As a result of world economic crisis and subsequent to ongoing debt crisis during the recent past, foreign direct investment suffered a impede as per the World Investment Report – 2012. Further this report discloses that even though world FDI flows surpassed the pre world crisis average in 2011 achieved US$ 1.5 trillion and still remained some 23 % below 2007 climax. South Asian region has achieved strong growth rate of 23% in 2011 in comparison with the previous year and however, majority inflow of FDI has recorded by India.
As of 2011 value of Gross Fixed Capital formation in private sector of Sri Lanka was 1,402, 220. During the previous five years, it has reached in the year 2011 maximum value of 1,420,220 while in the year 2004 a minimum value of 422, 061.
Annual percentage growth of the value for gross fixed capital formation in Sri Lanka was 14.59 as at 2011. During the past eight years it reached in the year 2011 a maximum value of 17.84 and in the year 2009 it has recorded the minimum value of 1.34
Political environment and other external factors contributed to the decrease of foreign Direct investment to Sri Lanka. As a result of escalation of terrorist activities and civil war in the North and East provinces as well as uncertainty prevailing in whole of Sri Lanka and also due to the East Asian currency crisis this sector was severely affected. After the recovery in 1990s FDI inflows was severely affected by the Islamic terrorist attack on the World Trade Centre of United State of America on the 11th September 2001. Further it impacted the terrorist attack on one and only international Airport in Sri Lanka by the Tamil terrorists in the same year. After the year 2002 it was visible a favourable condition after signing the peace agreement with LTTE by the then Sri Lankan Government. However, LTTE withdrew from negotiations and the government took the decision to wage war against terrorist again in the year 2005. It shows there is a steady growth in FDI inflow during 2003 – 2010 periods. After crushing the tiger rebels in the year 2009 May by the Sri Lanka Armed Forces Sri Lanka attracted significant inflow of foreign direct investment.
In the year 2011 as per data of Central bank of Sri Lanka FDI net inflow percentage of GDP was 1.62. In the year 2007 highest value recorded of previous 10 years which was 1.86. In the year 2011 FDI outflow percentage of GDP was 0.10. In the 2007 it is recorded as 0.17. In inflow and outflow there is no big difference in post war period. As such, it was not the only factor which affect foreign direct investment.
In comparison with the previous year in the first quarter of year 2013 the gross domestic Product has expanded by 6% in Sri Lanka. This is as per the report of the Department of Census and statistics of Sri Lanka. Average growth rate of Gross domestic product has been 6.42% until 2013 beginning with 2003. It has reached 8.60% the highest in the year 2010 in the month of December. And lowest being 1.50% in the year 2009 in the month of March. Sri Lanka is a developing country in the Indian ocean and despite the fact of three decades of terrorist disturbances and civil war but in the recent years country has recorded a strong growth rate. Tourism, Export of tea, garments and rice production are the major segments of the economy of Sri Lanka.
Sri Lankan economy has grown remarkably at a rate of 6.4% in the year 2012 and meantime inflation was retained at single digit in fourth consecutive year in spite of world economic crisis and local political and other challenges as per the Annual Report of 2012 issued by the Central Bank of Sri Lanka.
On the backdrop of improving world economy, Sri Lankan economy too had dragged out of the setbacks and has displayed continuous expansion in the year 2010.Overall gross domestic product growth was due to the progress in industries and services. However, the resources based sector remained unstable as a result of seasonal trends. The post civil war conducive environment contributed towards the economic growth with more positive consumer reaction and investor confidence was growing. Industry players have confidence in activities which also is remarkable in the wake of the economic bounce back of Sri Lanka’s main business partners in the South Asian region.
In spite of tea production decreasing 4.3% in the year 2012 taken as a whole agricultural segment was reasonably sturdy as per one of the economic Analyst Report. At the first quarter of year 2011 paddy field were devastated as a result of floods in the Eastern and North Central provinces and paddy production was 35.5% during this period. Meanwhile fish production too had shown an increase of 9.7 percentage.
Even though peace and stability is in Sri Lanka from 2009, foreign direct investment has not been increased substantially according to the Central Bank reports. In the first quarter of the year 2013 Sri Lanka has received 218 million US dollars worth foreign direct investments and the target for the whole year was two billion US dollars.
§ 37 projects – more than one million US dollars
§ 144 projects less than one million US dollars
Countries from which FDI came were UK, Australia, Canada, Northlands, India, Singapore, Taiwan and Virgin Islands. Reports indicates that applications have been received by the Board of Investment in Sri Lanka more than 300 million US dollars which were worth 5.0 billion US dollars. Government should take speedy action to give approval as it took two to five years for the FDI to flow into Sri Lanka. Sri Lanka received 1,338 million US dollars in Foreign Direct Investment in the year 2012. It is more than 1066 million US dollars in 2011 but the target was 2.0 billion.
