By Rohan Parikh
It is no secret that Sri Lanka is facing unrest and great pressure at present. From the COVID-19 pandemic to today’s economic situation, Sri Lanka has persevered through it all. As an island nation that can tackle any and all challenges thrown at them with pure resilience, Sri Lanka is now in dire need of foreign investments.
Sri Lanka faces a challenging macroeconomic situation. There are a combination of options that are contrary to each other when facing this challenge and understanding how to mitigate through them, while resolving them will require some difficult decisions.
The construction industry presents an array of issues that a foreign investor will directly look into in their consideration of the country as the ideal spot for their investment. We can see that nearly 3/4th of construction sites in Sri Lanka have currently been halted due to varying reasons from the ever-rising cost of raw materials to the unavailability of essential goods due to import restrictions and the ongoing forex crisis. This results in a massive blow to the labour market as construction sites employ large numbers of labourers.
It also impacts a huge amount of local suppliers of the hundreds of items needed for construction from doors, windows, steel, locks, tiles, glass, wood, and more.
Real Estate is an infrastructure asset and adds to the wealth and asset base of the nation and enables the creation of a stable middle class and secure working class. Key aspects to economic growth. Thus it is critical to get the real estate industry moving again. To achieve this it will be critical to make Sri Lanka an attractive destination for foreign investment.
There are two major tools that the leaders of the nation have in their belt:
Financial incentives: Now, more than ever, it is critical that foreign investment in real estate be tax exempt. This exemption was mistakenly removed several years ago (while taxes on domestic industries were disastrously slashed). The lack of tax benefits to foreign investors led to a slowdown in future projects funded by foreign exchange and thereby an impact on forex inflows.
Simultaneously, the tax cut on local companies led to a draining of the state budget leaving the country extremely vulnerable to a shock like COVID. It is hoped that strong financial incentives are put in place to attract foreign investors back to Lanka. Without these markets like India, Pakistan, Thailand, Dubai will always seem like better avenues for investment.
Policy clarity: It is important for foreign investors to perceive the country as having a stable regulatory environment. The period from 2016 to 2018 saw a lot of sudden changes in policy and processes that resulted in a great amount of uncertainty and trepidation amongst foreign investors.
This needs to be avoided during any change of administration as it does long term damage to the country’s reputation amongst investors. Just as an example, the rule on VAT and NBT was changed 3 times in the space of a year during that period.
Protection of investors: A foreign investor must be made to feel welcome and safe. Here, despite the efforts of an overwhelming majority of forward thinking leaders and bureaucrats, a small minority can do a lot of damage.
In my own case, we were hounded and harassed by a certain Member of Parliament without cause, and were slandered in an extremely unfair and untrue attack in a local paper. We were attacked for being a foreign company and we lost a lot of business due to this slander. This frightened our staff and made many of our investors decide not to invest in Sri Lanka again.
I am happy to report that in the end the legal system in Sri Lanka came to our rescue and the courts passed an order protecting us. In the end we survived, shaken but still resolute in our commitment to Sri Lanka. Unfortunately, not all foreign investors have that kind of resolve, especially when there are other markets that offer more welcoming access. The solution here is to empower the Board of Investment with real powers to tackle such roadblocks and to protect foreign investors.
I have been investing in Sri Lanka for over 15 years now. We were the first company to invest in Sri Lanka once the war ended. I have seen the resolve and strength of the nation and I am confident that this crisis will pass. I hope that we are able to learn from the crisis and come back better and stronger.
(The writer is the Chairperson of Iconic Developments and an alumnus of the Wharton School of Business and INSEAD)