Policy inconsistency deterring investment – ADB

Boosting private investment will be a major challenge going forward as growth in private investment—domestic and foreign—is falling below planned levels despite the improved political and economic environment, the Asian Development Bank cautioned in its latest report last week. Releasing the Asian Development Outlook 2012, it stated that one reason for the failure is that the government has taken only a few steps to reduce red tape and improve the business climate needed to create the conditions for ramping up private investment.

“Although Sri Lanka’s position in the World Bank’s Doing Business index has improved in 2012 to 89 (out of 183 countries) from 98 in 2011, some challenges still deter private investment especially paying taxes,” the ADB said in the report titled ‘Economic trends and prospects in developing Asia: South Asia’.

It noted that investor confidence is a key factor in attracting investment and this requires a predictable policy environment as articulated and reinforced through the legal, regulatory, and institutional framework.

“Thus, the lack of such an environment for the private sector is a major obstacle to private sector development. Developing that framework will reduce uncertainties in the business environment and avoid unplanned actions that may send mixed signals to potential investors,” the report highlighted.

The government’s Development Policy Framework for 2010–2016 seeks private investor participation (beyond the traditional areas of industry and commerce) in infrastructure. The framework projects private investment to rise from around 21% of GDP in 2011 to about 26–28% in the next few years.

Meanwhile, the report also noted that the impact of currency depreciation on external debt, additional budget borrowing, and slower growth is on course to worsen the debt-to-GDP ratio in 2012.

The public debt ratio has been reduced over the last few years, although it was still very high at an estimated 78.9% of GDP at end-November 2011.

The ADB report has forecast that Sri Lanka’s GDP is expected to edge down to 7.0% in 2012 from the high 8.3% in 2011 but recover to 8.0% in 2013. It further projected that export growth is expected to fall to 11.0% in 2012, mainly owing to weaker demand, especially from Europe  although the trade gap is projected to stabilise, as import growth will also be much slower as higher interest rates, tighter credit, and a marked depreciation in the exchange rate are felt, especially for consumer goods.

“The current account deficit is projected to edge down to 6.4% of GDP in 2012, reflecting the more stable trade gap and continued large gains in remittance receipts,” it noted.