Sri Lankan industry sector is mainly represented by he export oriented garment industry , the manufacturing sector show a 6.5% growth rate in the year 2012 driven by powerful private consumption. On the other hand declining demand in main exports markets such as European Union and United States of America together with a less than competitive labour market has resulted a decrease in manufacturing and production and loss in magnetism in relation to other low cost competitors like India, Bangladesh and Cambodia. However, Sri Lankan Government had offered attractive incentives for the investors to come to Sri Lanka targeting modernizing the below par garments industry yet still too early to see the outcome of those decisions.
In the year 2012 it is recorded an expanding of 17.9% in the construction sector and this is a remarkable achievement on the backdrop of sustained rebuilding and capacity building endeavors. This is due to large scale ports and transportation deals Sri Lankan government specially had with China. The higher interest rates are dubious to discourage construction since private sector partaking in large scale projects are limited by a restraining public and private sector partnership structure.
After three decades of civil war Sri Lankan tourism sector has been progressing rapidly since the year 2009. In post war economic growth tourism is the bright beam and the Sri Lankan government is banking on the tourism industry to boost public expenditure and make foreign direct investment numbers look more remarkable yet there is still much to carry out prior to two aspects of tourism and FDI synergize in order to create sustainable development. Tourist arrivals and earning of foreign exchange has shown flexible against external crisis. Revenue of tourist hotels and restaurants are increasing at higher rate and the Sri Lankan Government is targeting UDS$ 400 million FDI inflow for this sector.
In 2013 month of April exports of Sri Lanka dwindled to US$ 696.60 million . It was in March 2013 US$ 837 million as per the reports of Central Bank of Sri Lanka. During the period of 2003 to 2013 export average US$ 1516.10 million. Highest recorded US$ 2720.80 million in March 2011 while lowest US$ 696.60 in April 2013. Garments consists 40 percent of the total exports and 17 percent is the tea which is the second largest. Spices, gems, coconut products, rubber and fish other exports of Sri Lanka and major buyers from Sri Lanka are United States of America, Germany, Belgium and Italy as per the Central Bank reports.
In 2013 Currency expected to appreciate 1% – 3% on average to a range of US$/LKR 125 – 130 according to one of the economic analysts. In 2013 March Foreign exchange reserves of Sri Lanka dwindled to Sri Lankan Rs. 848576.40 million. From 1975 to 2013 FER of Sri Lanka averaged SL Rs. 145694.16 million. Highest was SL Rs. 935700.20 million recorded in July 2012. The reserves are made of a specific currency or Gold. Foreign exchange Reserves can be special drawings rights and securities denominated in foreign currencies such as treasury bills, corporate bonds , government bonds, equities and loans in foreign currency.
During the past few years it was visible post war huge development of infrastructure in Sri Lanka. Ports, road networks, rail lines, irrigation, energy and water supply are areas of development bears evidence the continuous dedication in order to improve the economic infrastructure in Sri Lanka. The Mattala International Airport, Hambantota Harbour Project, Highway projects, Magam Ruhunupura Port, Southern expressway, Colombo – Katunayake expressway, Northern Province railway extension line up to Jaffna were other mammoth projects of development of infrastructure during the period of 2012. In the year 2012 public investment on economic and social infrastructure development amounted to Rs. 388 billion which is 5.1% of GDP.
Economy of Sri Lanka is facing key challenges of deliberate growth and high rate of inflation had given a nod for monitoring of post program according to a review made by the Executive Board of the International monetary Fund. In 2012 the International Monetary Fund rescued Sri Lanka by granting US$ 2.5 billion for two balance of payment crisis situation occurred by contradictory exchange rate and monetary policies. Authorities endeavour to cut current state expenses which is appreciated by the IMF. In 2012 revenue to GDP had fallen to 13% and it is necessary to increase it. During the past, taxes collected from the public had been busted on current spending specially the expansion of state workers handouts to politically powerful special interest groups and also mismanaged and corrupted state enterprises have been cautioned by economic analysts. There are relative low by most metrics and encouraged strengthening the reserve position as circumstances permit and foreign reserves should also should be built according the IMF. Banking sector of Sri Lanka appears stable and was in progress and in strengthening regulations and called for vigilance following recent high credit growth according to the IMF.
In the year 2009 end of the insurgency and peace has dawned in Sri Lanka. This has led to much expectation of higher Foreign Direct Investment. However, this has not been realized except hospitality and leisure sector in Sri Lanka. Merely enlarging Foreign Direct Investment is not adequate and the increase should be in key areas such as industries production and manufacture. There is no doubt the necessary factor to attract higher levels of FDI are consistent macroeconomic policies, good governance, consistent market friendly policies, healthy economic indicators, guarantee of property rights and the rule of law.