Sri Lanka debate: Reform-driven Sri Lanka puts trade on the agenda


Elliot Wilson
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Sri Lanka’s focus on reforming and liberalizing its economy is bearing fruit, with the country signing new free trade agreements and posting record exports and growth figures. The government is keen to sell down state assets and position the island at the heart of Indian Ocean maritime trade.


Published in association with

Ministry of Finance,
Sri Lanka

Learn about the debate participants


• Sri Lanka focuses on economic reforms, divesting non-core assets in sectors including banking and empowering private enterprise

• Free trade agreements will spur growth of the manufacturing base and integrate Sri Lanka further into Asian supply chains

• The government aims to make it easier for foreign investors to put capital to work in key industries

• Sri Lanka is on track to become the focal point of maritime trade in the Indian Ocean

• New reforms and acts are helping to stabilize the economy, boosting tax revenues and ensuring long-term fiscal stability

• Record FDI and export figures show Sri Lanka, nearly a decade after the end of the civil war, is on the right track

• Colombo’s International Financial City will be a great place to locate regional headquarters, for firms and financial institutions from across the world

Elliot Wilson, Euromoney: Sri Lanka is performing very well – but what can take the economy to the next level?

Mangala Samaraweera, minister of finance and mass media (MS, FM) When this government took over in 2015, the economy was, for various reasons, locked in a pro-state and anti-privatization mindset. But we changed that, starting work on a three-pillar policy of democracy, reconciliation and development. 

Sri Lanka before was almost veering away from democracy. We put an end to that. Today, Sri Lanka is one of the most democratic countries in our part of the world, with a strong print media and independent courts. The rule of law has been restored. And the current government has made reconciliation one of its main policy pillars – and that too is working, after nearly 35 years of war. And we have again reignited the reform process. 

We are fast-tracking the liberalization process, systematically divesting non-strategic state assets and empowering private enterprise, and the economy is in a healthy state. We have laid a strong foundation for the future we deserve and the one we want. 

P Nandalal Weerasinghe, deputy governor, Central Bank of Sri Lanka (PNW, CBSL) Sri Lanka is a small economy, so our focus has to be on opening up to the rest of the world, becoming a more investment-friendly and open market. That’s why the key will be to liberalize sectors, one by one, encouraging more foreign capital to come and be put to work. Look at what we’re doing: land reforms, labour market reforms, free trade agreements. We have had a huge fiscal imbalance for 35 years, but that is being resolved. We posted record exports in 2017, while the IMF sees growth rising toward 5% and the current account deficit shrinking to 2% by 2020. We were constrained and closed for so long; now we are opening up, becoming a regional trading hub. We don’t have a ton of natural resources, but we have ample human resources and a great geostrategic location.

Shiran Fernando, chief economist, Ceylon Chamber of Commerce (SF, CCC) We are more stable than we have been for years, but how we move forward from here is very important. We are breaking the cycle of boom and bust, getting our finances in good shape and showing foreign investors that we are a great place to put money to work. 

RHS Samaratunga, secretary to the finance ministry and secretary to the treasury (RHSS, FM) We are updating legislation to cater to a modern economy. The ministry is now drafting new customs and excise legislation, which is now almost ready to go to cabinet and parliament. We aim to divest a certain percentage of shares in our two leading, state-run banks, Bank of Ceylon and People’s Bank. The Inland Revenue Act implemented in April will help foster innovation, encourage entrepreneurs, and boost the direct tax revenue take from 18% now to north of 40%. 

Mark Prothero, CEO, Sri Lanka and Maldives, HSBC (MP, HSBC) Sri Lanka is a relatively small, $80 billion economy, with close to 21 million consumers. Domestic trade alone would be insufficient to achieve higher and more sustainable growth. Exports can help to transform Sri Lanka into an upper-middle-class country. 

There is an urgent need to diversify exports beyond apparel and agricultural products, and to invest in the right sectors to build competitiveness. Sri Lanka needs to exploit its competitive advantage to the fullest, given its strategic location in the Indian Ocean and preferential access to the EU, India and Asean economies and hopefully, in time, China, if the two sides can successfully sign a free-trade agreement. 

MS, FM In order to achieve that mindset change, there also needs to be the political will to do so. 

Euromoney: Does this government does have that political will?

