Assessing the FDI Opportunities in Sri Lanka Essay Example

big shift from inward-looking policies and pursuing social welfare-oriented policies in 1977, when the government started implementing economic liberalization and introducing different policy measures to promote economic growth. Among the key features of the new policy regime was promoting export-led industrialization by giving incentives to domestic entrepreneurs, and encouraging foreign direct investment in its newly established export processing zone. Fortunately, the new liberal policy environment in the 1980s persuaded some big multinational corporations to invest in Sri Lanka.

Between 1977 and 1982, Sri Lanka gained the reputation among global media outlets as "Asia's new investment hub". This resulted in a surge in tourism, with more than 400,000 tourists visiting the country in 1982. Concurrently, there was an exponential growth of exports fueled by the garment industry. It is worth noting that this period represented the only five-year phase since independence when Sri Lanka experienced an average growth rate above six percent. While Sri Lanka had not attained the same level of economic expansion as other high-performing East Asian countries from 1960 to 1977 based on all economic indicators during this time frame, it finally appeared to be making significant strides towards rapid development.

According to Kelegama (1999, p. 72), economists were of the opinion that Sri Lanka had the potential to attain a level of prosperity similar to some affluent East Asian nations by the beginning of the 1990s. The statement is presented in a paragraph with an HTML link to a related resource.

Sri Lanka's beauty and rich heritage have been overshadowed by the prolonged civil wars between the Buddhist Sinhalese majority and their Hindu Tamil counterparts seeking autonomy in the northern and eastern provinces. The

conflict has resulted in violence, destruction, and a negative global perception of Sri Lanka. Clifton (1999) emphasizes this seriousness in the following excerpt:

Clifton reports that the Sri Lankan conflict caused over 80,000 deaths, particularly affecting younger males. In addition, the war damaged an economically hopeful country in the region, resulting in a 1.5% drop in GDP growth - the first economic setback since independence due to political and social turmoil.

Despite facing power shortages, budget issues, and the global economic downturn, Sri Lanka's economy has steadily recovered since 2002. As of 2007, it was recognized as an emerging country with lower-middle income status and a population of 19 by the U.S. Department of State Commercial Guide.

Reports indicate that Sri Lanka has a population of 9 million and a GDP of $27 billion, resulting in a per capita GDP of $1,375. Compared to other South Asian countries, Sri Lanka boasts a relatively open financial system, moderately good infrastructure, and generally capable workforce; factors which make it an appealing location for foreign investment. The economy is dependent on imports including food & consumer items, oil, raw material and machinery while exports include apparel, tea and rubber. Additionally, agriculture and remittances from low-skilled workers abroad play important roles along with services like tourism. It was reported that Sri Lanka's economy grew by 7% during the previous year.

Although the government troops and Tamil Tiger rebels continue to engage in violent confrontations in the north-east battle zones, the economy experienced an 8 percent growth from June to September of last year. This growth rate surpasses the 6.9 percent recorded during the same period in 2005, despite ongoing conflict. The International Monetary

Fund (IMF) had forecasted a growth rate of 7 percent for 2006, which aligns with this adjusted general expansion rate.

Although the agricultural industry employs over one-third of the workforce and contributes about 20% to GDP, it is not as dominant as manufacturing, which encompasses textiles, garment production, food and beverages, chemical goods, and rubber-based products. The services sector is crucial in generating over half of GDP through transportation, communications, financial services and tourism. Despite some improvements resulting from negotiations between the government and Liberation Tigers in February 2006, fighting resumed later that year causing an overall decline. Thus significant progress is needed for both infrastructure development and human resources.

Due to obstacles faced by the private sector, only 2% of young people attend university in this country, which is lower than the South-Asian average. These challenges include expensive and unreliable power costs as well as inadequate road infrastructure. Although these hindrances have not affected tourism-related activities, growth has been primarily driven by the services sector since the start of this century. The rise in demand for both imported consumer goods and services contributed significantly to growth from this industry. Low real interest rates and an expansion of worker remittances fueled domestic demand. However, poverty affects approximately one-quarter of the population, particularly those residing in Tamil Tigers controlled areas.

After the 2004 Indian Ocean tsunami, Sri Lanka was aided by the international community. During the initial stages, relief was efficiently distributed by the government; however, it is now their ongoing responsibility to ensure transparent and effective management of reconstruction for sustained economic stability and donor assistance. To improve growth prospects in the medium term, increasing foreign direct investment

and domestic public and private investment plans are crucial.

The aim of the "300 factories" program is to boost economic activity in the north and east provinces, where poverty rates surpass the national average of 22% (Rajapaksa, 2006). The strategy involves offering substantial tax benefits for companies that invest in these regions. Although consumption has traditionally been a key driver of growth, it is predicted that private investment through foreign direct investment (FDI) and privatization will have a greater impact in the future. Nevertheless, inadequate infrastructure improvements over the past twenty years have hindered economic progress.

Enhancing Sri Lanka's infrastructure is essential for its medium-term growth. Companies lacking in road quality have suffered a 44% decline in total factor productivity, and those without adequate power access experienced a decrease of 35%. Over the last five years, Euromonitor International (2 November 2006) notes that labor productivity has decreased by 10% in agriculture and 3% in services, while manufacturing has seen an increase of 1%. To enhance agriculture's poor performance, significant policy changes are necessary.

The fact that Sri Lanka's growth pattern is uneven and unstable is a cause for concern. Over the past decade, the western province - headed by Colombo - has seen a substantial rise in its GDP share from 40% to 48%. However, the eastern and northern regions of the country continue to struggle economically. Despite this, there is potential for foreign direct investment (FDI) to benefit Sri Lanka's IT and telecommunications sectors if it receives support from the United States.

The main driver of the Sri Lankan economy is the private sector, as emphasized in the S. Commercial Guide (2007), which benefits from a range of

services such as telecommunications, transport, international trade, banking, and tourism. In addition to this, export industries including apparel, ceramics, gems and tea play an important role in contributing to the country's growth. Even though there has been some growth in the IT industry in Sri Lanka over time, it still falls behind its neighboring country India. Despite being strategically located on container routes in the Indian Ocean region, Sri Lanka has yet to fully exploit this opportunity.

Although the closure or absorption of smaller, less efficient producers in the clothing industry has resulted in a slower projected annual growth rate of approximately 8% for exports in Sri Lanka's medium term, tax incentives are still being provided to potential investors. It should be noted that this projection is contingent upon the current conflict not worsening. Nonetheless, Sri Lanka remains focused on long-term issues such as fiscal consolidation, implementing structural reforms to encourage investment and reviving the peace process.

Despite having established robust democratic and judicial systems early on, Sri Lanka lags behind in governance and public institutions. The private sector has been impeded by politically influenced and economically favored public sectors, leading to labor market distortions and hindered growth. Addressing social and economic disparities is crucial for maintaining long-term social and political stability through even distribution of economic benefits. Successful peace talks will make Sri Lanka an attractive foreign investment destination.