Opinion: Economic Priorities in Sri Lanka’s Foreign Policy

By Deshal de Mel Context Sri Lanka is a small island economy with a population of 20.9 million and an economy of GDP US$ 82 billion (which is less than Apple’s 2015 gross profit of US$ 89 billion). Sustained growth of enterprise requires economies of scale, which in a country of Sri Lanka’s size, necessarily entails penetration of markets beyond its shores. Expanding trade and foreign investment therefore becomes a key aspect of Sri Lanka’s economic development strategy. Sri Lanka’s recent economic history has taken a different path, with export intensity declining from 33% of GDP in 2000 to 12% of GDP in 2015. At the same time, FDI has declined to around 1% of GDP, indicating a regression in Sri Lanka’s global economic engagement. Sri Lanka has also failed to significantly change its diversity and complexity of exported products – with 60% of export value, still derived from apparel and tea. Sri Lanka is no longer a low cost manufacturing destination, and therefore finds it difficult to compete on price with countries such as Bangladesh and Viet Nam. However, Sri Lanka also lacks the product sophistication (on a large scale) to compete with countries such as Thailand and Malaysia. Sri Lanka’s export objective ought to be to shift towards products and services that have a higher embodiment of value and technology, which would entail not competing only on labour price arbitrage. Furthermore, value chains need to be further explored by moving beyond the manufacturing stage of production and into realms both backward on the value chain (such as product development, design, R&D, machinery and equipment development etc) and forwards (packaging, marketing, branding etc.). This would automatically diversify exports earnings beyond goods and further into services as well. Sri Lanka’s exports markets also remain dominated by exports to Europe (28.8%) and the US (26.7%). Globally however, economic dynamism has shifted to emerging markets in Asia. Attracting export oriented FDI would be one way to penetrate new markets since this would help obtain the appropriate technology and distribution channels to penetrate new markets and develop new export products. Foreign Policy Dimensions The economic agenda of foreign policy should encapsulate strategy and activities in promoting Sri Lanka’s interests in; · Trade of Goods & Services · Foreign Investment & Capital Markets · Economic engagement with Non-resident Sri Lankans with a view to positioning Sri Lanka as a fulcrum for trade in goods and services in the Indian Ocean, leveraging its strategic logistical location at the mid-point of east and west Asia. Sri Lanka should endeavor to regain its historical legacy as a liberal, trading economy, open to economic engagements with all partners within a transparent, rules based multilateral trading system. Trade in Goods & Services 1) Position Sri Lanka as a location for production of high quality, authentic, and sustainable manufactured goods, agricultural products, and services, with a view to developing a global reputation for this through consisting messaging across several channels. This would be through proactive engagement in target countries such as relevant industry associations, events, targeted company visits, public engagements, and other interactions with relevant stakeholders. 2) Support Sri Lankan enterprise to identify and gain access to new markets. Sri Lankan embassies should build networks and relationships in target countries with relevant business channels such as industry associations, distribution networks, procurement arms of target companies, regulatory bodies, government agencies, for sectors of current and future business interest to Sri Lankan exporters of goods and services. To achieve this end, it is necessary for commercial sections of embassies to have the relevant resources, appropriate training, and importantly regular and structured engagements with Sri Lankan exporters of goods and services. 3) Particular attention would need to be paid to key sectors such as tourism and logistics. In tourism for instance Sri Lanka would need to develop consistent messaging positioning Sri Lanka as a unique destination for authentic experiential tourism. This would be one sector where Sri Lanka has clear comparative advantages and significant growth potential. A positioning strategy is being developed at SLTDA and foreign policy would play a crucial role in helping market this. The same applies to logistics – another sector of comparative advantage but without the necessary positioning and promotion. In this case it would be necessary to work with the BOI in positioning this sector effectively as a unique selling point from an investment attraction perspective – for example through effective marketing of the commercial hub regulation of 2013. Examples of successful industry-wide positioning include the apparel sector and IT/BPO – led by their respective industry bodies. Foreign policy can support such efforts and promote similar initiatives by other sectors/industries of export interest. 4) There is an urgent need for technology transfer and research collaboration with technology leaders in other countries. A key objective of foreign policy should be to facilitate such collaboration with Sri Lankan enterprise and research bodies. For example, there is significant technological capacity in Israeli agriculture – which could have great value if applied in Sri Lanka, either through FDI or direct engagement with research bodies. 5) Support Sri Lankan enterprise in its engagements with foreign governments and regulatory bodies and help advocate on behalf of Sri Lankan business interests overseas – be it in trade or investment. 6) Sri Lanka would also need to enter into trade agreements with target markets in order to create a robust, rules based institutional framework under which trade can occur. Sri Lanka’s broad policy on global trade should be towards furthering a strong rule based multilateral global trading system – but in the absence of which, entering into strategic bilateral and plurilateral trade agreements with economically significant trade partners. Ideally, such agreements should be comprehensive in nature, dealing with trade in goods, investment, and services. Key countries/groupings to consider in this regard would be ASEAN, Japan, Bangladesh, Turkey, Iran and South Korea. This is of course in addition to continuing to pursue agreements with India and China. Such agreements must take place in a spirit of transparency and consultation. Foreign Investment & Global Capital Markets Investment is multifaceted and encompasses FDI, portfolio investment (equity and debt markets), investment in public infrastructure through PPPs, and bilateral credit lines/concessional funding. FDI – Sri Lanka has hitherto taken a largely passive role with regard to FDI. It is necessary to change this to an active role, where in conjunction with the BOI, it is necessary to proactively target large global companies that might have an interest in setting up in Sri Lanka and present a case for investing in Sri Lanka to them. For example, a good starting point