Sri Lanka tariffs, land stumbling blocks for factories

Originally appeared on Economy Next

By Chandeepa Wettasinghe

State regulations, protectionist para-tariffs and lack of industrial land in Sri Lanka has stopped competitive new industries from taking root in the island, a research from US-based Harvard University said.

“Because of taxes and para-tariffs and the limited land in industrial zones, the government had to regulate who came in and went out,” Harvard University Center for International Development Research Fellow, Tim O’Brien said.

“It favoured Sri Lankan companies with proven track records rather than newer companies,”

O’Brien was speaking during a Facebook Live online event held by the Advocata Institute, a Colombo-based free market think tank.

He said that newer industries may have made more competitive export products.

A new Inland Revenue Act which came into effect in April 2018 put an end to a complicated tax structure with loopholes, which companies with political clout had exploited.

Though established domestic or foreign companies with BOI status were able to get some raw materials without incurring para-tariffs, many international investors had found the complex legal systems off-putting, according to some reports.

Sri Lanka’s exports to gross domestic product had fallen from 33.3 percent in early 2000s to 12.7 percent in 2016 as the economy became more protectionist, and non-tradable sectors such as government driven infrastructure projects gained more importance, according to one analysis.

However services including software, where there is no protection and is competitive, and tourism has also grown, especially outside the capital Colombo, where there are no state mandated price floors on hotel rooms.

The Harvard team had found that the lack of industrial land, in the form of zones, was the biggest stumbling block for Sri Lanka in attracting foreign direct investments for competitive export products.

Sri Lanka has 14 Board of Investment industrial zones, which have not rapidly multiplied.

O’Brien said that with more industrial zones planned, and the BOI expected to move away from regulation of investments to attracting investments, new competitive industries such as solar panel and medical equipment manufacturing are expected to start in Sri Lanka.

It is not clear what role Sri Lanka’s relatively robust environmental regulations play in setting up factories, compared to poster child Vietnam or China

Hoteliers in Sri Lanka for example had managed to find land, though it sometimes takes up to a year to get approval from multiple domestic and national authorities.

They also face higher construction costs, food and drink prices, which tend to undermine their competitiveness compared to East Asia which has free trade.

Sri Lanka’s labour markets are also tight especially for so-called 3-D (Dull-Dirty-Dangerous) jobs and there are vacancies in BoI zones for jobs at existing salaries amid currency depreciation.

Currency depreciation may be causing an net outflow of better qualified IT workers, according to some analysts.

But workers are leaving for factories in countries with stronger currencies such as Korea, Japan, the Middle East, where strong currencies have forced firms to boost labour productivity and pay higher salaries.