Priyanka Jayatilake, Managing Partner of KPMG Sri Lanka and Suren Rajakarier, Partner, Chief Operating Officer & Head of Audit & Assurance, share insights into how the Firm is helping Sri Lankan companies to navigate through economic challenges by offering specialized knowledge in over 50 business areas, including restructuring, capital and funding, digitalization, cost optimization, talent acquisition and placements, and market exploration. KPMG Sri Lanka also supports local companies to meet global standards and facilitates mergers and acquisitions by working with international markets. It also aids the government in digitization, promoting investment, and improving the ease of doing business. Jayatilake and Rajakarier share their views on critical reforms needed to revive the economy.
What is your outlook on the economy?
Jayatilake: Despite the significant economic constraints over the past year, the Sri Lankan government is making progress towards recovery. However, economic stability remains elusive, with persistent inflation and an urgent need for debt restructuring, the path to recovery will be long and challenging. Creating a conducive environment for foreign investments and aid is pivotal. Political stability is crucial, especially with the upcoming elections potentially impacting the long-term economic health of the country.
The outlook for the economy is positive, especially following the anticipated IMF agreement, however, it’s unrealistic to expect significant growth for 2023. The focus should be on consolidating resources and developing methodologies beyond restructuring and taxation. Investing in industries that promise export growth and revenue, such as IT, logistics, and tourism, is imperative, though progress has been slow due to external challenges.
We must also brace for potential economic downturns and competition for investment from other nations. Thus, maintaining optimism and resilience while remaining cautious and aware of global trends is essential for Sri Lanka’s economic journey.
How is KPMG assisting Sri Lankan companies in navigating the unfolding economic challenges?
Jayatilake: KPMG Sri Lanka offers an array of services to guide businesses through uncertainties while focussing on cost optimization. Our advisory services include IT consulting, tax, auditing, and governance, assisting companies with compliance, good governance, and restructuring. Recognizing the important role played by family businesses, our specialized team focuses on helping them establish systems, structures, and governance processes to spur growth. In order to support SME sector businesses, our team is working on accounting support and tax services. With a dedicated team of over 1200 professionals, we leverage our extensive global network and resources to offer tailored solutions to clients, both locally and globally.
How is KPMG engaging with the banking sector?
Rajakarier: KPMG Sri Lanka is engaging with banks to make sense of the current economic conditions and prepare for potential scenarios, including the worst-case ones. In a challenging economic environment, we advise banks to build adequate buffers into their balance sheets to prevent sudden shocks and foster stability and confidence on an international level.
Providing thoughts on potential concerns relating to the ‘haircut’ on international and domestic bonds is important. To lessen the impact on the domestic economy, already affected by high inflation and wealth loss, one must recognize that international bond buyers, especially those who bought at reduced rates, may not experience significant losses with a potential restructuring, compared to those who bought them at face value.
Can you share details about any work the firm is doing with the government to improve governance, digitize the economy, or attract investments for large-scale projects such as the Colombo Port City?
Jayatilake: One of our key contributions to the government’s initiatives is driving digitalization and improving the ease of doing business. We have automated the entire Registrar of Companies functions, transforming it into a thorough and paperless process. This digital shift has significantly reduced transaction times and improved revenue generation for government entities. We are presently engaged in implementing a single-window system for port operations, which will streamline processes and reduce costs for the stakeholders involved, including customers, shipping lines, logistics operators, regulators, and customs. We are actively involved in promoting investment in projects like the Colombo Port City, where we provide assistance and guidance on tax matters and contribute to the overall structure and development. Our global perspective and specialized knowledge enable us to offer valuable insights and actively contribute to the success of international initiatives for organizations like the IMF, World Bank, and ADB, a recent example being the asset quality reviews on banks.
What are the emerging new opportunities for Sri Lankan businesses and how can KPMG help them unlock these?
