Cost of the War on FDI’s:

Sri Lanka has lost Rs.2900 billion in the last 24 years

Rohantha ATHUKORALA, Director Economic Affairs Government Peace Secretariat (SCOPP)

The current investment on Research and Development (R&D) in Sri Lanka is around 0.16 percent of GDP. Our counterparts like Bangladesh, Vietnam and South Korea invest 2.8 percent of the GDP on R and D.

The private sector needs to support the State in its fight against terrorism and proposed reforms, so that in the near future we can direct the moneys spent on the war towards R and D.

When Gordon Brown took wing out of India with his business delegation last week, the French head of State touched down on Indian soil the very same day with another business delegation - which is the robustness of corporate India in driving investment into the country.

For the third consecutive year India has crossed the GDP growth of 9%. Apparently India will pass the magical 30 billion dollars in FDI’s in 2007.
 

Loss of Foreign Direct
Investment 1982 - 2006
 

Year	Net FDI		Expected Loss ($ Mn.)
	($ Mn.)		 Avg.	Investment *($ Mn.) 

1982	63.6 		63.6 	-
1983 	37.5 		70.1 	32.6 
1984 	32.6 		77.2 	44.6 
1985 	24.4 		85.1 	60.7 
1986 	28.2 		93.1 	64.9 
1987 	58.2 		103.3 	45.1 
1988 	43.0 		113.8 	70.8 
1989 	18.0 		125.4 	107.4 
1990 	42.0 		138.2 	96.2 
1991 	63.0 		152.3 	89.3 
1992 	121.0 		167.8 	46.8 
1993 	187.0 		184.9 	- 
1994 	158.0 		203.7 	45.7 
1995 	53.0 		224.4 	171.4 
1996 	120.0 		247.2 	127.2 
1997 	430.0** 	272.4 	- 
1998 	193.0** 	300.1 	107.1 
1999 	177.0 		330.3 	153.3 
2000 	176.0 		363.3 	187.3 
2001 	172.0 		366.0 	194.0 
2002 	185.0 		420.9 	235.9 
2003 	201.0 		484.0 	283.0 
2004 	227.0 		556.6 	329.6 
2005 	233.8 		613.3 	379.5 
2006 	451.1 		675.4 	224.3 

Total 	2872.4 		6432.4 	2937.0

Source: Cost of the War in Sri Lanka, NPC; 
Annual Reports, Central Bank of Sri Lanka, Various issues.

Note: On assumption of an average growth 
rate of 10.18% from 1982-2001 (according to 
Cost of the War in Sri Lanka, NPC study).  
From 2002-2004 (CFA period) growth is 
predicted at 15% while 2005-06 again its 10.18%.

Infact, I feel India has insulated itself from the global economic downturn due to its home grown economic model. Let’s see if this holds ground.

The Global Economic Prospects (GEP) reported last week that even if the US congress does not approve the 143 billion dollar impetus to the US economy and pull the world out of a probable world recession, South Asia will grow by 8.4% in 2007.

Consumer demand in the region has been boosted by expanding credit, rising incomes and strong worker remittances. South Asia experienced investment growth being buoyant, as the business sentiments transmitted was positive.

Revenue and profits of the corporate sector catapulted to make it the most attractive region for global players. If I may quote the British Premier Gordon Brown from the India - UK business debate last week in Delhi, he said if a country does not look at India in ones Global strategy then there is no global strategy.

The pundits of economics predict 2008 growth for South Asia to be 7.9% even though there are indications that the US is heading for a recession. Goldman Sachs expects slower external demand in 2008, whilst the Global growth is estimated to settle at 3.6%.

Sri Lanka - against odds

In this backdrop we see little Sri Lanka performing against all odds. World Bank reported last week that the Sri Lanka’s economy registered a 6.3% growth in 2007 whilst the cost on the war and the impact to the tourism industry was 1.1% of the GDP in 2007.

I will be failing in my duty I do not mention that Sri Lanka has experienced accelerated growth over the past two years despite adverse shocks such as oil price hikes, the tsunamis and the escalation of terrorism. Growth has averaged at 6.5% during the last two year and 4-5 per cent historically.

