Economic Update

Published 25 Jul 2018

Sri Lanka has moved to increase foreign direct investment (FDI) flows following the launch of a new programme aimed at streamlining Customs procedures to boost trade.

In late May the Board of Investment signed a memorandum of understanding with six government agencies to develop the National Single Window (NSW), an online one-stop shop for investor applications and certification processes.

The signatories were the Department of Registrar of Companies, the Department of Inland Revenue, the Central Environment Authority, the Colombo Municipal Council, the Urban Development Authority and Sri Lanka Customs.

The six agencies comprise the first phase of the Single Window Investment Facilitation Taskforce (SWIFT), a specialist body established by the Development Strategies and International Trade Ministry to expedite investment approvals. In its second phase, due to roll out next year, SWIFT will implement the NSW and incorporate 19 more state agencies into the system.

The creation of the NSW is expected to substantially simplify the foreign investment process, which formerly required investors to obtain in-person approval for projects from all relevant agencies, involving up to 14 permits in some cases.

The NSW will also be boosted by companion platform the Trade Information Portal (TIP), expected to be launched in the second half of the year. With instant access to close to 800 regulatory documents, including laws, prohibitions, standards and procedures, the TIP should improve transparency and reduce errors, allowing traders to find all relevant regulatory information on a single digital platform.

Reforms comes amid increase in capital inflows

The digital integration of ministries and relevant bodies is expected to greatly streamline existing bureaucratic procedures for exports and imports, often cited as a key factor restricting FDI.

While Sri Lanka recorded $1.6bn in FDI last year, its highest-ever annual intake and double that of 2015, it represented just 1.6% of GDP, significantly lower than levels in Malaysia and Vietnam, where rates stand at around 3-4% and 5-6%, respectively.

By simplifying the investment process and centralising trade information via online portals, the government is seeking to attract $2.7bn in FDI by the end of this year and $5bn annually by 2020.

For the past decade FDI has been largely concentrated in infrastructure and construction projects, evidenced by the June release of the final tranche of China Merchant Port Holdings’ $976m investment – the country’s largest-ever single FDI – for the 99-year lease of Hambantota Port.

In addition to the positive impact that planned upgrades at Hambantota should have on logistics and trans-shipment activity, further potential lies in the proposed industrial zone at the site, which could incentivise FDI in high value-added manufacturing and service industries.

Furthermore, a series of government reforms – including the elimination or reduction of some 1200 para-tariffs late last year and ongoing efforts to update century-old Customs legislation, coupled with the signing of more free trade agreements, such as the deal completed with Singapore in January – are expected to further encourage foreign investment.

Currency weakness and immigration policies pose risk to foreign investment

While efforts are under way to improve the investment climate, some factors could hinder foreign capital inflows.

Chief among these is the value of the rupee, which has depreciated almost 5% against the dollar since 2016, and has been susceptible to sharp drops in value, as experienced in 2011 and 2015. However, the passing of the Active Liability Management Act – aimed at improving public debt management – in May has seen the rupee stabilise.

Additionally, existing visa, immigration and naturalisation policies have been cited as factors limiting critical knowledge transfer to the country, and the subsequent development of expertise in new technologies.

At present, immigration law offers no path to permanent citizenship, and places restrictions on both foreign workers and their family members.