There was a strong expectation that foreign investments would flow in soon after the end of the war. Minister Sarath Amunugama expressed this expectation when he said: “Terrorism and the security threats were largely contributing to the loss of investments in the past. However with the dawn of peace new and large opportunities for investors have arisen especially in the North and East.” This was a realistic expectation soon after the end of the war.
‘Now foreign investments will flow in freely’ was a refrain in the business community. The events soon after placed this inflow of investments on hold till political stability and certainty was established. The high rate of economic growth that was anticipated after the war was based partly on the higher foreign investments that were envisaged. This must be necessarily so as economic growth of 8 to 10 percent per year that is expected by the government can only be achieved with additional foreign investment. The rate of required investment cannot be generated by domestic savings as these are quite low. The savings of nationals abroad that come in as remittances are a useful component of funds for investment. Yet even with these funds it would be inadequate to generate a growth of 8 to 10 percent as the economy requires an investment of about 35 to 45 percent of GDP to achieve such high rates of growth.
Apart from the mere bridging of the savings-investment gap through foreign investment, there is the need for foreign investment for other reasons as well. This is because the industrial output generated by increased investment would have to be largely for exports. Foreign direct investments by corporations that are already global market leaders and have established markets around the world bring with their expertise brand names and an international demand for their goods. This cannot be achieved easily by local investors. Investment in industrial exports that use some of the country’s raw materials and much of the country’s labour would contribute to export incomes, the balance of payments and even more to employment generation and improved incomes.
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Even though some of these enterprises would have a large import content and the domestic value addition per unit of output may be low, the scale of their operations could lead to substantial aggregate domestic value addition. The narrow domestic raw materials and the extremely limited domestic market make it imperative that our industries are export-oriented. Therefore the large inflows of foreign investment to expand export industry are vital.
There are other advantages of foreign investments too. The establishment of foreign industries results in a technology transfer that is an important contribution for local labour gaining skills and higher level staff gaining technical and management skills. This advantage of foreign investment is not often recognized as the emphasis is on the quantum of foreign investment and export earnings that are generated.
Technology transfer through foreign collaboration is a long term decisive factor for industrial and economic development. The more sophisticated the industries established in the country, the more advantageous this technology transfer.One of the disadvantages of foreign investment thus far has been that the more complex technological industries have shunned investments in this country owing to the instability caused by the war and terrorist activity. In fact many important Japanese investors did not invest in Sri Lanka for manufactures owing to terrorist activities.
This obstacle was removed with the elimination of the LTTE. As the minister pointed out, one of the most important obstacles for foreign investors was removed. Therefore the expectation of high inflows of foreign capital and foreign direct investment was a realistic one. However peace and absence of terrorism while being a necessary condition is not a sufficient one, as there are several other requisites for attracting large foreign investors.
The expectation of large investments has hardly been realised owing to the political situation in the country. The Presidential elections put a hold on foreign investments, the wait and see period ensured. Then the post election political confrontation with the opposition that occurred was even more destabilizing than the election itself. Now there is in addition another vital election that would determine foreign investment inflows. It is only after the April general elections and a return to political stability that we could expect foreign investments to flow in the manner that is required and what Minister Amunugama expected in June last year.
What this implies is that we have lost time and with it possibly some important investors. Investors who were ready to come to Sri Lanka then, may have had second thoughts and decided to invest in other countries. Time is in the essence of things when it comes to foreign investment decisions and once again we have lost an opportunity that came with the end of the war. One year after the end of the war is a long period when it comes to foreign investment and we have lost another year and opportunities for higher investment.
Although this discussion has been in terms of foreign investments the conditions in the country have also not been as conducive as it could have been for domestic private investments as well. Private investors too sense the situation as uncertain and destabilizing and have therefore perhaps withheld their investment plans. In the case of domestic investors, economic considerations may have been uppermost in their minds; issues such as whether the IMF will continue their stand-by arrangement owing to non compliance with the conditions laid down, especially the containment of the fiscal deficit to 7 percent of GDP in 2009. The outturn of last year’s fiscal operations exceeded the deficit of 7 percent by a large margin of 2.7 percent of GDP.
In the event of the IMF pulling out, the repercussions would be serious. It is not the financial support that is anymore important as the country’s reserves are high at US$ 5 billion. It is the shattering of confidence that an IMF withdrawal creates. In the event this happens foreign investor confidence would be seriously affected. There is also the prospect of an outflow of foreign borrowed finance and the credit rating of the country deteriorating. These are serious concerns that must be taken care of. In addition to this serious financial prospect, there is the likelihood of the country losing its GSP Plus status.
Such a loss of important markets is certainly a huge disincentive for foreign as well as domestic investment.
The end of the war, cessation of terrorist attacks and peace were necessary conditions to attract foreign investment. As is very evident these have not been sufficient. Political stability, getting the economic fundamentals strengthened and compliance with the containment of the fiscal deficit and the continuation of the GSP Plus status are among other preconditions to achieve higher inflows of investment. |
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