By Asoka S. Seneviratne –

Prof. Asoka.S. Seneviratne

“Foreign Direct Investment (FDI) is the key to global economic integration, providing financial stability, driving economic growth and improving social welfare.”

I read an interesting and valuable briefing by the Board of Investment Chairman (BOI), Arjuna Herarh, about FDI flows.

I read the above after I published an article on “AKD/NPP Govt. Significance of US$3.7 Billion Oil Refinery” with the Colombo Telegraph a few weeks ago. Establishing the Greater Colombo Economic Commission (GCEC) in 1978  (No 4 Act of 1978) along with the Trade Liberalization Policy of the government marked a turning point in FDI because one of the purposes of GCEC was to encourage and promote FDI. Accordingly, the first FTZ was established in Katunayake, focusing on garments and clothing manufacturing. The basic objectives were (i) export promotion, (ii) employment creation, (iii) value addition, and (iv) infrastructure development. BOI was established in 1992, expanding the scope of the GCEC, which was formed in 1978.  Accordingly, BOI was to function as the government’s principal agency for promoting, coordinating, and facilitating industrial development in designated areas of Sri Lanka.

When GCEC and BOI were established, I was fortunate to work with them. I was attached to the Industry Division of the Economic Research Department (ERD) of the Central Bank of Sri Lanka. Indeed, GCEC became a new research focus of the ERD’s Industry Division. Accordingly, my task was to collect all data and information regarding the investment projects approved by the GCEC for the Katunayake Free Trade Zone (FTZ). Given the above and among many, making official visits to all manufacturing units in the FTZ,  I collected data and information on the value of the investment of each manufacturing unit of FTZ, data on raw material imported, employment creation, export, and earnings, infrastructure development, and finally, most importantly, evaluated and assessed the contribution of FTZs to economic growth. ERD published that information and data under the heading of Economic Indicators. In short, the above helped me to learn and understand some practical or operational aspects of the theory of FDI, which I learned at the University of Colombo.

I explained the above so I can place the recent valuable briefing by the Chairman of BIO in the proper context. It has been nearly 50 years that FDI has been with GCEC and BOI. Compared with other Asian countries, it is a long period to mark significant impact of FDI on the economy in many ways. Since 1948, Sri Lanka’s economy has been governed by Green and Blue or UNP and SLFP/SLPP politicians. However, they failed to establish stable and sustainable economic growth and development, and finally, the economy collapsed in 2022. Parallel to the above, compared with other Asian countries, the performance of FDI in the Sri Lanka’s economy has been dismal. According to recent data, FDI contributes significantly to Vietnam’s GDP, with estimates placing its share around 20%.  According to World Bank data, FID contributes around 0.84% to the GDP in Sri Lanka. Fortunately, the AKD/NPP government is in power and has changed the situation in the right direction (system change).  Along with the above change, i.e., the right person (AKD) for the right job at the right time is also applying for the BOI. In other words, the right professional for the right job and at the time for BOI.  Given the above, BOI marks a new chapter in FDI flows.

Expectations or objectives of FDI in the proper context

In the broader context, based on BOI, FDI’s contribution to financial stability, economic growth, and integration into the global economy is profound. Given the above, employment creation, foreign exchange earnings, acquisition of the latest technology, management skills, infrastructure development, regional development, and  Public-Private Partnerships (PPPs) are crucial.

Economic growth is value addition via land, labor, capital, entrepreneurship, and hence the associated payments such as rent, wages, interest, and profit. Given the above, the most significant factor is labor or employment creation and its impact on the economy via Backward and Forward Linkages (BFLs), as explained below. A substantial part of interest /profits is exported as dividends or return on investment. An equally important factor is Backward and Forward Linkages (BFLs) in the production process. To cut it short, the garment or apparel industry has been popular as the “footloose” industry. This industry can be located in many places without being affected by factors of land, labor resources, or capital. Furthermore, this industry is prone to relocation because their resources can be found in multiple places. When FTZs were established in Sri Lanka, one of the basic objectives was to create employment because of the rising unemployment. Its raw materials, basically textiles and other inputs, were imported. As a result, Backward Linkages occurred abroad, creating employment and other benefits there. Forwards Linkages are related to transport, banking, storage, insurance, shipping, etc. Usually, Forward Linkages are not that significant. Backward Linkages are most important in many ways, so their contribution to economic growth and development is substantial to the extent that input or raw materials are procured locally.

Regarding the Backward Linkages of the proposed US$3.7 billion oil refinery, as almost all inputs are imported, Backward Linkages occur abroad. Accordingly, I concluded that a US$3.7 billion investment may contribute to economic growth of about 0.7 percent. The point that the value of US$ 3.7 billion alone is not essential. What is important is the contribution to economic growth and development. In other words, there is no direct correlation between the value of investment and its contribution to economic growth. What is essential is the Backward and Forward Linkages of an industry related to FDI. This topic is related to supply change management in the context that Backward and Forward Linkages are directly related to supply chain management, as they represent the connections between different stages of a supply chain, including the relationships between suppliers (Backward Linkages) and customers (Forward Linkages) within the production process; essentially analyzing how different components of a product flow through the chain from raw materials to finished goods.

