Better regulatory environment needed to boost FDI flows

* Research report says debt:GDP ratio could increase this year

With much-needed foreign direct investment (FDI) inflows well below expectation, the country needs a better regulatory environment, investment and infrastructure quality and a better ranking in the World Bank’s index measuring the ease of doing business, a research report highlights.

The government had forecast FDIs to reach US$ 2 billion in 2012, but the Central Bank estimates the actual to be a little more than US$ 1.1 billion.

"Investor confidence and more stable government policies seem to be the need of the hour on FDI inflows. Better regulatory, investment and infrastructure quality and better ranking in the ‘ease of doing business’ would help in this area. We believe the FDI inflows would strengthen with improving infrastructure, policy reforms and rationalization of the country’s external trade policy," Bartleet Religare Securities said in a report ‘Sri Lanka: Looking Ahead’.

"Foreign Direct Investment (FDI) inflows have risen steadily despite the conflict over the recent years. The major absorbent for FDI inflows for 2006-08 were energy and telecommunications sectors. There was a significant deterioration of FDI inflows in the aftermath of the global financial crisis, but picked up in the post conflict era- with a sharp spike in 2011. There is significant interest in the leisure sector following the end of hostilities. However FDIs remain a weaker growth area for Sri Lanka in comparison with South East Asian counterparts Vietnam, Thailand, South Korea and Malaysia," the report said.

"Sri Lanka recorded a robust growth of over 8% during last two years. The higher growth has been accompanied by falling unemployment and stabilizing inflation. However, the efforts to regain macroeconomic stability in the country will see a slowdown in GDP growth for 2012 and 2013. We feel that a sustainable lower growth rate is more desirable than an unsustainable high short-term growth.

"The Central Bank expects recovery in 2013 with the anticipation of higher domestic demand compensating low external demand. This transition to a post-conflict, middle income, growth economy calls for a sustainable growth process. This has been further evident by mainstreaming the contribution to GDP by provinces other than the Western Province.

"Sri Lanka’s economy by nature is demand-driven. The sharp increase in private consumption, rising to 70% of the GDP in 2011 (compared to 65% in 2010) stands witness to this. This explains the fall in the nation’s domestic savings ratio to

15.4% (from 19.3% from the previous year). A correction of the existing negative real returns scenario would see a reverse to this.

"Sri Lanka’s low Savings to Income ratio and the domestic savings ratio remains a concern although noteworthy gains in the per capita income is made. Although a low interest rate regime would promote investment and spending, while boosting the economy, it would also dissuade individuals from saving. Sri Lanka’s savings/investments however increased to 29.9% of GDP in 2011."

BRS belies inflation would remain at single digit levels, but the trade deficit would remain high.

Inflation reached 9.2 percent end December 2012.

The trade deficit during the first eleven months of 2012 reached US$ 8.6 billion, a 2.1 percent decline from the previous year.

On the fiscal front, it said the debt: GDP ratio, which had declined in recent years owing to higher growth, could increase this year with the government expected enter into new finance agreements.

After declining in recent years, the public debt-to-GDP ratio expanded to 81 percent in 2012 from 78.5 percent in 2011, Central Bank data showed.

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