would be global multinationals that have large scale operations in southern India, where certain segments of operation that could take place in Sri Lanka are identified and presented to the relevant decision makers in the company, backed by objective factual evidence such as lead times, logistical costs, operating costs, talent availability, and natural resource opportunities if any. Sri Lanka should particularly target companies that have potential for technology transfer. Location and logistics is Sri Lanka’s biggest comparative advantage and Sri Lanka should target companies that need Just in Time logistics such as FMCG companies that require quick access to the Indian sub-continental markets, companies requiring multi-country consolidation and freight forwarding targeting both East and West Asia (considering competing logistical hubs such as Singapore, Port Klang in the East and Dubai in the West – whereas Colombo is strategically positioned at the mid-point), among others. The Commercial Hub Regulation Act of 2013 creates the policy framework to enable logistics businesses such as entrepot trade, multi-country consolidation and warehousing and so on, however the utilization of this has been limited, and a pro-active effort to persuade companies to use Sri Lanka for its logistical advantage could address this. Portfolio Investment – Being a middle income nation, Sri Lanka would necessarily have to continue its shift away from reliance on concessional financing and would rely more on global capital markets to finance investment. This entails a lot more maturity in communication of economic policy and strategy. For example – proclamations by the government regarding hidden debt burdens from the previous administration might be attractive from a domestic political standpoint – but this kind of statement spooks global markets and creates uncertainty among global investors in Sri Lanka’s equity and debt markets. Furthermore, global markets will not tolerate regular economic policy reversals and different entities in government giving conflicting statements on matters of economic policy. It is recognized that a coalition government entails ideological differences and compromise – such compromise should be reached between the relevant parties through internal consultation and debate. However, when entering the public domain, the government should speak in one voice on crucial matters such as economic and foreign policy. It was these issues, along with the failure of the November 2015 budget to realistically address fiscal issues, which constrained Sri Lanka’s access to global capital markets, driving up local interest rates and thus costs of investment, and forced the country to once again revert to the IMF. The global communication of macroeconomic policy issues becomes part of the foreign policy mandate – and the Ministry of Foreign Affairs should champion the cause of delivering consistent messaging on economic policy issues with sensitivity to the sentiments of global markets. Investment in Public Infrastructure and Bilateral Credit – Given Sri Lanka’s current fiscal constraints, a major role in the development of the country’s infrastructure would have to come through Public Private Partnerships (PPPs), the scale of which would necessarily entail foreign participation as well. The previous regime focused on a China centric partnership for such infrastructure development – this was characterised by a lack of transparency and related allegations of graft, along with exclusion of local enterprises and labour. Sri Lanka should now re-balance these partnerships for such investment in public infrastructure to include other countries, particularly India, the US, East Asia, Europe, and ASEAN (and without excluding China). The key change should be that such engagements must be on the basis of robust, transparent, rules based frameworks for investment, which encourages participation of local enterprise and labour. Sri Lanka should not “offer” its infrastructure development investment opportunities to score diplomatic points, but these should be on the basis of competitiveness and fairness, with a view to obtaining the best possible outcome for the specific infrastructure requirement. Economic Engagement of Non-Resident Sri Lankans Expatriate Sri Lankans could play an important role in contributing to Sri Lanka’s economy through investment, access to networks for trade, remittances, and as informal ambassadors of Sri Lanka’s economic narrative in their resident countries. An illustrative example of this is the role played by non-resident Indians in California’s Silicon Valley in the development of India’s IT hub in Bangalore. The potential for using Sri Lanka’s expat community to develop trade and investment networks has not been fully utilized. A key foreign policy objective should be to help organize overseas Sri Lankan business professionals, enterprise owners, technology leaders, and others influential in the corporate sector, into formal networks. An example of this is Advance, a network of Australian professionals living and working overseas. A similar network of overseas Sri Lankan professionals could enable Sri Lanka based enterprises to engage with these networks to help explore and develop linkages with requisite business channels in those countries. For instance, a Sri Lankan exporter wanting to connect with the procurement department in Walmart, may have a better chance of linking to the correct person and executing a transaction if she can obtain an introduction through an expat Sri Lankan who happens to work for Walmart in a senior position. At present, exporters in Sri Lanka rely on private networks to obtain such connections, whereas a formal network of this nature, facilitated by the Ministry of Foreign Affairs, could help a multitude of export companies in Sri Lanka. Steps could also be taken to facilitate the return of expat Sri Lankans to the country to contribute to the economy through investment and by joining the labour force. However, there are barriers to this process, such as spouses being unable to work without a separate work permit, and continued uncertainty over issues such as land ownership. An important objective of foreign policy should be to engage expat Sri Lankans through better information regarding Sri Lanka’s economy and related opportunities, to foster better understanding. This could help Sri Lanka’s expats to act as informal ambassadors of Sri Lanka’s economic opportunities narrative to the outside world. Remittances continue to be a major source of external sector stability for Sri Lanka. However, the rights of temporary migrant workers, particularly in the Middle East, are often violated. A key objective of foreign policy should be to better protect and enforce the rights of Sri Lankan workers overseas. (– Deshal de Mel is the senior economist at Hayleys Group. Prior to joining Hayleys, he worked for the Institute of Policy Studies. He has a degree in Philosophy, Political Science and Economics from the University of Oxford, UK, and a Master's in International Political Economy from the London School of Economics, UK. Read his blog at https://deshald.wordpress.com –)