Sri Lanka policy instability, skill shortages holding FDI back: survey

ECONOMYNEXT – A shortage of qualified labour and policy instability were the biggest problem facing foreign investors and more qualified labour, though the strategic location and the quality of labour and access to markets, were key positives, a survey has found.

A survey among members of the American Chamber of Commerce (AmCham) in Sri Lanka found that perceptions of business environment were ‘neutral’ leaning slightly towards the poor side and the good side.

Rafi Musher, head of Stax, a Chicago-based consultancy that had also invested in Sri Lanka 12-years ago said.said policy instability was a ‘huge hurdle’.

In Sri Lanka there was a lot of discussion over tax issues even now.

"The US also has a lot of the same challenges this year," Musher said. "We also do not have some of the guidance on tax issues in the US. But it is a huge hurdle here.

"Streamline in get it right, give some people some consistency and it is going to bring a lot of money."

In Sri Lanka tax inconsistency is a given critics say with each budget celebrated for secretly hatched tax changes that are slammed on people the day after the budget, even without an underlying law until last year.

However Sri Lanka still has a law which allows import and excise taxes to be slapped at midnight, while citizens are sleeping, with no prior notice making a mockery of the parliament and the principle of taxation by consent.

Donald Trump, a white nationalist, has started slapping import duties by executive order, and there are now discussions about reigning in executive powers as the negative effect of nationalism is becoming more evident.

Analysts say Sri Lanka’s policy sways between short forays to policies that provide more freedom to consumers and investors, to nationalist and pro-ruler policies such as expropriation that undermines property rights, and retrospective taxes.





Meanwhile Musher said he personally found that there was a lot of technical talent in the country, more than was generally perceived. The tech sector, which was employing increasing number of high earning talent, was not adequately captured in statistics, he said.

However the survey respondents said shortfalls of qualified labour was a key constraint. Investors also cited the high labour costs, insufficient employee productivity as reasons.

There were investors in manufacturing (mostly apparel), in services (40 percent logistics and 40 percent information technology and consulting), who may face different problems with labour.

Of the overall FDI that was coming a lot of money was now going into tourism. Manufacturing was still growing, he said.

"Sri Lanka used to be one of cheapest labour places, but the fact is labour rates are going up, so you are going to need to invest in technology to be competitive with Africa and countries with lower costs," Musher said.

Sri Lanka has tried to give cheap labour by permanently depreciating the currency or unsound inflationary money, which analysts say could lead to brain drain in the services sector and brawn drain in others, while creating political instability.

Investors and people in countries like Vietnam which had a chronic unstable and weak currency due to a bad central bank – especially before strong growth started in the mid 1990s backed by a more stable currency – had escaped poverty by dollarizing salaries and large sections of the economy, analysts say.

An International Monetary Fund report noted last week that following an extended period of stable currency since the end of the great recession, another bout of of ‘de-dollarization’ had begun in Vietnam.

A depreciating currency will destroy financial capital making investments to boost productivity less easy, while also keeping interest rates chronically high, critics have said.

Cost of setting up a business was also a problem faced by a fifth of respondents. Senior management running around figuring out what the tax policy or regulations was a cost, he said.

About 19 percent of investors also cited the high cost of office space he said. In countries which had plenty of capital flowing into real estate, set-up costs were lower, he said.

In Chicago, when Stax was set up, the real estate firm had given 6-month free rent because a 5-year contract was signed, which allowed them to invest the money in setting up office build out, because there was so much capital flowing into real estate, Musher said.

"Something that people do not realize is that in the rest of the world, where there is so much capital flowing into real estate developers can actually front the build out and give you free rent for a period of time," Musher said

"In our Chicago office of Stax, there was six-month of free rent, which paid for all the furniture and build out, because we were signing a 5-year lease," Musher recalled.

"In our Sri Lanka office they want six-months (rent) ahead and plus all the furniture and build-out."


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