logo logo

FDIs Or Economic Partnerships?

Sunday Leader, Sri Lanka

FDIs Or Economic Partnerships?

By Hasitha Ayeshmantha

16 January 2016

GIF - 82.1 kb

Pakistan Premier Nawaz Sharif meeting Sri Lanka President Maithripala Sirisena during the former’s three day visit to the Island

When talking of economic development, foreign investments could be easily defined as a major portion of the base foundation of a country’s economy. In the modern era, countries extend their partnerships with the counterparts by initiating various investment strategies and by opening up their local markets and industries for global investors.

Looking down this road, Sri Lanka has had several mainstream foreign investment and trade partnerships with neighbouring countries such as India, China, and Pakistan. Also the governments that came into power over the time period have forged financial relationships coinciding with their foreign policies.

Considering Sri Lanka’s economic relationships and investment environment, facts such as the long term partnerships with China, proposed economic partnership with India, free trade agreement with Pakistan, the port city project with the Chinese government and the highway construction projects, and various development projects taking place around the country could be witnessed as clear examples to the foreign investments and partnerships.

In the matter of foreign investments, Sri Lanka has always been open and had encouraged the entire world to explore the investment opportunities available in the local market. In many occasions, the government had opened up the industrial sector for the foreign investors.

But, in the case of economic partnerships, especially the proposed Comprehensive Economic Partnership Agreement (CEPA) with India, the governments have always maintained a protective approach and also several industrial sectors have raised protest over the proposal claiming that the opening up the country’s economy to a highly placed entity such as India will jeopardize the country’s industrial and manufacturing sectors. These parties in return requested the government to venture into more Foreign Direct Investments and bilateral trade agreements.

Free Trade Agreements (FTA)

Free Trade Agreements (FTAs) are designed to reduce the barriers to trade between two or more countries, which are in place to help protect local markets and industries.

Trade barriers typically come in the form of tariffs and trade quotas. FTAs also cover areas such as government procurement, intellectual property rights, and competition policy.Lowering trade barriers helps industries access new markets, boosting their reach and the number of people they can sell their products to. FTAs are also ultimately designed to benefit consumers. In theory, increased competition means more products on the shelves and lower prices.

Agreements are notoriously difficult to be negotiated, and often call for laws in two different jurisdictions to align. Investor-State dispute settlement (ISDS) provisions give investors the ability to take governments to an international tribunal if they think there has been a breach in an FTA.

One of the downsides of an FTA is the ability of powerful economies to impose their will over smaller, developing economies. Most often, this comes in the form of a smaller economy making more concessions than are beneficial in the long term, while the larger economy keeps its trade restrictions in place.

Accusations have also been made in the past that FTAs have been enacted for foreign policy purposes, rather than for bilateral economic benefit. Critics also argue that FTAs do not encourage trade liberalisation as effectively as multilateral agreements do. Furthermore, critics argue that FTAs simply promote large, competitive trading blocs that could create economic instability.

Sri Lanka-Pakistan FTA to flourish

The Free Trade Agreement (FTA) between Sri Lanka and Pakistan was signed in 2002 and it came in to effect from 2005. Under the Free Trade Agreement, Sri Lanka and Pakistan have agreed to offer preferential market access to each others’ exports by way of granting tariff concessions. Sri Lanka would be able to enjoy duty free market access on numerous products in the Pakistani market, including tea, rubber and coconut. Pakistan, in return, would gain duty free access on 102 products in the Sri Lankan market. These products include oranges, basmati rice, and engineering goods.

However, with Pakistan Prime Minister Muhammad Nawaz Sharif’s Sri Lankan visit coming to a conclusion, it has been established that Sri Lanka and Pakistan intend to achieve US $1 billion bilateral trade target at the earliest through the Free Trade Agreement (FTA).

It was learnt that even though the Pakistan government has allowed Sri Lanka to export 156 goods free of tariff, at present, Sri Lanka is only exporting 35 goods of them.

