On the heels of the interim budget speech and a Staff Level agreement on an Extended Fund Facility with the IMF, the Ceylon Chamber of Commerce hosted a virtual session on the 01st of September 2022 to discuss, ‘How can Sri Lanka compete for investment amidst turbulence times: Economic growth vs Fiscal consolidation’.

Joining the discussion were Natarajan Sankar, Managing Director and Partner at Boston Consulting Group (BCG), Dr Dushni Weerakoon, Executive Director at the Institute of Policy Studies, Ashique Ali, chairman of SLASSCOM, and Thulci Aluwihare, Deputy Managing Director of CHEC Port City Colombo. 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, similar to Dubai, Singapore and Malaysia. The presentation demonstrated that Sri Lanka is now at an inflection point, where bold reforms must be implemented to enhance export competitiveness and FDI attraction, similar to major South Asian Economies following the 1997 Asian Financial Crisis.

Discussing these ideas further in the context of Port City Colombo, where BCG has been engaged as the International Strategy Consultant, Sankar stressed that the structural advantages offered by Sri Lanka need to be augmented by strengthening the country’s brand as a destination for investment, as well as by improving the ease, risks and costs of doing business. As many SEZs have failed due to poor conceptualization and implementation, he emphasized the need to form a compelling value proposition through a comprehensive package of fiscal incentives, infrastructure support, talent pool and a conducive legal/ regulatory framework.

Sankar also discussed the vast potential that exists in the IT, Digital Education and Professional Services segments, where Sri Lanka could position for an India+1 strategy, on the back of lower cost of operations, good quality talent pool and robust connectivity. In the context of IT companies, he pointed out that businesses consider a multitude of factors in their international location decisions, as they take a long-term view on graduating from Outposts to Satellites, and eventually, Hub operations. Hence, a precise overarching narrative and investor pitches, tailored for sectors and sub-sectors, should be set out to appeal for international investment, he explained.

Adding to the discussion, Dr Dushni Weerakoon, Executive Director of the Institute of Policy Studies, referred to the World Bank’s Global Investment Competitiveness Report, which points out the top 3 factors for investment decisions as: supportive political environment, macroeconomic stability and a supportive regulatory regime. Sri Lanka’s poor performance across these pillars, coupled with the ongoing economic crisis, could cause investors to generally steer away from long term investments and consider opportunistic/portfolio investments where exit is relatively easier.

However, to attract “efficiency seeking FDIs”, which are the conduit for new technology, management know-how and business networks, the long-term reform agenda plays a crucial role. Amidst an economic crisis and an era of fiscal consolidation, there is a case to be made for strategically considering tax incentives to attract investment in sectors such as IT, construction and exports. This could also position Sri Lanka competitively amongst the 50-70% of developing countries that offer fiscal incentives to attract investment.

Providing an insight from an IT/BPM perspective, Ashique Ali, chairman of SLASSCOM, underscored the importance of developing globally relevant skills to benefit from the vast opportunity within the IT/BPM sector, which remained resilient globally even during the pandemic, due to the rising demand for digitalization. He stressed that Sri Lanka continues to remain attractive for global clientele despite the disruptions to business activity that the industry experienced over the recent couple of months.

Discussing the matter from the point of view of the Port City Colombo development, Thulci Aluwihare, Deputy Managing Director at CHEC Port City Colombo explained the significance of strong economic growth in achieving long term debt sustainability, notwithstanding fiscal consolidation. Whilst agreeing that efficiency of the workforce, quality of infrastructure, political stability etc. take precedence over fiscal incentives in the context of investment decisions, Aluwihare revealed a comparative analysis of regional peers, which highlights Sri Lanka’s poor ranking in these aspects. Furthermore, Sri Lanka is also a relatively high tax jurisdiction, where taxes were second to India despite the lack of a vast domestic market. On the other hand, even developed jurisdictions such as Singapore and Dubai, UAE provide targeted tax incentives for as long as 40-50 years.

He also further explained that the hurdle return rates expected by international investors, commensurate with country risks, is significantly higher than in the region, which in turn makes large-scale development projects relatively unattractive. Aluwihare concluded by stressing that targeted incentives should be offered by considering a cost benefit analysis where the wider economic impact outweighs the cost of such incentives.