​Assessing Sri Lanka’s legal system for investment mgt: Insights from Germany

Marie Antonia von Schönburg

Sri Lanka is currently at a critical juncture where luring foreign investors is imperative for its development agenda. However, lack of transparency and policy inconsistency has made this a rather challenging task. Mirror Business recently sat with Chief Delegate of the Delegation of German Industry and Commerce in Sri Lanka, Marie Antonia von Schönburg for an exclusive interview to gain insights on the experience of foreign investors who are keen to venturing into the island nation. Sharing insights on the impact of VAT changes, the country’s strategic location, and recent free trade agreements, von Schönburg offers valuable perspectives on how Sri Lanka can enhance its appeal to investors and promote economic growth.
Following are the excerpts of the interview: 

Foreign investors often express concerns about the investment climate in Sri Lanka, particularly in terms of transparency and consistency. Can you share your experience on these challenges?

Absolutely, the lack of transparency and consistency are significant hurdles in attracting and retaining foreign investment in Sri Lanka. The sudden policy changes, such as the increase in VAT at short notice, make it difficult for businesses to plan ahead. This affects not only foreign but also local businesses. Long-term, transparent policies are essential for fostering a conducive investment environment. Without them, it’s difficult to attract new FDIs and ensure the sustainability of existing investments.

How has the German investment community responded to the impact of VAT changes in Sri Lanka?

Despite the challenges, the German investment community remains resilient. However, the VAT increase has particularly affected sectors such as tourism, where customers buy packages well in advance. Suddenly increasing VAT rates means that tour operators have to bear the additional costs. Other sectors have also seen their budgets and sales targets affected as consumption falls due to higher prices and low purchasing power.

Given Sri Lanka’s strategic location, how competitive is the country for investors compared to its regional counterparts?

 While Sri Lanka’s strategic geographical location and well-educated workforce are advantageous, they alone are not enough to compete with neighbouring countries such as Vietnam, which benefit from favourable free trade agreements. To become a more attractive investment destination in the region, Sri Lanka needs to prioritise policy coherence. Addressing the issue of brain drain is also critical to attracting FDI, which in turn will support job creation, income growth and higher wages, thereby enhancing economic sustainability.
In addition, efforts to stabilise the currency are essential as fluctuations have been a burden on exporters.

Isn’t the appreciation of the rupee beneficial for long-term economic stability?

An appreciating rupee signals positive economic trends and long-term stability. However, while a stable currency is beneficial in the long term, short-term fluctuations can adversely affect exporters by making their products more expensive to international buyers. Balancing these short-term challenges with the long-term goal of currency stabilisation is essential for economic resilience.

Sri Lanka recently signed a free trade agreement with Thailand and is planning more with India and China. What’s your view on this?

Sri Lanka’s recent FTA signing signifies a commitment to promoting international trade and economic cooperation, and Sri Lanka should seek to sign more FTAs. At the same time, Sri Lanka should focus on attracting investment for high value-added niche manufacturing. Leveraging such agreements to position Sri Lanka as a hub for specialized and innovation-driven manufacturing can drive sustainable economic growth.

How do Sri Lankan companies fare under Germany’s new import laws, particularly with regard to labour standards?

With robust labour laws, Sri Lanka is well positioned to meet the requirements of Germany’s new import laws, with minimal adjustments required for compliance. Sri Lankan companies therefore have a competitive advantage over companies from other South Asian countries, making them attractive suppliers for German companies. Sri Lanka should use this competitive advantage to attract more FDIs into the country.

How should Sri Lankan companies diversify their exports to Germany?

 Sri Lanka should move up the value chain of its traditional export products to diversify its exports. In addition, by targeting niche industries such as organic products and leveraging its strengths in IT services, Sri Lanka can offer innovative solutions tailored to the German market. Strengthening logistics infrastructure and attracting FDIs will enhance Sri Lanka’s export capacity, drive economic growth and foster long-term partnerships with German companies.

Will you encourage German companies to invest in Colombo Port City?

Encouraging investment in Colombo Port City can be challenging, particularly as it focuses solely on attracting service-based companies. At the moment, other hubs such as Dubai or Singapore offer superior infrastructure and connectivity. In addition, German investment in Sri Lanka tends to be in industrial or manufacturing rather than services.
Despite these challenges, we are happy to promote Colombo Port City and hope that many investors will take advantage of the opportunity.

What are your views on the effectiveness of the legal system in dealing with investment related matters?

The effectiveness of the legal system in handling investment-related matters in Sri Lanka is often questioned due to perceived corruption and inefficiency. 
Despite the existence of laws, implementation remains a challenge, which may deter investors from choosing Sri Lanka over other alternatives. By addressing investors’ concerns about corruption and inefficiency, Sri Lanka is now seeking to create a transparent and predictable environment that facilitates investment and ensures the protection of investors’ rights. Continued efforts to strengthen the rule of law will contribute to Sri Lanka’s reputation as a trustworthy and business-friendly destination for both domestic and foreign investors.

Do you have any personal experiences that highlight challenges within the legal system in relation to investment?

Unfortunately, we do. A dispute over unpaid dues highlighted the inefficiencies of Sri Lanka’s legal system. Lengthy legal proceedings, spanning several years, underscore the need for reforms to speed up dispute resolution and improve investor confidence. By addressing these inefficiencies, Sri Lanka could boost investor confidence and promote a culture of trust and accountability in its business ecosystem.