The higher economic growth has been accompanied by a declining unemployment level to 6.4 percent.

But a point to note is that average annual growth rate between 1983-2006 is around 4.5%, whilst the economy recorded a 4.4% growth rate during 1961-1982. This means that, against past trends the economy has grown very marginally. But we should be proud that the economy has contracted only once in the last 50 years, which is a performance very few countries can boast. This performance is greater, given that we have been torn by civil conflict for the last thirty years.

FDI flow Sri Lanka - fluctuating

The FDI flow to Sri Lanka has fluctuated widely during the last 24 years but overall been low in comparison to set targets each year. A point to note is that the investment is way below the regional counterparts. It is estimated that Sri Lanka has lost around 3 billion dollars on FDIs during the last 24 years.

When analysing the data, it reveals that there is a strong relationship between the security situation and the FDI flow into the country. Especially in the 1987 - 1989 periods, the trend was very evident but there after in the 1990s there was a surge in the inflows due to the higher business confidence experienced. But after the TNT laden truck of the LTTE ramming the Central Bank in 1995, there was another drop experienced in the flow of FDI.

SL- Drive investment in the Industrial sector

If we analyse the sectoral contribution to the Sri Lankan economy, I would strongly suggest that we focus and drive ourselves to be stronger in the Industrial sector through FDI’s and investment in R and D. Currently only 27% of the GDP comes from the Industrial sector with around 1.8 million people being employed (which is 24% of the population) A point to note is that the average annual growth rate in the Industrial sector has been 6.2% whilst it contributes to a mammoth 78% to the total exports which explains the importance of this sector for the future.

Vision for Industrial Sector 2005 - 2016

Indicator 		2005 	2006 	2010 	2016 

Contribution to GDP %	2.7	2.8	3.2	3.4 
Industrial Growth % 	7.9 	7.5 	8.6 	10.5 
Industrial Estates 	16 	17 	30 	45 
Export Processing Zones 12 	12 	19 	26 
Employment (000) 	1800 	1850 	2100 	3300 
Value of Exports ($ Mn) 4354 	4694 	8143 	20990 
FDI Inflows ( $ Mn) 	272 	760 	2421 	4391

(Source; 10 Year Plan Ministry of Finance & Planning)

Hence any investment that Sri Lanka can attract in this area will help drive the exports industry and help in attracting foreign exchange to the country.

Even though the Industrial sector is strongly diversified, it is skewed heavily to the Garments sector which has around 950 factories providing employment to 300,000 workers. We need to spread the risk to the Sri Lankan economy by way of export earning’s, given the recessionary economy of the US and the looming GSP+ issue in the EU.

If Research and development (R&D) is the ‘key’ to making an economy marketing oriented and strong in the years to come, current spending on R&D in Sri Lanka is only 0.16 percent of GDP down from the 0.30 spent, way back in 1996.

This is way below the investment by our competitor countries like Bangladesh, Vietnam and South Korea.

These countries has experienced phenomenal growth in the last two decades by investing almost a 2.8 percent of the GDP on R and D. This explains the strategic thinking required to make a country ride the industrial revolution. Scandinavian countries spend nearly a 4 percent of GDP on R&D whist reports coming in say that India has increased the investment to 1.5 percent of the GDP.

The Indian Prime Minister once made a comment that R and D is the only way to make a country compete with the western world. I guess the Nano car is ample testimony to this statement.

Global Learning’s - R&D

If we were to examine the best practices of the world like in Japan and South Korea, we can see that Research, Development and Commercialisation are separate functions in the country. The research agencies are linked to the university system. Development houses are linked to the business world.

This cycle makes the university system align their curriculum to satisfy the business needs.

Hence, naturally the graduates that are churned out by the universities are the most saughted by the business world. This is capacity building at its best to my mind. Sri Lanka needs to take a cue from this if we are to solve the unemployment issue of the graduates and making the economy marketing oriented.

