UNCTAD forecasts slow recovery in FDI inflows to Sri Lanka

• This is despite expected growth of FDI inflows to South Asia 
• FDI inflows to SL fell 43% in 2020 to US$ 434mn
• FDI inflows to South Asia grew 20% in 2020
• Pandemic, structural impediments and policy inconsistency identified as key reasons for lower FDI inflows

The United Nations Conference on Trade and Development (UNCTAD) expects a slow recovery in foreign direct investment (FDI) inflows to Sri Lanka after FDI inflows to the country contracted by a sharp 43 percent Year-on-Year (YoY) in 2020, mainly due to the pandemic. 

In 2020, FDI inflows declined to one of the lowest levels seen in recent years, as the country was only able to attract US$ 434 million in FDI inflows compared to US$ 758 million in 2019 and the peak of US$ 1.6 billion recorded in 2018.

However, FDI inflows to South Asia rose by 20 percent YoY to US$ 71 billion, driven mainly by 27 percent rise in FDIs to India amounting to US$ 64 billion. Sri Lanka, Afghanistan and the Maldives saw steep declines in FDI inflows in 2020.

Although, FDI inflows to Asia, including South Asia, are expected to increase in 2021, outperforming other developing regions with a projected growth of 5–10 percent, UNCTAD noted that it wouldn’t be the case for Sri Lanka.

“In Bangladesh and Sri Lanka, FDI inflows will take longer to recover, as investment commitments in these countries remained weak,” the UN agency said in its World Investment Report 2021 published this week.

It pointed out that greenfield investment projects, which are considered to be an indication of FDI trends over the next few years declined by 96 percent YoY in 2020, a worrying sign for Sri Lanka’s future FDI prospects. 

“This contraction is due to weak investment interests in garment production, a major export industry and FDI recipient in these countries. Investment in, and production of, garments suffered severely in 2020, with no sign of recovery as of early 2021,” the report stated.

Meanwhile, in 2020, Sri Lanka’s FDI outflows contracted to US$ 15 million from US$ 77 million in 2019. Overall, the country’s FDI inward stock increased to US$ 12.8 billion at the end of 2020.

The Central Bank (CB) blamed the prevailing structural, institutional and policy impediments for the country’s failure to attract sizeable FDI inflows, which has caused the country to excessively rely on external borrowings to bridge the gap between savings and investment.

“There are several areas Sri Lanka should improve in order to attract high levels of FDIs in the future, including the establishment of a coherent investment policy, enhancing efficiency seeking FDIs as well as market seeking investment, establishment of investment legislation on par with international best practices, labour and land market reforms, developing a monitoring and evaluation framework, improving investment promotion activities, effective management and development of economic zones, establishing an effective mechanism to address investor grievances, and systematic evaluation of the effectiveness of investment incentives,” the CB emphasised in its recently published annual report.

Further, policy inconsistency was also blamed for the low level of FDI flows into the country.

In 2018, Sri Lanka attracted the highest FDI inflows in South Asia behind India, Pakistan and Bangladesh.  
The government expects significant inflows of FDI to China-backed Colombo Port City project, which aims to become a financial hub in the region. 

Recently, the Sri Lankan Parliament enacted the Colombo Port City Economic Commission law facilitating required legal framework for the multi-billion-dollar project.