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Sri Lanka’s entrepreneurial activity up in 2015

By Indika Hettiarachchi

May 02, 2016 07:36 AM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - Sri Lanka’s overall macroeconomic conditions deteriorated in 2015. With the government adopting expansionary policies to boost consumption spending, both fiscal and external balances deteriorated in 2015.

Gross domestic product growth declined to 4.8 percent. This deterioration forced the government to seek an IMF support program. However, GDP growth alone may not be a reflection of underlying entrepreneurial activities of an economy. It is important to examine data, which are indicators of new businesses/project initiatives. When we closely analyze data provided in the recently released Central Bank annual report for 2015, we could observe several positive trends.

These trends suggest that entrepreneurial activities have seen an increased compared to 2013 and 2014. Discussed below are some of the positive developments seen in 2015.

GROWTH IN “JOB CREATORS”

One of the closely watched data in evaluating the state of an economy is data relating to employment. A data series that could be used to assess the level of “entrepreneurial” activity is trends in “job creators” or the number of employers. An increase in new employers is a barometer for new business startups/new ventures. The number of employers (as represented by businesses contributing to Employee Trust Funds) has seen an increase in 2015 compared to 2013 and 2014. This trend is also reflected in laborforce data. The percentage share of persons classified as “employers” have increased sharply in 2015, and has been at the highest level since 2010. This suggests that there had been a healthy level of new business startups or new business initiatives in 2015.

Source: Central Bank annual report 2015

Source: Central Bank annual report 2015

AN INCREASE IN PROJECT APPROVALS

Another indicator of new business initiatives is the trend in project approvals. Project approval from the Board of Investment (BOI), the main business promotion agency in the country, is a good indicator in this regard.

Although some businesses no longer consider it important to go through the agency, they are required to obtain BOI approval if a project/company is backed by foreign investors. Data show that the number of BOI project approvals in 2015 was more than approvals granted in 2013 and 2014.

Source: Central Bank annual report

FOREIGN DIRECT INVESTMENT

Compared to 2014, FDI declined 36.6 percent to $0.9 billion in 2105. However, overall FDI is not an accurate indicator of foreign risk capital flowing into the county, as a major share of total FDI consists of retained earnings and borrowings (which are mostly from local lending). Data show that equity inflows to privately held businesses in 2015 were almost at the same level as in 2014. Equity FDI is a good indicator of startup activities of forging funded projects/ventures. It should also be noted that the level of equity capital flowing into Sri Lanka remains very low for a middle-income country.

Source: Central Bank annual report 2015

PRIVATE SECTOR INVESTMENT

The level of private sector capital formation is also a good indicator of entrepreneurial activity in the economy. However, (for the first time) the Central Bank annual report for 2015 does not provide a breakdown of the investment expenditure (i.e., private sector and government), thus depriving analysts of carrying out any analysis regarding private sector investment. (Furthermore this exclusion will deprive economists and economic students from examining vital economic trends such as crowding out effect, etc.) The overall level of investment expenditure in 2015 was 30.1 percent of GDP - the lowest level since 2010. It is likely that government investment declined sharply in 2015 due to tight government finances in 2015. This means the level of private sector investment is likely to have increased significantly in 2015.

THE ECONOMIC AND INVESTMENT OUTLOOK

Despite Sri Lanka’s worsening economic conditions in 2015, the level of entrepreneurial activity appears to have remained at a healthy level during the year. Data show that entrepreneurial activity improved in 2015 compared to 2013 and 2014. Both employer data and BOI project approvals suggest that there had been a recovery of new business activity in 2015. FDI data show that the level of foreign investor risk-taking activities did not decline in 2015.

Hence, it is likely that the increase in entrepreneurial activity will result in higher economic growth in the future. It is also likely that more investment opportunities will be available for financial investors as many entrepreneurial initiatives reach growth phase.

Indika Hettiarachchi is the Founder/Managing Director of Jupiter Capital Partners (indika.h@jupitercapitalpartners.com), a Colombo-based private equity firm.


 

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