Insight and Right Direction of BOI

The Charmin of BOI Arjun Hearth revealed that the highest recorded FDI was $ 1.7 b in 2018, accounting for 1.8% of GDP. This goes with the dismal performance of FDI I indicated above. As far as I can remember, along with GCEC, FDI did not have a Strategic Plan except to focus on increasing the number of FDI. However, Vision BOI is to establish the country as the most preferred destination for sustainable investment in Asia, attracting high-quality investments that generate employment, enhance exports, and bring new technologies and skills to the nation, essentially aiming to position Sri Lanka as a leading hub for foreign direct investment in the region. Based on the recent economic reforms, Sri Lanka’s economy is expected to reach US$ 84.78 billion by the end of 2025. In the long run, Sri Lanka’s GDP may reach  (forecast) around  US$86.48 billion in 2026 billion  and US$ 88.21 billion in 2027.  Given the above and  along with the Vision of BOI, if  Sri Lanka can acquire a minimum of US$ 2 billion FDI annually, it can contribute around  1.85% to  GDP. The above is possible, along with the strategic thinking and utmost commitment of the chairman of BOI.

Requirements to foster FDI with AKD/NPP Government

BOI now knows well about the standing of FDI in the economy, as it failed to achieve at least US$2 billion in investments annually, which is the target. Also, against the current FID contribution of around 0.84% to the GDP, If BOI can make it at around 1.85 %, it will be a significant contributor. The above means that the economy needs structural transformation based on FDI. Given the above, there is no doubt that BOI will formulate a Strategic Plan to achieve the minimum U$$2.0 billion FDI annually and hence around 1.85% contribution to GDP. Regarding the above, FDI literature indicates 13 areas to be focused. Those are (i) Security, (ii) Property Rights, (iii) Bureaucracy and Corruption, (iv) Clarity of the Law, (v) Civil Liberties, (vi) Women’s Economic Freedom, (vii) Trade Freedom, (viii) Elections (ix) investment Freedom (x) Judicial Independence and Effectiveness. (xi) Political Rights, (xii) Informality, and Finally, ( xiii) Legislative Constraints on the Executive. Compared to the previous regimes of UNP and SLFP, under the AKD/NPP-headed government, the above areas fully accommodate fostering, thriving, and sustaining FDI flows rather than focusing on mere incentives as of 1978.  Most importantly, the AKD/NPP government has earned a worldwide reputation for being free of corruption, which is a significant factor in attracting FDI flows. Regarding bureaucracy, establishing the “Single Window Investment Facility Taskforce” (SWIFT) by BOI is an essential step in the right direction to streamline investment approval, one of the considerable barriers to fostering FDI flows.

Given the 13 focused areas mentioned above to foster FDI, BOI focuses on three (3) pillars, namely,  (i) market access, ( ii) supply chain stability, and  (iii) skilled labor in the right direction. In 1978, the above was not in much focus because FDI was based on garment and textile manufacturing. FDI investors had their markets. Supply change management and skilled labor were not problems. However, over the last 50 years, FDI has gone beyond manufacturing garments and textiles into scientific and technical areas or logistics, renewable energy, technology, hospitality, infrastructure development, modern agriculture, and Public-Private Partnerships (PPPs). However, the three areas mentioned above have imposed serious challenges for acquiring, promoting, coordinating, and facilitating industrial development in designated areas because of their inadequate and increasing competition among countries to attract FDI. Regarding market access, the BOI Chairman’s focus on the proposed Sri Lanka-Thailand Free Trade Agreement (FTA), Sri Lanka-Singapore Free Trade Agreement, and the resuming negotiation of the Economic and Technology Cooperation Agreement (ETCA) between Sri Lanka and India are vitally important. Also, garnering the maximum benefit of Colombo harbor and others and connectivity with industrial zones are vital for fostering FDI flows. All of the above will be part and parcel of the proposed Strategic Plan of BOI.

Conclusion

Since the establishment of GCEC in 1978 and the opening of FTZ in Katunayake, FDI flows to the country have been lagging. According to the Chairman of BOI, Sri Lanka has failed to achieve at least US$1.7 billion annually. However, along with establishing the AKD/NPP government, BOI is headed by a capable and result-oriented professional. As he is strategic and insightful, it is possible to achieve US$ 2.0 billion FDI annually, contributing to around 1.85% of GDP. In short, the new leadership of BOI will cause a quantum leap in FDI flows and its contribution to GDP growth.

*The writer, among many, worked as the Special Advisor to the Office of the President of Namibia and was a Senior Consultant with UNDP for 16 years. He worked as a Senior Economist with the Central Bank of Sri Lanka (1972-1993) before he migrated to New Zealand due to a family tragedy. The author can be contacted: asoka.seneviratne@gmail.com