On the heels of the interim budget speech and a staff-level agreement on an expanded financing facility with the IMF, the Ceylon Chamber of Commerce held a virtual session on September 1, 2022 to discuss “How Can Sri Lanka Compete for Investment Amid Turbulent Times: Economic Growth vs. Fiscal Consolidation”.
Natarajan Sankar, Managing Director and Partner of Boston Consulting Group (BCG), Dr Dushni Weerakoon, Executive Director of the Institute of Policy Studies, Ashique Ali, President of SLASSCOM, and Thulci Aluwihare, Deputy Managing Director of CHEC Port City, participated to the discussion. Dove. The session was moderated by Shiran Fernando, Chief Economist at the Ceylon Chamber of Commerce.
During the discussion, Natarajan Sankar highlighted how the development of economic clusters could be an important policy tool to activate growth in new sectors, such as Dubai, Singapore and Malaysia. The presentation demonstrated that Sri Lanka is now at an inflection point, where bold reforms need to be implemented to improve export competitiveness and attract FDI, similar to major South Asian economies after the Asian financial crisis of 1997.
Discussing these ideas in more detail in the context of Port City Colombo, where BCG has been engaged as an international strategy consultant, Sankar stressed that the structural advantages offered by Sri Lanka must be increased by strengthening the brand of the country. as an investment destination, as well as improving the ease, risk and cost of doing business. As many SEZs have failed due to poor conceptualization and implementation, he stressed the need to form a compelling value proposition through a comprehensive package of fiscal incentives, infrastructure support, a pool of talents and an enabling legal/regulatory framework.
Sankar also spoke of the vast potential that exists in the IT, digital education and professional services segments, where Sri Lanka could position itself for an India+1 strategy, thanks to lower operating costs, a good quality talent pool and robust connectivity. In the context of IT companies, he pointed out that companies consider a multitude of factors in their international location decisions, as they take a long-term view to move from outposts to satellites, and eventually to operations. of hub. Therefore, an accurate global narrative and investor pitches, tailored to sectors and sub-sectors, should be established to attract international investment, he explained.
In addition to the discussion, Dr. Dushni Weerakoon, Executive Director of the Institute of Policy Studies, referenced the World Bank’s Global Investment Competitiveness Report, which outlines the top 3 factors for investment decisions. investment like: a favorable political environment, macroeconomic stability and a favorable regulatory regime. Sri Lanka’s poor performance on these pillars, coupled with the current economic crisis, may cause investors to generally move away from long-term investments and consider opportunistic/portfolio investments that are relatively easier to exit.
However, to attract “efficiency-seeking FDI”, which is the vehicle for new technologies, managerial know-how and business networks, the long-term reform program plays a crucial role. In the midst of an economic crisis and an era of fiscal consolidation, tax incentives should be strategically considered to attract investment in sectors such as IT, construction and exports. It could also position Sri Lanka competitively among the 50-70% of developing countries that offer tax incentives to attract investment.
Giving an overview from an IT/BPM perspective, Ashique Ali, President of SLASSCOM, highlighted the importance of developing globally relevant skills to benefit from the vast opportunity in the IT/BPM sector, which is remained globally resilient even during the pandemic, due to the growing demand for digitization. He pointed out that Sri Lanka continues to remain attractive to global customers despite the disruptions in business activity the industry has experienced over the past two months.
Addressing the issue from the development perspective of Port City Colombo, Thulci Aluwihare, Deputy Managing Director of CHEC Port City Colombo, explained the importance of strong economic growth to achieve long-term debt sustainability, notwithstanding fiscal consolidation. While agreeing that labor efficiency, quality of infrastructure, political stability, etc. take precedence over tax incentives in the context of investment decisions, Aluwihare revealed a benchmarking analysis of regional peers, which highlights Sri Lanka’s poor ranking in these aspects. Additionally, Sri Lanka is also a relatively high tax jurisdiction, where taxes were second only to India despite lacking a large domestic market. On the other hand, even developed jurisdictions such as Singapore and Dubai in the United Arab Emirates offer targeted tax incentives for 40-50 years.
He also explained that the rates of return expected by international investors, commensurate with the country’s risks, are significantly higher than in the region, which makes large-scale development projects relatively unattractive. Aluwihare concluded by emphasizing that targeted incentives should be offered taking into account a cost-benefit analysis when the wider economic impact outweighs the cost of these incentives.