Balancing China and India partnerships and diversifying exports key for Sri Lanka

Sept 13, 2018 (LBO) – Sri Lanka needs to balance geopolitical partnerships while also managing several other key aspects of its economy like structural weaknesses, limited export performance, constrained public finances and regulatory barriers to investment, Arun Kumar, chairman and chief executive of KPMG India said.

So what are the aspects that to be considered?, he asked at the Sri Lanka Economic Summit, Thursday.

“First, trade, especially exports – whether it is Sweden, with half the population of Sri Lanka, or South Korea with two and a half times the population, it is clear that exports are critical to growth and prosperity.”

“Sri Lanka’s static export structure signifies an absence of competitive forces to drive trade dynamism, innovation, and diversification; for over two decades exports have remained concentrated on garments, tea, and rubber products with a declining share in global trade.”

Secondly, he says, there is an urgent need to catalyze domestic investment and attract Foreign Direct Investment in order to grow and create more jobs.

“Sri Lanka can take a leaf from India’s book; there, a liberalized FDI regime with automatic approvals with some exceptions has resulted in it becoming a prime destination for FDI.”

“Despite operating a complex and an expensive system of tax incentives to promote investment, FDI remains low.”

Connectivity is also another important factor, policies and investments to promote regional cooperation and integration — should be a key strategic priority

Fourth, Arun Kumar says investment in growth-oriented infrastructure and logistics is imperative to make Sri Lanka an economic hub in South Asia.

Another very important factor would be balancing geopolitical partnerships, specifically those with China and India.

“Many countries like China, India, Japan are seeking a greater role in developing Sri Lanka’s strategic location,” he said.

“However, the recent expansion of China’s economic and military reach has caught international interest and Sri Lanka should be fully conscious of this.”

The full text of the speech follows:

Good morning.

It is a great honor for me to be with you, and as always, a pleasure to return to your beautiful country. On my visit, a couple of years ago, representing the US Administration when I served in Washington, I recalled an episode of trade from Sri Lanka’s history. Ice used to be cut from the frozen lakes of New England, significantly from Walden Pond outside Boston, covered with salt and sawdust to lower their melting point, and would be shipped out to Sri Lanka and India. On the return voyage, from Sri Lanka, the ships would carry graphite which would be made into lead pencils that American school children would write with.

Walden Pond became famous when Henry David Thoreau the philosopher wrote his book, Walden. It turns out that Thoreau worked in his family’s pencil factory shaping Sri Lankan graphite into pencils. This is, to my mind, a story of the connections we find in our world. Everyone and every country is connected in some way. “No man is an island” said John Donne, the English poet, we are all connected with one another.

And this applies not just to people, it equally applies to an island nation. In today’s world, more than ever before, we need to be connected – ideally with open economies operating according to common rules.

This connectivity has perforce to be at the center of any economic strategy in today’s world and applies even more to Sri Lanka given its geographic situation.

Eight years after the end of a long civil unrest, the Sri Lanka economy has grown on average at a rate of 5.8 percent a year. While there have been signs of a slowdown in the last three from a peak of 8% in 2009 to 3.1% in 2017, there are many indicators to suggest that things do look bright from here on.

There are a few matters to keep in mind when we discuss what needs to be done:

In the 70-80s investment in the tradable sectors led the productivity boost. Post the civil war, investment was mainly driven by mega-scale public-financed infrastructure projects, and did not seem to result in immediate productivity gains — as reforms to enable the business environment lagged.

Sri Lanka’s static export structure signifies an absence of competitive forces to drive trade dynamism, innovation, and diversification; for over two decades exports have remained concentrated on garments, tea, and rubber products with a declining share in global trade.

Introduction of para-tariffs barriers during the last decade has effectively doubled the protection rate, making the present trade regime one of the most complex and protectionist in the world. Despite operating a complex and an expensive system of tax incentives to promote investment, FDI remains low. However, over the last couple of years, efforts are being made to transition the economy from a predominantly rural-based economy towards a more urbanized economy oriented around manufacturing and services.

To that end, Sri Lanka’s new Vision 2025 sets out a course of reforms to make the country more competitive and lift the countries’ standards of living.

Structural weaknesses, limited export performance, constrained public finances and regulatory barriers to investment are some of the macro economic issues which have impa