Sri Lanka must lift investment rate above 30% for faster growth: Indian economist

By Shannine Daniel

Sri Lanka must actively explore avenues to raise its investment rate to above 30 percent, if it is to return to a growth trajectory of 6 percent to 7 percent, as the current level of around 20 percent is insufficient for rapid expansion, a top Indian economist said.

Dr. Montek Singh Ahluwalia, a senior economist and former chairman of India’s Planning Commission said the island nation faces a tougher global environment even as it works to resolve domestic economic challenges.

Drawing on data from the World Bank, Dr. Ahluwalia noted that Sri Lanka’s investment rate is around 20 percent, almost near the levels of the EU and the US at 21-22 percent.

However, as Dr. Ahluwalia pointed out, since Sri Lanka is still in its stage of post-economic crisis recovery and growth, the country has to fix its issues as well as face a world which is more difficult than it was in the past.

“Earlier commitments made by the leading economies to maintain an open world trading system without resorting to protectionism, have clearly changed,” he said while delivering a public lecture at the Central Bank of Sri Lanka (CBSL) earlier this month.

He noted that the rise in protectionist policies and trade restrictions among major economies was reshaping global trade dynamics, making it more challenging for developing countries such as Sri Lanka to expand their export and investment bases.

“I don’t think Sri Lanka has been hit by any exceptionally negative action. But the extent to which current geo-politics will lead to a slower growth rate of world trade will clearly affect Sri Lanka,” Dr. Ahluwalia said.

I don’t think Sri Lanka has been hit by any exceptionally negative action. But the extent to which current geo-politics will lead to a slower growth rate of world trade will clearly affect Sri Lanka 

He referred to recent trade tensions between the United States and China, where higher tariffs and tighter export controls on strategic goods have added to global uncertainty. Semiconductors and rare-earth minerals, critical for sectors ranging from electronics to defense, have become flashpoints in the ongoing rivalry between the two economic powers.

The World Bank has previously found that trade disputes between US and China have weighed heavily on global investment confidence, hitting developing nations the hardest due to their reliance on trade and foreign direct investment.

According to the United Nations Conference on Trade and Development (UNCTAD), global foreign direct investment (FDI) flows fell by 40 percent in 2020, with developing nations experiencing sharp declines. UNCTAD has since warned that investment flows remain weak and developing economies are likely to struggle to attract new foreign capital.

“There is a lot of uncertainty right now in the global arena, and this uncertainty doesn’t just affect exports. It also affects investment flows. Companies that are trying to attract investment flows will be left wondering if anyone will invest in a developing country,” Dr. Ahluwalia said.