Robust structural reforms and macroeconomic stability seen as vital to ensuring FDI inflows

By Ifham Nizam

The National People’s Power (NPP) government to enhance Foreign Direct Investment inflows, must continue to implement robust structural reforms, maintain macroeconomic stability and address vulnerabilities in the financial sector, senior Chartered Accountant Heshana Kuruppu said.

Kuruppu, who is the President of CA Sri Lanka and President of the South Asian Federation of Accountants, speaking to The Island Financial Review stressed that consistent and transparent policies, along with efforts to improve infrastructure and reduce bureaucratic hurdles, will be essential in rebuilding investor confidence and fostering a conducive environment for long-term investments.

Extracts from the interview;

Q: How do you perceive the new government’s economic initiatives in terms of their potential impact on local businesses?

A: NPP’s current proposal is for an interim government until parliamentary elections occur. Thus, it’s uncertain if they will implement major initiatives outlined in their policy framework. A new budget must be presented to parliament for any significant changes, which won’t happen with the existing parliament. Consequently, it’s too soon to assess the impact on local business.

Q: Which sectors do you think will benefit the most from these initiatives, and which ones might face challenges?

A: As highlighted above, it is too early to comment on the sectors going to have an effect. However as per the policy statement NPP has identified several priority sectors, such as, ICT, Fisheries, Construction, Agriculture, Tourism, Creative sectors (Art, Cinema, Music) etc.

Q: How prepared are businesses in Sri Lanka to adapt to these new policies?

A: Sri Lankan businesses seek consistent policies, whether fiscal, investment or labor-related. Despite past inconsistencies, the private sector has significantly contributed to economic growth. Consistency could have unlocked greater potential. Political parties need to support this now and the NPP appears to share this view, having promised private sector-friendly policies.

Q: How will these initiatives influence tax policies and what are your expectations regarding changes in corporate taxes?

A: Following the crisis, low and middle-income earners faced significant challenges. Their disposable income decreased due to taxes and the cost of living rose markedly. Despite low inflation, high living costs persist since incomes haven’t adjusted accordingly. The election results clearly show their dissatisfaction.

The incoming President and new administration will face the challenge of addressing these needs. To satisfy this segment, taxes need to be reduced, safety nets increased, or both. However, these actions should not strain the government budget as borrowing is not an option.

Conversely, achieving a sustainable solution in the mid to long term relies on real GDP growth. However, this requires a boost in capital expenditure. Yet, raising capital expenditure might result in a budget deficit.

Therefore, a careful strategy is needed to manage these conflicting demands. I don’t anticipate significant changes in corporate taxes in the near future.

Q: What is your opinion on the new President’s focus on the promotion of entrepreneurship and innovation in the business sector?

A: Key initiatives of the entrepreneurship policy include creating strategic think tanks, introducing tailored taxation frameworks and enhancing investment protection legislation. The policy emphasizes supporting micro, small, and medium-sized enterprises (MSMEs) through specialized divisions, collateral-free loans and cooperative business models.

Additionally, it focuses on optimizing industrial zones, adopting sustainable practices and leveraging digital technology to drive innovation and market efficiency. The overarching goal is to create a conducive environment for entrepreneurship, ensuring affordable infrastructure and transparent market operations.

These are all good initiatives. Historically, many promising proposals appear in election policy statements and sometimes in budget plans, but very few are actually implemented. Let’s hope this time is different.

Q: Do you think the new policies are sufficient to attract foreign direct investment (FDI)? Why or why not?

A: Regardless of whether policies are new or existing, their consistency is what truly matters.

Maintaining consistent policies is vital for drawing and keeping FDI. Predictable regulations, lower risks tied to sudden changes, aiding long-term investment planning are important. Conversely, inconsistent policies can deter investors by creating uncertainty and unexpected costs. Frequent alterations in tax laws, labor rules or trade policies can lead to an unstable business climate, deterring foreign investors.

In addition, economic and political stability is crucial for attracting Foreign Direct Investment (FDI), as it provides a predictable environment for investors. Sri Lanka’s recent economic challenges, including high inflation, currency depreciation and a significant debt burden, have created a complex landscape for potential investors. However, the country is showing signs of stabilization, with moderate growth projected at 2%-3% in 2024.