Sri Lanka has faced multiple challenges in the past few decades, ranging from economic instability, political upheavals and natural disasters and to the ongoing impact of the global Covid-19 pandemic.
However, the country’s geographical advantage, human capital, and potential for growth offer several opportunities for economic recovery and development. Among the key drivers of this recovery are export promotion and Foreign Direct Investment (FDI) attraction.
These two pillars not only hold the potential to enhance the country’s economic resilience but also contribute to job creation, infrastructure development, and technological advancement. The Government set targets to promote exports and attract FDIs in its recently tabled Economics Transformation Bill of 2024.
Importance
Export promotion has always been a critical element of Sri Lanka’s economic policy. Historically, the country’s economy has been heavily reliant on exports such as tea, garments, rubber, and coconut products. However, global trade dynamics, shifting consumer preferences, and competition from other emerging economies have made it imperative for Sri Lanka to revamp its approach to export promotion and diversify its export base. The Government has in recent years made concerted effort to improve export performance.
According to data from the Central Bank of Sri Lanka, the total export earnings for 2022 amounted to $12.4 billion, a slight increase from the $11.8 billion recorded in 2021. However, when compared to the island’s import bill, which exceeded $20 billion, the trade deficit remains a significant issue.
To tackle this, export promotion has become a priority in national development strategies. By diversifying exports, improving the quality of products, and expanding into new markets, Sri Lanka can reduce its dependence on imports, improve its balance of payments, and build a sustainable economic model.
A key strategy for export promotion is the development of new export markets, especially in regions such as Asia, Africa and Latin America, where Sri Lanka has historically had limited engagement. This diversification is essential in reducing the country’s vulnerability to global market fluctuations.
Sri Lanka must also focus on high-value exports such as electronics, pharmaceuticals, and ICT services, which offer higher returns than traditional products such as tea and garments. Similarly, Sri Lanka needs to enter into trade agreements and open up its economy to the rest of the world while addressing bottlenecks for completion and productivity improvements in the domestic economy.
The Economic Transformation Bill proposed a number of initiatives to promote investments, though the new Government is yet to initiate its implementation.
It is high time for the Government to either amend the Bill or introduce a new Bill with changes to promote exports.
Attracting FDIs
FDI is another critical component of Sri Lanka’s economic strategy. Foreign investment helps bring in not only capital but also technology, management expertise and access to global markets.
During the past decade, Sri Lanka has attracted less than US$ 1 billion FDI, average annual inflow, while its neighbours have performed much better. Sri Lanka’s comparatively lower FDI is reflective of challenges related to policy uncertainty, political instability and infrastructural constraints.
The country needs to improve its ability to attract as a FDI destination by reforming the regulatory framework, simplifying business processes and improving infrastructure. Invest Sri Lanka and Zone Sri Lanka are some of the new initiatives proposed in the Economic Transformation Bill which need to be operationalised soon to change the existing lethargic investment and business climate for foreign direct investment.
Challenges
In particular, to attract more FDI the country must address these challenges and create a stable and predictable investment climate. Attracting FDI also requires a focus on improving the ease of doing business in Sri Lanka. The World Bank’s “Doing Business” report consistently ranks Sri Lanka lower than its regional peers in terms of business regulations, reflecting the need for comprehensive policy reforms. For FDI to flourish, Sri Lanka needs to streamline its regulatory processes, offer incentives for investors and protect investor rights.
Sri Lanka should also focus on sectors that are attractive to global investors, such as tourism, energy, agriculture, and manufacturing. Sri Lanka’s tourism sector, despite setbacks due to the Covid-19 pandemic, has a potential for significant growth with its rich cultural heritage, pristine beaches, and biodiversity.
Similarly, the energy sector holds promise for attracting FDI, particularly in renewable energy sources such as wind and solar power, where international investment can help meet the country’s growing energy demands in an environmentally sustainable manner.
Strategic partnerships
In recent years, Sri Lanka has looked to strengthen bilateral ties and trade agreements with countries such as India, China, Japan and the European Union to promote exports and attract FDI.
Sri Lanka’s participation in regional economic agreements, such as the South Asian Free Trade Area (SAFTA) and the India-Sri Lanka Free Trade Agreement (ISFTA), presents opportunities to boost trade volumes and investments in the region.
China’s Belt and Road Initiative (BRI) which focuses on infrastructure development and connectivity, also presents a new opportunity for Sri Lanka to improve its infrastructure and attract FDI. It is reported in the media that the president’s recent visit to India and China helped in encouraging potential investors to invest in Sri Lanka.
Similarly, Colombo Port City offers vast potential in attracting FDI into a number of sectors such as Finance, Logistics, Maritime services, and IT.
Export promotion and FDI attraction are key strategies that can help Sri Lanka recover from its economic challenges and lay the foundation for sustainable growth.
While Sri Lanka has made some strides in promoting exports and attracting FDI, more needs to be done to overcome obstacles such as policy uncertainty, regulatory inefficiencies, and infrastructural limitations.
By focusing on product diversification, market expansion, and improving the investment climate, Sri Lanka can unlock its full economic potential. Developing strategic partnerships with other countries and international organisations will allow the island nation to strengthen its position in the global economy.
By embracing a dual approach to export promotion and FDI attraction, Sri Lanka can, not only achieve economic growth but also foster job creation, technological innovation and an improved standard of living for its people.
The writer is an economics professor at the University of Colombo.