MS, FM I believe it does. We have made some major legislative reforms towards this end. We introduced a new Inland Revenue Act and a new Foreign Exchange Act in 2017, and we are now looking to amend our customs and excise laws, which date from the Victorian era.

MP, HSBC Certainly it does. The biggest wins so far on the reform front have been the gains made in fiscal consolidation. Fiscal imbalances have long been the biggest source of macro-economic instability in Sri Lanka, and for the first time in decades, Sri Lanka had a positive balance in the primary account of the budget in 2017. Our revenue structure is highly inequitable: at present, 18% of revenues come from direct taxes and 82% from indirect taxes. The Inland Revenue Act of 2017 will shift that balance closer to a 40/60 ratio, putting us more in line with our peers regionally and globally. We are also leveraging technology to enhance tax collection. 


Euromoney: What do foreign investors see when they look at Sri Lanka’s capital market – and what do you want them to see?

Ajith Fernando, CEO, Capital Alliance Group (AF, CAG) Investors see a small but increasingly open economy with improving macroeconomic and fiscal stability. They see a government committed to liberalizing industries, from banking to shipping, to broadening and deepening its capital markets, and to being focused on free trade. Perhaps free trade and globalization are unpalatable terms elsewhere, but they aren’t here. 

Vajira Kulatilaka, CEO, NDB Capital Holdings (VK, NDB) During the civil war, which ended in 2009, investors and entrepreneurs became short term in their thinking, looking one or two years ahead. In most stable countries, good companies think 10 years ahead, and sometimes more. So, the stable policies the current government is introducing really matter. The other factor helping the economy is a drive to boost our skill base, which was neglected during the war years. Some people left the country; others weren’t encouraged to learn new skills. These changes are helping boost the strength and depth of the capital markets. Private equity and venture capital firms and other funds are putting money to work, and they in turn are thinking as well in the longer term. 

Euromoney: Look around Colombo and you see a lot of private equity coming in.

VK, NDB Private equity and venture capital are enjoying a golden age. M&A is making a return – a notable deal earlier in 2018 saw German insurer Allianz buy 100% of Janashakthi Insurance for $106.4 million. The International Financial City will boost our prospects too, as the new hub taking place offshore in the capital is based on the City of London’s trading and securities ownership laws. Now our aim is to encourage more companies to invest and list here. 

Euromoney: Sri Lanka posted record exports and FDI last year. Is that connected with free-trade agreements (FTAs), like the one signed with Singapore?

RHSS, FM We have been renewing and updating free-trade agreements over the years. We have FTAs with India and Pakistan, and we signed a new one this year with Singapore. Vital to our future is the ability to boost trade, foster special economic zones and attract more inward FDI. 

Duminda Ariyasinghe, chief executive, Board of Investment of Sri Lanka (DA, BOI) In 2017, we posted record inward FDI more than double the previous year. And we had a good first half in 2018. Necessary structural reforms have certainly helped. We are becoming more private-sector-driven, with word spreading that Sri Lanka is open for business. We have consistent and investor-friendly private sector-supporting policies. A lot of countries and corporates see this regime is committed long term to supporting the private sector. 

Euromoney: What is the first question an investor asks when you meet them?

DA, BOI We have created a single-window investment taskforce that brings together 24 agencies, so when an investor is keen to invest in Sri Lanka, we connect them immediately with every relevant agency, and get answers to their questions. There is a drive to cut bureaucracy and improve the investment environment. 

We need to be able to compare ourselves to southeast Asia – given our high quality of life, fast-growing economy and excellent education system, that’s where the comparison needs to be. Even from an FDI standpoint, we now compare ourselves to the Thailands and Malaysias of the world. 

Tariffs imposed on some countries by the Trump administration should benefit us, as corporates seek to shift production to Sri Lanka, which has a lower rate of taxation when exporting to the United States. One company we are talking to is keen to shift production here from China specifically to avoid paying higher tariffs. That hands us a big competitive advantage. 


Euromoney: While the world focuses on US-China trade, under the surface, there are many FTAs being signed. Is that a positive for the future of free trade?

MP, HSBC The global trade dynamic is now in east and southeast Asia, with a focus on integrated value chains and intra-regional trade, and previously, Sri Lanka didn’t have any exposure to that part of the world. We had to be more attractive to FDI, committed to having a low-tariff environment and to showing the world we have a stable policy environment and a clear investment strategy. The recently signed FTA with Singapore shows the world that Sri Lanka is committed to economic reform and integration with regional and global markets. 

