Interview: Mangala Samaraweera
How important is foreign direct investment (FDI) for GDP growth and reducing state expenditure?
MANGALA SAMARAWEERA: Sri Lanka’s place in the global economy has declined over the last decade, with both exports and FDI performance not reaching their potential. FDI will therefore play a crucial role in shifting away from debt-financed capital inflows. Export oriented FDI – supported by trade agreements with India, China and Singapore, with the latter expected to be signed in early 2018 – will enable the country to connect with Asian value chains in electronics, machinery and automobiles, with this being crucial to boost exports. Logistics, shipping and port-related services are other areas in which the country is aiming to attract FDI. Investments from global players in these sectors will help unleash the island’s potential in becoming a trade and logistics centre in the Indian Ocean. Tourism and related services will continue to be another important area where the country has high growth potential.
An important policy shift of this government is the increased emphasis on public-private partnerships (PPPs) as a vehicle for infrastructure investment. There will be many projects that will be open for PPPs under the Western Region Megapolis plan, which aims to transition the country’s western province into a global city between Dubai and Singapore. This strategy would enable more prudent fiscal management without compromising infrastructure objectives. These partnerships provide another major avenue for foreign capital investment in the Sri Lankan development process.
With increases in employment and income, FDI should also facilitate long-term economic growth through inflows of technology, and improvements in human capital and productivity. Capital inflows from foreign institutional investors were very positive in 2017, with robust inflows into both debt and equity markets. The continuation of this trend can be expected to have a positive effect on the economy, particularly by shoring up foreign reserves and enabling currency stability.
In what way will the increase in minimum capital requirements impact the banking sector?
SAMARAWEERA: The primary objective of implementing Basel III is to improve the stability, risk resilience and transparency of the banking system. These measures can be expected to help mitigate future financial crises. In the short term this will of course entail the introduction of some capital-raising pressure for banks and financial institutions. However, this pressure would be seen by the financial institutions as necessary in order to ensure the sustainability of future earnings.
In the recent past the banking and financial sector has expanded rapidly and made a vibrant impact on overall economic activity and development. Bank profitability in Sri Lanka has been strong and credit quality has remained high. This is a testament to sound risk management. Given the country’s sound financial position, it is likely that the required capital can be raised without too much disruption.
What policies are being implemented to reduce exposure to US interest rate hikes?
SAMARAWEERA: The country’s fiscal position has improved in recent months with positive revenue growth and controlled expenditure, which has created greater confidence in fiscal sustainability. Currency stability has also been maintained within the context of a market exchange rate. Also, the recently enacted Foreign Exchange Management Act will provide a more conducive framework for attracting foreign currency inflows. The central bank has been proactive in its management of future investment expectations by implementing timely monetary policy action. Meanwhile, inflation remains above mid-single digit levels, largely due to temporary factors including adverse weather and the passing effects of the rise in value-added tax in late 2016. Therefore, the government’s recent track record in prudent monetary and fiscal management will reduce the perceived risk levels for foreign investors.
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