Sri Lanka faces worsening fiscal policy and investment risks as conflict intensifies

May 05, 2007 (LBO) – The use of air power by Tamil Tiger guerrillas has raised the stakes in investing in Sri Lanka and prospects of higher defence spending is increasing fiscal risks, analysts said. Sri Lanka needs fiscal discipline and increases in turnover based value added tax (VAT) rates and its base to solve budget problems. But critics point out that in the past authorities have instead tended to increase the budget deficit and contributed to de-stabilizing the economy.

Tiger air strikes on April 29 hit the petroleum storage facilities partly owned by two multinationals in the island, Shell and the local unit of Indian Oil Corporation, although they were not seen as specifically aimed at the foreign firms.

Investment

"The more direct impact is on tourism and possibly insurance, if war-risk premiums are imposed for airlines and shipping," said Channa Amaratunga, Chief Investment Officer of Boston Capital Ltd.

"It could also affect foreign direct investment."

This may mean the government is unlikely to meet its very ambitious new target of raising four billion dollars in foreign direct investment this year with 2006 having brought only got 604 million dollars.