PNW, CBSL The Asean region is increasingly integrated – benefiting countries like Vietnam, Thailand and Indonesia. We have not benefited the same way in south Asia, but we’re trying to boost links with southeast and northeast Asia, and boost access to China. We are highly commercially connected with India and more integrated with Europe. The political will to liberalize the economy and put more of it in private hands is palpable. The banking sector is 35% owned by the state, while the economy is, I would estimate, 50% state-owned. We need to start monetizing these assets. I’m often asked: ‘When are we going to list 10% of each of the state-owned banks?’ We will do it gradually, not in a rush. 

Euromoney: Land sales in Colombo have been handled well and professionally. But will it not be harder to sell a minority stake in a big state bank or insurer? 

MS, FM We are strongly engaged in that process and are committed fully to the liberalization process. And we are focusing on making the process inclusive, including looking at selling shares in selected state firms to the employees. Some unions will oppose the process, but we are highly confident that we can see it through while engaging the relevant stakeholders.

Euromoney: There are also new projects like Enterprise Sri Lanka and ‘Gamperaliya’, which disburse subsidized loans and invest in rural infrastructure.

MS, FM These projects were launched a few weeks ago; early indications are very positive. Enterprise Sri Lanka was a fulcrum of my 2018 budget. We felt Sri Lanka’s entrepreneurial spirit had to be reignited. If we cast our minds back in history, Sri Lanka was one of the ancient world’s great trade hubs. We even had ambassadors at the courts of the Chinese emperors and Imperial Rome. Trade and commerce is in our genes – it’s time to reignite this talent in our young people. 

Enterprise Sri Lanka channels low-cost loans to individuals and young and innovative firms. It’s a creative process that encourages university graduates to apply for interest-free loans of up to SLR1.5 million ($9,260) to fund their startups. It’s a bottom-up process that ensures we continue to reverse a decades-long brain drain.

DA, BOI If a foreign investor wants to come here and build an upscale manufacturing plant that links Sri Lanka into supply chains around the region, they have to know that we have the requisite talents and skill base and a high level of education. 

MP, HSBC With manufacturing, we need to target the right niches. We are promoting investment proactively, identifying firms that can thrive here and reaching out to them. A European company is transferring its manufacturing facilities wholesale to Sri Lanka, where labour costs are one 10th the rate at home. There’s a recognition that sectors like electronic equipment, medical equipment and vehicle components, which require a certain physical dexterity, will do well here. 

PNW, CBSL In the last few budgets, Sri Lanka allocated a lot of money to skills training and vocational training. The mindset here has to be that everyone needs an education, but that not everyone needs to go to university. We want to encourage more young people to get skills that will give them a life they can be proud of – whether that means becoming a doctor, engineer, programmer or tourism entrepreneur. 

Euromoney: So you don’t see this as a cost or a subsidy, but more of an investment?

MS, FM Exactly. It is an investment. We see Enterprise Sri Lanka as an investment; we hope to invest even more next year. 

Euromoney: Can Sri Lanka transform itself into a logistics hub, a trade hub – the beating commercial heart of the Indian Ocean?

MS, FM Absolutely. We have China investing heavily in Hambantota Port, future investment is being planned in Trincomalee, and we hope to begin liberalizing the shipping sector. 

Euromoney: Are there vested interests in the way of the shipping sector being opened to foreign investment?

MS, FM There are – they are few in number but powerful. But liberalization of this sector will go ahead, and it will totally change the investment and commercial landscape, and change ineradicably how Sri Lanka is seen by global investors.

MP, HSBC There are a few sectors in Sri Lanka where we don’t allow foreigners to own 100% of a company. Shipping, freight forwarding and travel agencies are a few of the outliers, so in last year’s budget, there was a proposal to raise foreign ownership limits to 100% from 40%. That would send a strong signal we are committed to reform. This would be a great opportunity to try to attract big players in the global shipping industry to come and set up in Sri Lanka. 

DA, BOI We are at the heart of the Indian Ocean’s shipping lanes, with Europe, the Middle East and Africa in one direction and southeast Asia and east Asia in the other. We will benefit from China’s Belt and Road Initiative – we don’t want to miss out on that opportunity. No country in the region is as well placed to benefit from growing Indian Ocean maritime trade. Shipping and logistics will be services in which we can genuinely excel going forward. 

