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Sri Lanka needs to shift from a public investment, non-tradable  sector-driven growth model to a private investment, tradeable sector-led model, to sustain its growth, strengthen its structurally weak current account and reduce poverty, a World Bank (WB) report indicated.

Released last week, ‘Sri Lanka Development Update’ also emphasized on the need to enhance the effectiveness of Board of Investment (BOI) as a ‘one stop shop’ for foreign investors. At the same time, the document harped on the importance of strengthen BOI’s investment attraction capabilities by adopting modern tools and techniques in sector targeting, investor outreach, and investor facilitation, as well as to strengthen investment retention capacity through a variety of ‘after sales services’ for existing investors as in Malaysia.

“It is important to address regulatory barriers to FDI, including FDI in backbone services, which are also critical for competitiveness of manufacturing exports. The new performance-based incentive regime, rewarding actual rather than intended investment, included in the draft Inland Revenue Act is expected to be more efficient at attracting FDI than the current regime based on tax holidays, which has not attracted sufficient FDI and benefitted mainly firms in the non-tradable service sector with limited impact on employment. Most importantly, there is a need to ensure coherence and coordination between investment policy and trade policy with a clear indication of future policy direction—one of the goals of the new trade policy framework,” the report noted.
World Bank said that adopting a ‘piece-meal’ solution to address the challenges is unlikely to be successful.

“GoSL needs to recognize that its policies and behaviours play a critical role in shaping the investment climate in Sri Lanka. In this context, a well-defined framework covering set of initial reforms that will be pursued, the timeframe for accomplishment of the reforms expected, the roles and responsibilities of all relevant stakeholders and a mechanism to monitor progress on an ongoing basis and promptly identify and address bottlenecks are essential to lead reforms going forward. It is clear that investment reform is a cornerstone of meaningful and long-term growth; it attracts investment that generates employment opportunities, provides access to knowledge capital, and plays a significant role in formalizing the informal sector in Sri Lanka’s economy.”

In addition, the report also indicated that the immediate challenge facing the country would be to deal with the weak external liquidity position which is mainly due to significantly large Eurobonds falling due starting 2019.

“Rather than waiting until then, the Government can start to actively manage these liabilities now, while financial conditions are still relatively benign. This can be done by buying them back ahead of their maturity, and switching them with longer maturity bonds, which will reduce the refinancing risk. This will require a change in the legal framework to allow for liability management operations,” WB said.