Another, learning is that, the development houses are funded by the government so that strategically the government directs which industry should be developed. For instance in Brazil, the direction is given to the coffee industry. Sri Lanka needs focus strategically on the Tea industry, Apparel industry and niche BPOs.

We also must take the global learning on which investment will bring the best returns to Sri Lanka before venturing out. For instance the Ceramics Industry which is strongly laden on the power and energy zapping up almost 40% of its cost, need to be thought through before any future investments are made.

A point to note from a social economic angle is that the return does not have to be only from a monetary sense but, also from a social economics perspective. Namely, employment and poverty reduction.

The key challenges the economy is faced which needs strategic FDI is in improving the quality of infrastructure. A recent survey has been revealed that 40% of the urban manufacturing firms and 25% of the rural industrial entities has cited electricity as a major problem. Access to electricity is heavily concentrated on urban areas and rural areas and are grossly underserved that results in regional economic disparities.

This is a reason for the dominance of the western province, contributing over 50% to the overall GDP of the country. The survey also reveals that where electricity is available, supply is unreliable and manufacturing industries make use of generators to ensure continuous supply of electricity.

Using generators tend to further increase the cost of production as industries already pay a higher price for electricity over its regional counterparts.

This tends to make our Sri Lanka products out priced in the global market place or the margins are driven down to an extent that investment on R and D not been possible. The other challenge we face is the unsatisfactory transport infrastructure. This is particular with regard to rural enterprises specially.

There were two areas cited from the study- road quality and traffic congestion.

It is estimated that 40% of the vegetables are destroyed during transit from a farm to the buyer which throws light to the problem at hand.

Another key area emerging is the cost of finance. Even though there are concessionary financing schemes supported by the Government, World Bank and the ADB the urban manufactures are faced with a dilemma the spiralling interest rates.

Way forward- Sri Lanka

A way forward for the Industrial sector is for Sri Lanka to have a base of vibrant, competitive world class manufacturing industrial firms that could generate higher economic value added products that can drive up profits and create sustainable employment to a wider array of people to alleviate poverty.

We need to prove that Sri Lanka has stella infrastructural growth with projects like Upper Kotmale Hydro Power plant, the Puttalam and Trincomalee coal power projects, Kerawalapitiya Power Plant, address the key issue of power on the other hand to drive stronger logistics and accessibility, the Colombo South Port, Galle Port, The new international airport and national road projects like the Southern Highway, The Northern Expressway.

We must not forget to invest on Research and Development in our strategic sectors i.e. the last high yielding clone developed for the tea industry was in 1975. We also need to drive the existing engines of growth by introducing technology so that we keep Sri Lanka abreast to the changing global arena. Some may call this the knowledge based economy. What ever term used, the end result is making a particular industry more competitive globally.

How to attract FDIs in Sri Lanka

Some of the key strategies we can be ready to drive in the near future to attract FDIs should be High quality Infrastructure projects like Special economic Zones, Export processing zones, Technology parks whilst developing the supply chain aligned to the booming Indian market.

We must also launch a special incentive package aimed at selected Export Industries so that global FDIs can be directed to Sri Lanka. South Africa did this successfully in the aluminium industry a few years ago. Sri Lanka must enter the IT and knowledge-based industry.

May be target a BPO in the Jaffna district as world bank research in 2007 revealed that the youth of Jaffna has a higher education standard than the national average.

May be in the medium term we must build our own Nuclear Power plant. Ideally a 500 MW Nuclear Power plant can cater to the electricity demands of the future. Nuclear power is the most cost effective and environmentally clean source of power in the world.

This will result in Sri Lanka acquiring invaluable knowledge and technology, bringing down the electricity price drastically, create thousands of jobs, make Sri Lanka a modern country with state-of-the-art equipment and technologies and help re-position the country in a different perspective in the South Asian region.

To my mind Sri Lanka has never been short of Ideas and strategies. What the country requires is gold standard execution with passion.

May be the on going peace initiatives connected to the 13th Amendment will be the way forward. But the private sector must support the state to make this a reality. After all already we have lost Rs.3000 billion worth of FDIs into Sri Lanka.