Rajakarier: There are several key sectors in Sri Lanka that hold significant potential for growth. These include logistics, technology, tourism, real estate, and manufacturing and engineering, not to mention the well-established apparel sector.
Considering Sri Lanka’s performance in the DB Index, there is room for improvement. Our country’s rankings in areas such as obtaining credit, registering property, paying taxes, and enforcing contracts, place us very low on the index compared to other countries. This does not augur well for FDIs.
Another emerging trend worth exploring is the digital nomad or virtual worker phenomenon. Currently, there are approximately 10 million digital nomads based outside the United States. Attracting just 1% of nomads who on average spends around $2,000 on local expenses each month, may translate to potential inflows of approx. $2.4 billion annually. To tap into this opportunity, we need to address certain factors, like visas, Wi-Fi connectivity, creating an attractive environment, etc.
While embracing these opportunities, we should not neglect other sectors such as agriculture. Improving our self-sufficiency and focusing on import substitution strategies are crucial steps to strengthen the agriculture sector.
What are some of the reforms we should attempt at this stage?
Jayatilake: Reviving the economy calls for reforms to improve the fiscal health of the nation and the well-being of the populace. A significant area of focus is the overhaul of state-owned enterprises (SOEs). Initially, efforts should be geared towards enhancing their efficiency in the short term and over the medium to long term, progressively divesting from commercial activities and focusing on creating and enforcing robust regulations and regulatory commissions.
Strong regulation is essential across various sectors. The introduction of consumer protection and fair-trading authorities can aid in achieving balanced outcomes for both consumers and businesses, ultimately helping to curb inflation. It is critical to foster an appealing investment climate for both foreign and local investors which necessitates a substantial revamp of government procedures related to conducting business.
The government’s primary role should transition from direct involvement in businesses to a regulatory and facilitating one. At KPMG Sri Lanka, we frequently advocate for important issues such as tax laws, compliance, and governance, pushing for policies and procedures that support the overall reform process.
The effective enforcement of anti-corruption legislation, as prescribed by the IMF, will help to restore faith among the public and potential investors. Although KPMG Sri Lanka does not participate directly in political committees, we are available to provide our specialized knowledge, experience and guidance on related matters and play a vital role in driving Sri Lanka’s development.
What are your views on the recent tax changes? What tax reforms would you suggest to create an environment conducive to business and attract foreign investments?
Rajakarier: Reflecting upon the recent tax changes, I am reminded of Winston Churchill’s words, “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself by the handle”. We must balance taxation and government spending in Sri Lanka, where tax-consuming average incomes are comparable to OECD countries but with less evident benefits.
While expanding the tax net is in progress, the volume of luxury items does not correspond to registered taxpayers. Implementation of the IMF’s structural adjustments and governance improvement is crucial.
However, ultimately, comprehensive reforms, effective administration, simplified tax structures, and compliance-fostering environments can enhance our tax system, contributing to better FDIs.
Could you outline your services that enable companies to strengthen and expand their business relationships with the outside world?
Jayatilake: Through our extensive KPMG network, we leverage our deal advisory services to identify opportunities for mergers, acquisitions, and technical collaborations. Many clients of KPMG Sri Lanka have successfully ventured into the Middle East and Southeast Asian countries, using our established relationships with our KPMG teams in those regions to navigate through the local markets.
How is KPMG Sri Lanka making an impact beyond our borders?
Rajakarier: In addition to providing services within Sri Lanka, KPMG Sri Lanka is actively addressing the brain drain issue by offering global opportunities and training to our talented professionals.
Furthermore, we have established a resource pool to support the Cayman Islands & Maldives and are in the process of establishing a similar operation to cater to other locations. This approach not only helps us retain local talent but also enables us to offer competitive remuneration. By providing global opportunities, training, and competitive compensation packages, KPMG Sri Lanka aims to retain and utilize our talented workforce, contributing to the growth and development of our country while making an impact beyond our borders.