AF, CAG Look at how many ports China has, or the great ports in Hong Kong and Singapore. There is no reason why Sri Lanka cannot become a regionally relevant trans-shipment hub with capacity and scale. We are building our port infrastructure now, and the next step is to liberalize the shipping sector, allowing foreign investors to invest in it. That will really take it to the next level. 

Euromoney: What sectors and exports should Sri Lanka focus on and excel in promoting?

PNW, CBSL We recently launched a national export strategy that will expand the export economy. There are six sectors where we can benefit, including services, high-end apparel, shipping, logistics and wellness tourism, and information technology.

MP, HSBC Sri Lanka’s dream of doubling export earnings cannot be achieved by relying extensively on agricultural products like coconuts, spices or apparel. It needs to climb the value chain, which will add a competitive edge to its export offerings. There is a need for a policy push, which encourages value addition and discourages exports in raw form.

Euromoney: What can be done to make Sri Lanka into a more attractive and investable market?

VK, NDB As an economy, we are dependent on securing more inward FDI. How do we get more corporates to start investing in Sri Lanka? One of the problems we had in the past was imbalances on the fiscal and monetary sides. We are in a far more stable position now – even, I would say, a fantastic position. 

PNW, CBSL Developing further the venture capital and private equity industries is paramount. The economy cannot get enough capital. The best way is to attract more capital, to put it to work in local businesses, to attract FDI, to encourage foreign institutional investments to the island. And the only way to do that is through reforms and liberalizing entire sectors of the economy.

Euromoney: Some worry the liberalization programme will stumble prior to next year’s presidential elections. Are those concerns justified?

VK, NDB In the past, governments would hand out money like popsicles to the electorate and the business community before elections – a tax break here, a big subsidy there – but I don’t see that happening now. This government is committed to showing the region and the world that it is stable and fiscally responsible, and that its finances are under control. That’s not going to change. 


Euromoney: Looking ahead, $15 billion in foreign debt repayments are due in the period 2019 to 2022. What can be done to ensure there are no jumpy moments?

PNW, CBSL This is a situation that scares some people – but it shouldn’t. The new Liability Management Act allows the central bank to exceed borrowing requirements set out in the December budget, so long as we pay off new and existing debt. Before, parliament only had the authority to borrow for that financial year and couldn’t raise a single cent for the next financial year. We now have instruments available to manage ahead, for example, say the next four to five years, allowing us to plan ahead. 

We’re raising more money through taxes and tax reforms, through changes to customs duties, plus we will have capital flowing through onto our books, thanks to land sales and the partial privatization of state-owned assets. And as we become a more open economy, we are seeing investment flowing in from and trade increasing with countries including China, the Asean region, and even Central and Eastern Europe. 

We are also focused on inflation targeting. We used to struggle with high inflation rates, high interest rates, large current account and fiscal deficits. Those problems are being resolved. Interest rates on T-bills are down in the single digits and inflation set to fall below 5% in 2019. 

Euromoney: Sri Lanka has passed new Inland Revenue and Foreign Exchange Acts and is amending its customs laws. What impact has that had?

SF, CCC We are hauling our economy into the modern age and preparing it for the century ahead. Look at the FTAs we have with India, Pakistan and Singapore, our growing trade ties with China and the GSP-Plus trade concession we have with Europe. That’s three billion people, tied closely with one fast-developing economy in the Indian Ocean. I can’t think of another country in as strong a situation vis-à-vis trade links as us.

AF, CAG Our economy has been crying out for these changes. They aren’t eye-grabbers or vote winners, but they make a huge impact. They will help open up our economy, put it on a surer financial footing, and help small companies get big and big companies go regional or global. 

Euromoney: Unsexy reforms are usually the most important ones.

AF, CAG Absolutely. That’s what’s happening here. The reforms being pushed are unsexy but vital to our future. 

Euromoney: The International Financial City is nearer to completion. Do we have a better idea what the hub will become? 

AF, CAG It can become an offshore financing centre serving the Indian rupee and the Chinese renminbi. And it can become a logistics and shipping hub serving every nation between Singapore and the Middle East and Africa. The possibilities are endless.

