Conducive Environment Needed To Attract FDI

Professionals stressed the importance of attracting foreign direct investment (FDI) into the country to usher in much needed development and also to help in foreign debt servicing and to take away pressure on interest rates.
Former Central Bank of Sri Lanka Director Statistics Dr. (Mrs.) Anila Dias Bandaranaike speaking at a CIMA sponsored budget seminar in Colombo on Tuesday said that with the war over nearly three years ago, there was no reason why the island is not in a position to attract the required FDI other than due to policy inconsistency.
She said that the recently passed Business Takeover Act followed by a budget proposal of President Mahinda Rajapaksa’s of acquiring 37,000 hectares of unutilized land in the plantations sector and distributing it among the poor do not help to build investor confidence.
Bandaranaike said that the global economic downturn cannot be touted as an excuse for the slowdown in FDI into the island. “If so how is Vietnam able to attract far larger FDI inflows than Sri Lanka?” she asked.
“Otherwise it’s going to be a problem to service our foreign debt,” said Bandaranaike. A large amount of commercial loans are being taken from China in a non transparent manner where the interest charged is not known, which however was not the case previously, she said.
Bandaranaike also stressed the importance of rebuilding bridges with the West.
Ms. Shiromal Cooray, Managing Director Jetwing Travels, which Group is into the travel and tourism business, complementing Bandaranaike said that no plantation company would like a patch of land found in the middle of its estate to be given over to farmers for cultivation.
Such a regulation would make the private sector think twice before investing, Cooray an accountant by profession further said.
She also said that due to regulated city hotel pricing (as opposed to market determined pricing), Sri Lanka was fast becoming too expensive to the Indian tourist who preferred instead to take his holidays in cheaper destinations such as Thailand and Malaysia.
Meanwhile Bandaranaike said that Sri Lanka needs that 30-35% of GDP investments to take it to the next level. While 6% of that investment is coming from the Government of Sri Lanka (GoSL), the balance has to come from the private sector, but that’s not happening, she said.
The public sector and the private sector don’t trust each other, thereby causing a stumbling block in forming public-private partnerships, Bandaranaike added.
Hatton National Bank plc (HNB) Managing Director Rajendra Theagarajah in his speech said that the budget envisages a deficit of Rs. 468.9 billion of which Rs. 293.6 billion would be funded through domestic financing, of which the non bank borrowing component will be Rs. 207.6 billion.
As such the non availability of those funds to banks will cause pressure on interest rates, he warned.
Director General Fiscal Policy K.M. Mahinda Siriwardana in reply said that those borrowings will be from the EPF, ETF and National Savings Bank.
Theagarajah in his rejoinder said that it were with those institutions that his bank was trying to negotiate 10 year money, but they were demanding their pound of flesh, that was the reason why he said that such borrowings by GoSL would cause pressure on rates.
He also said that the trade deficit in the first nine months was US$ ($) six billion. That was financed from remittances ($ 3.4 billion), tourism (some $ 580 million) and FDI, also of a similar amount, but still leaving a gap of $ 1½ billion to be financed.
“That’s why it’s important to attract FDI into the country to bridge that gap,” he said.
Theagaraja further said that a study has revealed that local banks can raise only up to Rs. 90 billion of its tier 2 capital requirements. Deposits are insufficient, that’s why banks are encouraged to borrow from abroad, he said. Meanwhile Budget 2012 has envisaged bank borrowings to be at Rs. 64 billion to help bridge GoSL’s budget deficit.
Meanwhile Bandaranaike said it’s natural to expect the country to grow at 8% with the war end and the North and East opening up; schools, houses and hospitals needed to be built as a result coupled with the reawakening of agriculture in those areas giving a boost to growth.
She also said that the budget missed the bigger picture while looking at things microscopically. “Why give Rs. 100,000 to the third child of every policeman while ignoring us?” she asked.
Defence with Rs, 200 billion takes the biggest slice in the budget, what is GoSL planning to do with the 400,000 armed personnel after the war end? You cannot put them to manufacture shoes in Kilinochchi? She further said.
Why give concessions only to the tea sector? What about the others? Bandaranaike questioned.
Though the President talked of trilingualism where are the teachers to usher in that era? She asked.
Though poverty has come down to 9%, that still means that there are yet 500,000 families caught in the poverty trap, reminded Bandaranaike. A focus also has not been made to give further relief to that grouping, whilst on the other hand Budget 2012 has been concerned about the uplift of others who are outside the poverty trap.
Hasitha Premaratne, Chief Financial Officer Brandix Group, the island’s largest garment exporter, stressed the importance of improving the island’s road system, especially from the periphery to the centre, where the country’s major port is to be found.
He said that they recently opened up factories in Batticaloa but found that it took 8-10 hours to transport goods from there to the Colombo Port. Bandaranaike added that road congestion will affect efficiency and productivity. Some unpopular reforms have to be done, she stressed. Another shortcoming in Budget 2012 is that it hasn’t allocated any space for students aspiring for a university education, but having had been unable to gain entry into local universities because of limited seats available, said Bandaranaike.
No audit being done on previous Budget proposals was another drawback, she said.

Subsidising The Rich
President Mahinda Rajapaksa’s recent budget statement that state owned Ceylon Electricity Board and Ceylon Petroleum Corporation (CPC) making losses were a necessity as they were providing subsidized services to the masses cropped up at Tuesday’s Budget seminar.
But when this reporter asked Director General Fiscal Policy K.M. Mahinda Siriwardana who was also present at this occasion that if that was so why was CPC allegedly selling LPG to a private company at a subsidized rate when that company was allegedly reselling to the consumer LPG at three times that price? Siriwardana refused to answer that question.