could assist in the rapid economic development of Sri Lanka, as their views generally don’t align with an outward orientation, which is a prerequisite for development.
The country is in an economic crisis and will not recover unless all stakeholders come together and work towards the nation’s development and not their own individual agendas.
Sheran Fernando is a Co-Founder of Innosolve Lanka (Pvt.) Ltd, a start-up dedicated to introducing sustainable mobility solutions in Sri Lanka. He is an economist by training with wide commercial experience, including 20 years in the automotive industry. He belongs to the alumni of Harvard Business School (OPM53)
[email protected]
To be continued
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