A problem of perception?

Sri Lanka’s ruling party looks securely entrenched, with an all powerful president and a huge majority in the legislature. Outwardly signs all point to an investors’ paradise. So why don’t the numbers live up to the promise?

By Dharisha Bastian.

Published on January 01, 2013 with No Comments


Diarietou Gaye, World Bank Country Director for Sri Lanka and the Maldives once made a strange observation. In a speech to the Ceylon Chamber of Commerce in July 2011, Gaye highlighted two post-conflict economies she said could help Sri Lanka’s thinking, ‘moving forward’. The first was post-genocide Rwanda, where an estimated 800,000 people were slaughtered over 100 days and the economy contracted 40% when the conflict ended in 1994. Her second illustration was post-Soviet era Georgia, a newly independent state in 1991 and heir to turbulence for over a decade afterwards. Both economies were unique in that they had suffered tremendously from conflict; and both are economic success stories today, because global perceptions of the two nations in the post-conflict years have undergone a radical transformation. According to Gaye, the economies of Rwanda and Georgia experienced triumphant growth because the economic reforms process undertaken by the two countries focused not only on numbers and infrastructure, but also on curbing corruption and constituting good fiscal practices.

The Sri Lankan military crushed the separatist Tamil Tigers in May 2009, ushering in a new era of peace and stability for a country that has lived in the shadow of conflict for some 30 years. Growth rebounded, with a shift in state focus from arming the military to development and infrastructure-building. For two years after the war the country achieved 8 percent economic growth.

In many ways, the Government’s promise of a brighter economic future post-war has been justified. As part of a mega development spree, the Government of President Mahinda Rajapaksa has initiated major port and aviation projects. It’s also investing in the country’s road infrastructure, constructing expressways to link major cities to the capital Colombo. Tourism has also seen unprecedented growth in the post-conflict aftermath. Safety and stability are primary concerns in the tourism sector and under these post-war conditions the sector is likely to flourish for years to come if the situation remains stable. But other economic areas have proved a mixed bag. In the three years since 2009, share prices of listed companies rose sharply making the stock market here one of the world’s top gainers. But allegations of corruption and regulatory scandals have rocked the bourse and its value plummeted by 26 percent last year. The stock market debacle was brought about by rampant politicization and crony capitalism, economic analysts say.

This lack of confidence plagues not only the country’s bourse, but also its investment portfolio. The Sri Lankan Government paints a rosy picture of post-war economic recovery and growth potential. But in 2011, according to UN Economic and Social Commission for Asia and the Pacific (UNESCAP) statistics, Sri Lanka’s Foreign Direct Investment inflows amounted to a meagre 0.6 percent of GDP, or US $ 300 million, the lowest figures recorded since 2005. A bulk of this investment has been in the burgeoning tourism sector. The Government disputes these figures with the Central Bank recently saying FDI inflow exceeded a target of US $ 1 billion in 2011. Even so, some analysts say, in order to maintain economic growth rates of 8 percent, FDI net inflows should top at least 3 percent of total GDP or more while, based on the Government’s own calculations, US $ 1 billion amounts to around 1.2 percent, less than half the desired number.

The Board of Investment boasts on its website that Sri Lanka is one of the safest countries in the world to invest. The country’s constitution guarantees the safety of foreign investments under Article 157. It also maintains bilateral Investment Protection Agreements with 27 countries and bilateral Double tax avoidance agreements with 38 countries.

So why aren’t foreign investors biting?

Quite apart from the fact that Sri Lanka remains a difficult place to do business, given its high energy and labour costs, bureaucratic red tape and arbitrary policy making, other perceptions of the country continue to deter foreign investors. Despite the war ending the Government continues to drag its feet on reconciliation and lingering accountability issues from the final phase of its battle against the LTTE. The resultant tension especially in the north of the island where the military retains a massive occupational force raises fears about the country’s security in the future. The introduction of arbitrary legislation, like the recent asset seizure bill of 2011 which allowed the Government to acquire and lease out ‘under-performing’ enterprises –belonging to private citizens and at least one, with a Singaporean investment partner – remains a major concern for the investor community.

The US State Department’s Bureau of Economic and Business Affairs in its 2012 Investment Climate Statement even cited ‘an unreliable court system’ as a significant impediment to foreign investment.  “The courts are not practical for resolving disputes or obtaining remediation, because their procedures make it possible for one side in a dispute to prolong cases indefinitely. Aggrieved investors (especially those dealing with the government on projects) have frequently pursued out-of-court settlements, in hopes of speedier resolution,” the statement said. It cites the example of a Supreme Court order in 2008 that halted payments to five international and local banks involved in oil hedging contracts with the Sri Lankan Government that ended in international arbitration and in some cases, litigation.

A recent move by the ruling regime to remove the head of the country’s judiciary, Chief Justice Shirani Bandaranayake in what critics have called a political reprisal against certain Supreme Court decisions that went against the Government, raises graver issues about the rule of law and the independence of the Sri Lankan judicial system. Exacerbating matters, Bandaranayake’s private banking information was released – without a court order and presumably without client consent – to the legislative committee probing 14 charges of ‘misbehaviour’ against the sitting Chief Justice. Opposition legislators and corporate good governance activists have condemned the release of the information as a violation of the country’s Banking Secrecy Laws and say it could deter potential investors. “There is a lawful way to obtain this information and that is only through a court order. Nobody knows who presented this information to the Committee without a court order and without the client’s knowledge,” senior opposition legislator Karu Jayasuriya charged. He added that this violation of sacrosanct fiscal confidentiality would further hamper investor confidence in Sri Lanka and put the country’s agreements with international lending agencies promoting good fiscal practices in jeopardy.

The country also continues to grapple with corruption issues that plague the state sector and begin at the very top of the governance structure. In 2012, Transparency International’s Corruption Perception Index ranked Sri Lanka #79 out of a total of 176 countries. The index also ascribes country scores on a scale of 0-100 and TI says that while no country attains a perfect score, anything below 50 points indicates a serious corruption problem. Sri Lanka’s scored 40 points in the year 2012. While the Corruption Perception Index is not a traditional economic indicator, it is often consulted by potential investors.

Changing perceptions is no easy business. It must be buttressed by genuine will on the part of the state to bring about economic reform and reinforce the rule of law. In recent times, Sri Lanka’s ruling party has shown a tendency to do exactly the opposite. As calls for greater fiscal transparency and good corporate practices sweep the world, a country’s commitment to strengthening good governance structures and safeguarding civil liberties and the rule of law have become more relevant than ever to potential investors and lending agencies. Until Sri Lanka puts her house in order on this front, the really big fish will simply go another way.


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