SL'S public investments, FDIs lagging behind peers

Despite government investments in the economy increasing as a percentage of GDP as well as in absolute terms during 2012, the International Monetary Fund (IMF) points out that Sri Lanka’s public investment is low compared to countries that have experienced sustained high growth.

“Fiscal consolidation in the context of revenue weakness has resulted in low investment plans, and recent shortfalls relative to those plans,” IMF Staff stated in their country report.

Public investments increased by 28 percent to Rs.525 billion in 2012 improving its share of GDP to 6.9 percent from 6.3 percent in 2011. The government reiterated its stance on capping its share of total investments which peaked to 30.6 percent in 2012 to 6 percent of GDP to pave way for the private sector to play a leading role.

The government strives to achieve gross investments above 33 percent by 2016 in a US $ 100 billion economy.

Data compiled by IMF showed emerging Asia’s relatively strong government investment multipliers, indicating t hat increased infrastructure investment to remove bottlenecks and broaden growth is important if the authorities’ ambitious growth objectives are to be realized (Graph 1).

Meanwhile Foreign Direct Investment (FDI) inflows too remains anemic compared to the peers though authorities boast of attracting US $ 1,338 million, highest ever inflow for a year in 2012 (Graph 2).

 “Tax holidays and concessions have not delivered the expected increase in FDI inflows,” opined IMF, urging the authorities to reduce and revise tax holidays and exemptions, which have undermined revenues but failed to enhance FDIs.

IMF further pointed out that Capital account flows have been rather disappointing, as the large FDI inflows predicted at the end of the conflict are yet to materialize.

Meanwhile the Central Bank expects FDI inflows to improve over the medium term from the current level of 2.3 percent of GDP to 4 percent of GDP by 2016.

From total FDI inflows last year, US $ 305 million or 22 percent consisted of short-term capital to the Colombo Stock Exchange which has the risk of being pulled out.

A leading professional on Risk Management & Strategy, Felix Stephen pointed out at a recent forum of the significance of introducing instruments such as infrastructure bonds and facilitating investment in properties which could lock in FDIs for longer periods.