MP, HSBC In addition to the financial centre aspect of the Colombo International Financial City, it could be a great place to locate regional headquarters. Colombo is a far more liveable city than other regional cities like Dhaka, Karachi, New Delhi and Mumbai. It has great connectivity with the wider region, with an expanding airport and excellent shipping links. 

You are also going to see more global corporates establish R&D centres here, with Sri Lanka being positioned as a knowledge centre and research hub, catering to ambitious startup firms. We are creating a lifestyle proposition for smart, young people, who want to set up their own firms and enjoy good living standards here. That’s the thinking behind the high-end hospital and globally recognized international school that will be built in the CIFC. 

Euromoney: What final message would you like to relay to institutional investors and government officials around the world?

PNW, CBSL Foreign investors believe we are committed to liberalizing the economy. A good start would be to list a 10% stake of Bank of Ceylon in the Colombo Stock Exchange. That would send exactly the right message to the outside world and attract a lot more new investment into the capital market.

MP, HSBC Sri Lanka has significant untapped potential. The 2018 budget showed it was open to business, and that the budget was aligned with the ‘Vision 2025’ plan. The government has also undertaken a lot of structural reforms, introduced energy price reforms and prioritized expanding the export sector. In 2019, we expect the government to continue to work hard to continue to reform the economy. 

AF, CAG Let’s not forget that Sri Lanka is a vibrant democracy. The government that won the civil war in 2009 was ousted democratically. While some people see this as a sign of instability, I look at it as absolute stability. The system works. This is the key.

DA, BOI We want to become an export specialist in areas where we can make a difference, like IT, where export earnings have been growing at 20% to 25% a year. We are building special economic zones, as well as the Colombo International Financial City. The real benefit of these zones will begin to be felt in the next five to 10 years.

MP, HSBC A key question is: will Sri Lanka veer off its current trajectory of stability and reform and liberalization? The government’s message is this: we are committed to the reform process and to maintaining stability. 

There is a strong understanding that this is the best and only way to improve the economy and people’s quality of life, and to manage our external debt, which we are also committed to reducing. 

Sri Lanka debate participants

Mangala Samaraweera (MS) minister of finance and mass media. Samaraweera was appointed Sri Lanka’s minister of finance and mass media in 2017. He has also held the post of foreign minister on two occasions, from 2005 to 2007 and from 2015 to 2017.

P Nandalal Weerasinghe (PNW) deputy governor, Central Bank of Sri Lanka. Dr Weerasinghe assumed the office of deputy governor of the Central Bank of Sri Lanka in September 2012. He is also chairman of the Monetary Policy Committee and the Foreign Reserve Management Committee of the central bank.

RHS Samaratunga (RHSS) secretary to the finance ministry and secretary to the treasury. Dr Samaratunga has more than 30 years of experience in the public sector. In his capacity as the secretary to the ministry of finance, he also serves as ex-officio member of the Monetary Board of the Central Bank of Sri Lanka and the Finance Commission of Sri Lanka.

Duminda Ariyasinghe (DA) chief executive, Board of Investment of Sri Lanka. Before taking the helm of the BOI, Ariyasinghe spent 10 years as an executive director at the BOI, spearheading the development of critical sectors including tourism, IT and knowledge services.

Shiran Fernando (SF) chief economist, Ceylon Chamber of Commerce. 
Fernando is chief economist of the Ceylon Chamber of Commerce, and head of its Economic Intelligence Unit. Before joining the CCC, he was lead economist at Frontier Research. 

Vajira Kulatilaka (VK) CEO, NDB Capital 
Holdings. Kulatilaka is CEO of investment banking at NDB Group and a director of the Colombo Stock Exchange, boasting 28 years’ experience in onshore banking, finance and capital markets. 

Ajith Fernando (AF) CEO, Capital Alliance Group. 
Fernando has been at Capital Alliance since 2000, helping to establish the company as a full-service investment bank with a mission to be the preferred partner in onshore capital markets.

Mark Prothero (MP) CEO, Sri Lanka and Maldives, HSBC. During a 26-year career with HSBC Group, Prothero has held senior positions in commercial banking, risk management, and global banking. Prior to his current job, he was regional head of internal audit for HSBC’s Middle East and North Africa region. 

Published in association with

Ministry of Finance,

Sri Lanka