Sri Lanka's movement toward market economy offers unexpected investment opportunities

Business America, Feb 25, 1991

Sri Lanka's Movement Toward Market Economy Offers Unexpected Investment Opportunities

For centuries Arab sailors referred to Sri Lanka as the "Land of Serendib." Hence the English word "serendipity:" finding something of value unexpectedly. Despite recent political upheavals and 20 years of flawed socialist economic policy, many investors believe Sri Lanka is now becoming a market of "unexpected value" for foreign investment. Nearly 200 foreign firms have set up shop in Sri Lanka, investing more than one billion dollars.

While the movement toward a more market-oriented economy began a decade ago, the past few years have seen economic reform gather momentum. Sri Lanka has moved to reform its tax structure, phase out subsidies, and lift price controls. The government has also taken steps to liberalize foreign trade. Tariffs have been lowered, from as high as 500 percent to a current maximum of 50 percent. Many tariffs are already well below the 10 percent mark, and the government plans to reduce the maximum tariff to 35 percent within two years.

Ironically, although the United States is its largest trading partner ($449 million in 1989), Sri Lanka's progress toward an open economy has gone mostly unnoticed here. There are, of course, notable exceptions: Pfizer, GTE, and Union Carbide all are manufacturing products there. GTE recently opened a fluorescent light assembly plant in one of Sri Lanka's two Export Processing Zones (EPZs), employing a thousand workers and producing more than 25,000 lamps per week for export to Europe.

Nonetheless, while over 40 U.S. firms are represented in Sri Lanka, it has primarily been investors from Asia Pacific countries who are investing there. Australia, Hong Kong, Japan, and even Korea--have invested in a total of more than 70 enterprises there, producing a broad range of products from footwear and textiles to electronics and computer software.

The reasons for this influx of foreign investment are several: labor costs in Sri Lanka are among the lowest in Asia, while labor productivity is one of the highest among developing countries. The workforce is not only inexpensive, but also well-educated. Sri Lanka boasts a literacy rate of nearly 90 percent and much of the workforce speaks and reads English--a holdover from the days of British rule. The judiciary is also based on the British model.

Sri Lanka's economic progress over the past decade would have been greater had it not faced some daunting political problems. For much of this period, Sri Lanka was beset by a Tamil separatist movement in the north and, more recently, by a Maoist style insurgency in the south. By December 1989, however, the southern insurgency was put down. And, although the government remains engaged in defeating the separatist forces in the northeast, the economy is expanding and the government is more focused on economic reform and development. Foreign investment is accelerating, tourism has rebounded, and the GNP registered a 5 percent rate of growth for 1990--despite the heavy costs associated with the Gulf crisis, including increased petroleum costs, diminishing tea exports, and reduced remittances from workers in the Gulf.

Steps taken by the Sri Lanka government to attract capital and technology are significant, among them the export processing zones first established in 1978. Katunayake, adjacent to the international airport, is virtually filled, while Biyagama, located 16 miles from the Port of Colombo, is operating at 55 percent capacity and is expected to be filled within two years. Together they contain more than 130 firms from 25 different countries manufacturing everything from artificial flowers to fine porcelain to magnetic tape heads. Since the two EPZs are insufficient to accommodate the increasing number of foreign firms, plans have been drawn up for a third EPZ near the Port of Galle, along Sri Lanka's southern coast.

The government of Sri Lanka also has taken steps to make Sri Lanka a major South Asian transshipment hub. Heavy investment during the eighties has made the Port of Colombo the most modern and efficient containerized port between Singapore and the Persian Gulf. Since 1979, the transshipped cargo has risen from less than 20,000 tons to more than six million tons. Sri Lanka is also developing the Port of Galle in the south, and modernizing the Port of Trincomalee in the north which contains one of the best natural harbors in the world.

Additionally, the government of Sri Lanka is actively seeking foreign partners for state-owned enterprises. Last year, six state-owned companies were privatized; this year the government plans to sell two dozen more. Among the corporations to be sold are textile mills, hotels, and plants in a variety of industries, including cement, plywood, tires, ceramics, leather, mining, paper, mineral processing, and chemicals. While the rules are not hard and fast, most state corporations are being offered on a 60/30/10 percent formula: 60 percent for the foreign purchaser, 30 percent offered to the public through the sale of shares, and 10 percent reserved for the employees. The most recent sale involved Ceylon Oxygen, a producer of industrial and medical gases and cryogenic liquids. Purchased by a Norwegian firm, Norsk Hydro, the new purchasers are already planning to expand their operations.