It is known that a major part of Sri Lanka’s export income is recorded with the countries of South Asia. Alongside India, Bangladesh, and Maldives, Pakistan plays a vital role when it comes to Sri Lanka’s export sector.

With a lot of players entering the global market, a country should make a strong impact on the foreign market as an exporter,

which will ultimately pave the way for a more sustainable exports sector and a healthier economy, especially for a developing Third World country, such as Sri Lanka. Therefore, rare opportunities such as this should not be wasted, but made use of ‘efficiently’ in order to secure a strong position in the global market. The present volume of trade between the two countries, which is estimated at US $325 million, does not reflect the true potential that both parties possess.

Free Trade Agreements are considered as trade partnerships between two, but has more limitations than a comprehensive economic partnerships. In this aspect the main concentration will be on the export and import sectors of the country and adding certain relief to the import – export sector participant via reduction in tariffs and certain taxes.

Therefore, several importers and exporters told The Sunday Leader that they would much rather prefer initiating FTAs with powerful economies. They further stressed that the mandates and the limitations applicable in a Free Trade Agreement will boost confidence

Foreign Direct Investments (FDIs)

An FDI is an investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation’s stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.

Foreign direct investment is distinguished from portfolio foreign investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of “control”. According to the Financial Times, “Standard definitions of control use the internationally agreed 10 percent threshold of voting shares, but this is a grey area as often a smaller block of shares will give control in widely held companies.

Moreover, control of technology, management, even crucial inputs can confer de facto control.”

The origin of the investment does not impact the definition as an FDI: the investment may be made either “inorganically” by buying a company in the target country or “organically” by expanding operations of an existing business in that country.

Broadly, foreign direct investment includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans”. In a narrow sense, foreign direct investment refers just to building new facilities.

Direct investments exclude investment through purchase of shares. FDI is one example of international factor movements. An FDI is a controlling ownership in a business enterprise in one country by an entity based in another country. Foreign direct investment is distinguished from portfolio foreign investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of control.

Government’s stance

At a recent interview with The Sunday Leader, Minister of Finance Ravi Karunanayake said the need of the hour is a strong local investment sector. He added that the country has to drive the economy forward while promoting more local investments in the industrial sector.

According to the Minister of finance, the country should first create an investment friendly environment within its sphere and then look to attract more foreign investments. The Minister also commented on the requirement to implement more successful startups within the country.

Commenting on the Foreign Investment strategy of the country, Minister Karunanayake said that the country’s investment agenda will have to coincide with the foreign policy. He believes that then the full potential of the investment sector could be put to use.

In the matter of Comprehensive Economic Partnerships, the government was faced with many concerns when talks of CEPA came to light. Although the comprehensive economic partnership between Sri Lanka and India was in the balance, due to many concerns raised by various sectors of the country, the government could not establish a solid platform to launch the aforementioned agenda. However, with Prime Minister Ranil Wickremesinghe and President Maithripala Sirisena putting a full stop to the rumours on reinitiating the Comprehensive Economic Partnership Agreement (CEPA) with India, attention was shifted to the Indo Sri Lanka Economic and Technology Co-operation Agreement (ETCA). The move was viewed by some as an attempt to re-introduce CEPA under a different name.

Dual approach

Meanwhile, speaking to The Sunday Leader, Ceylon Chamber of Commerce Chairman Samantha Ranatunga said Sri Lanka needs a collective of both FDIs and FTAs and economic partnerships.

According to Ranatunga, their belief is that Sri Lanka needs to focus on both attracting more FDIs as well as inking more economic partnerships. He said that so far the government has had constructive and comprehensive consultations with the chambers.

However, he cautioned that resorting to partnership without consultations with stakeholders would be detrimental in the long run. He also said the position of the chambers had been that they are not against any partnership with any country but that they don’t want any partnerships to come through the backdoor, which creates uncertainty in the minds of all stakeholders.