FRONTIER MARKETS REPORT: SRI LANKA
Sri Lanka has an open business environment, but challenges—not least its recovery from the civil war that ended in 2009—remain.
The Sri Lankan government has a priority over and above a frontier market’s customary aims of improving the economy and attracting foreign direct investment (FDI). It must deal with the aftermath of the civil war with the Liberation Tigers of Tamil Eelam (the LTTE, known as the Tamil Tigers). The native Sinhalese forces won that war in 2009, but recriminations and accusations of atrocities continue on both sides.
As to the first aim—that of improving the economy and attracting FDI—Sri Lanka has a history of being proactive. “You’ve got to remember Sri Lanka was one of the first countries to liberalize in Southeast Asia,” notes Indika Hettiarachchi, founder and managing director of Jupiter Capital Partners.
Anthony Kim, senior policy analyst at the Heritage Foundation, a Washington-based think tank, explains that liberalization started in 1995 with membership in the World Trade Organization and accelerated after the end of the civil war and general election in 2009–2010.
Streamlining business procedures was a key plank in the path to liberalization. The number of days required to start a business has dropped from 58 in 2004 to 8 this year. Moreover, the government relaxed capital controls in 2008, and investors can freely move profits and dividends out of the country.
Sri Lanka attracted over $1.3 billion in FDI in 2013, according to estimations provided to Global Finance by the government’s Board of Investment. The BOI targets nearly double that figure—$2.4 billion—for 2014, a reasonable projection, given ongoing investment negotiations with Chinese officials. FDI goes primarily to the infrastructure, education, tourism and high-tech sectors.
Companies pursuing investment opportunities in Sri Lanka face several risks. Jan Zalewski, South Asia analyst in Control Risks’ Singapore office, cites operational risks such as a lack of clarity and consistency in policymaking. In 2011 the government passed the Revival of Underperforming Enterprises or Underutilized Assets act, which lists entities that, presumably, may be nationalized: An annex to the act lists companies—mainly domestically owned—intended for nationalization. But the consequences of the Act are ambiguous. “It’s unclear in terms of the wording what exactly constitutes either an underperforming enterprise or underutilized asset,” Zalewski says from his office in Singapore. “So basically it leaves the door open [to problems]—or at least that’s the interpretation of many investors.” Regulations about foreign land ownership are also vague.
Intellectual property thefts are a problem, too, according to Kim. Although copyright enforcement has improved, piracy levels remain high.
The war’s noxious aftermath creates political tensions. As a result, companies investing here face potential reputational risk—particularly as these tensions receive a lot of airtime in Western media reports on Sri Lanka and at the United Nations. The country is also plagued by allegations of corruption, censorship and human trafficking. Last June an American State Department report described Sri Lanka as “a source and, to a much lesser extent, a destination country for men, women and children subjected to forced labor and sex trafficking …” Which certainly affects the country’s attractiveness to corporates. But given the exponentially growing FDI, the benefits, it would seem, outweigh the risks.
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Vital Statistics |
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Location: South Asia, East of India |
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Neighbors: India |
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Capital city: Colombo |
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Population: 20.3 million (2012) |
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Official language: Sinhala and Tamil |
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GDP per capita (2012): US$2,923 (not in PPP terms) |
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GDP growth (2012): 6.4% |
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Inflation (2012): 7.5% |
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Currency: Sri Lankan Rupee |
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Investment promotion agency: Board of Investment www.investsrilanka.com |
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Investment incentives available? Yes. Incentives and tax holidays. |
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Ease of Doing Business rank: 85 (of 189 countries) |
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Corruption Perceptions Index rank: 91 (of 175 countries) |
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Political risk: Sri Lanka has far warmer relationships with China and India than with the West. |
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Security risk: Post Civil War tensions continue. Possibility of continued protests following those on January 29 but localized only. |
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PROS |
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Foreigners are allowed to have 100% ownership |
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– Relatively little red tape for foreign investors – Strong interest in FDI and clear list of targets – Central bank plans to consolidate the banking sector |
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Cons |
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Ratings downgrades (but not by all major ratings agencies, just Moody’s) |
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Potential for reinstatement of capital controls |
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Rising healthcare costs and aging population |
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Risk of infectious diseases |
Sources: 2013 Trafficking in Persons Report—Sri Lanka—by the US Department of State, June 2013; Fitch Ratings; IMF; Moody’s Investors Services; Standard & Poor’s; Transparency International; World Bank
For more information on Sri Lanka, check out our Country Economic Reports.
