To shore up the country’s image as a preferred investment destination, the Sri Lankan government plans to obtain the assistance of an international consulting firm for the promotion of the country’s improving investment and business climate to prospective foreign investors.
Sri Lanka currently has lower tax and interest rates and benign inflation—a trifecta, which preserves the value of direct investments. The new government policy reset to rebuild a domestic production economy has galvanised the industrialisation, while policy continuity maintained in fiscal and monetary policies has also strengthened business and consumer sentiments.
But corruption, excessive bureaucracy and the enormous challenge in securing workers with the required skills to support industries remain key challenges for both local and foreign investors seeking to set up manufacturing bases in Sri Lanka.
Sri Lanka received US $ 548 million worth of foreign direct investments in 2020, as the pandemic disrupted both short and long-term investment flows, with investors deferring big-ticket offshore investments till the pandemic recedes.
Sri Lanka received US $ 1.5 billion in direct investments in 2019.
As a result of consistently weak direct investments into the country, “it has been recognised the need to implement a well-designed combination and centralised marketing and coordination strategies to demonstrate the attractiveness of Sri Lanka as a most suitable host country for investments,” the Cabinet office said.
While port-related developments taking place particularly in Colombo and Hambantota could trigger vast amounts of direct investments, it takes time for the commitments to turn into real fund flows, which usually happens through several years. Hence, direct investments become all the more important, for the immediate purpose of managing the recent unwarranted volatility seen in the rupee and more medium-term purpose of rebuilding foreign currency buffers through non-borrowed sources. Sri Lanka’s overnight liquidity slumped to just above Rs.100 billion this week, from about Rs.180 billion at the start of the month, amid the depletion in foreign reserves.
Sri Lanka’s foreign reserves fell to US $ 4.55 billion in February-end, from Rs.4.8 billion in January, due to the settlement of dollar-denominated liabilities.