It’s official: Sri Lanka’s main problem in attracting foreign investment or for that matter, doing business in the country, is inconsistent policies, not instability in the government nor corruption, two areas the country seems to be slipping down the ladder, all the time. In the Central Bank’s latest 2016 annual report released this week, ‘policy [...]

The Sunday Times Sri Lanka

Unstable policy vs unstable government


It’s official: Sri Lanka’s main problem in attracting foreign investment or for that matter, doing business in the country, is inconsistent policies, not instability in the government nor corruption, two areas the country seems to be slipping down the ladder, all the time.

In the Central Bank’s latest 2016 annual report released this week, ‘policy instability’ , in other words inconsistent policies has been defined as the biggest deterrent in the business climate in Sri Lanka

In a special section on ‘Improving Sri Lanka’s Competitiveness within Global Markets’, ‘policy instability’ at 12.9 per cent out of 100 per cent has been listed as the top-most issue (also see report below). Other issues were: access to financing (9.7 per cent); inefficient government bureaucracy (9.1); tax rates (8); tax regulations (7.8); inadequate supply of infrastructure (7.6); inflation (7.4); poor work ethic in national labour force (6.5); corruption (5.6); insufficient capacity to innovate (5.4); government instability (5.2); foreign currency regulations (4.7); inadequately educated workforce (4.4); restrictive labour regulations (3.7); crime and theft (1.7); and poor public health (0.1).

Interestingly, as stated before, corruption and ‘unstable government’ figures far lower in the negative index providing a lot of food for thought to business planners, investors, economists and others engaged in attracting investments to the country.

The country’s banking regulator has thought it fit to focus, apart from other problematic issues in the economy, on the country’s competitiveness in world markets given the dire need to attract a large dose of foreign investment which has eluded the country despite a war-free environment. Foreign investment is just a trickle in recent years while a reliance on US dollars to pay off loans means Sri Lanka has to borrow heavily to pay off mounting debt. Apart from old debt, new payments from project loans and infrastructure development are adding up.

Export growth is in reverse gear as the country has failed to widen its export base, still relying on the traditional garments, tea, rubber and some industrial goods.

And as the Central Bank points out, inconsistent policies seem to be the villain here contrary to what politicians from all sides of the spectrum will tell you.

Most countries with a strong public sector, judiciary and independent media have maintained consistency in national policies despite changing governments or disruptive coalition governments, India being one example. India is also the recipient of reverse migration as professionals return to the country convinced of its growth patterns simply because policies don’t change irrespective of which political party is in power.

Changing governments doesn’t matter as the system works and any investor, be it local or foreign, is comfortable in investing since policies aren’t altered for political expediency, taxes don’t change and most importantly, policies on repatriation of profits are consistent.

Sri Lanka has dabbled with both one-party rule and coalition governments without much success, as seen in recent times with a merry-go-round kind of administration: Governing parties playing to the ‘gallery’ in policy formulation, dismantling proposals because one side of the government was opposed to it.

Tax proposals, revenue-raising measures, key policy changes to improve revenue, reducing government debt and subsidies have either been reversed or delayed. Implementing budgets approved by Parliament has been problematic and worrisome to the Finance Ministry, often exacerbated by the Exchequer (Treasury) working at cross purposes – regular Treasury officials versus the Minister’s own team of advisors. Some of these ‘issues’ came to the fore during an ongoing Commission of Inquiry probing two tainted Treasury bond issues in 2015 and 2016.

As these columns have repeatedly said the absence of national policies in the development sectors – health, education and related areas – is the sine qua non of a solid, working economy. Unfortunately, this has eluded Sri Lanka since independence as politics overrode any attempt to get national consensus on a policy for development.

The Central Bank also refers to this in its annual report, saying there is a lack of national development policy consensus as they change from time to time, in line with the agenda of the political parties.

“… in order to compete in a global marketplace, it is essential to draft and implement policies over the long term in a consistent and transparent manner, irrespective of the government in power. Policy inconsistency raises vulnerability to market risks, thus deterring investor confidence. This results in low levels of FDI inflows and dampening of domestic investments by the private sector. Hence, to build investor confidence in the domestic economy, it is important to move away from the stop-go policy culture that was prevalent in the past while having a coherent national development policy, implemented with strong commitment,” the report said.

Sri Lanka, the Central Bank noted, is in need of a comprehensive action plan that receives the support of all stakeholders. Sustaining and advancing reforms to enhance competitiveness require a strong political commitment, while it is necessary to obtain the support of the public for implementing national plans. To achieve this, changing the mindset of the public is also essential, it said.

Public support for economic reforms, largely based on maximising public expenditure and moving away from subsidising costly state enterprises laden with inefficiencies, bureaucracy and corruption, is crucial. But for such support, public trust and faith must be won, not making promises that aren’t kept or wrangling in the Cabinet where ministers are publicly gunning for each other. If the Cabinet is at sixes and sevens, a classic example being a ‘comment’ by the President to assign former army commander-turned-politician Sarath Fonseka a role in ‘managing’ a rash of public protests and strikes that is threatening to tear apart daily life and ministers giving their own version and interpretation to this, what faith does the public have in committing to a discourse on national policy?

The government’s dual personality akin to a Dr. Jekyll and Mr. Hyde attitude portrayed in public is not gaining any mileage. Rather it is adding to the book of ‘policy instability’ and ensures Sri Lanka slips further down the Global Competitiveness Index (GCI).

The sooner the more rational politicians (just a few) in the ruling set-up realise this, the better. However, that would be too much to ask when even the rationalists in the Cabinet are busy fighting too many fires apart from running the affairs of the country.

Oh dear, the silence is killing me. What has happened to Kussi Amma Sera, our kitchen-bred ‘ee-co-no-mist’ and her rambunctious theories? KAS , was snoring away under the mango tree probably bored that her views won’t matter.   The public probably feels the same; no purpose is served in supporting sector reforms in an administration that is filled with inconsistencies.

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