Could Port City-Related FDI Bailout Sri Lanka?

A recent press release by the Finance Ministry in response to the downgrade of Sri Lanka’s sovereign rating by Fitch Ratings expresses the government confidence in overcoming Sri Lanka’s short-term economic challenges.

- Indika Hettiarachchi

In the same statement, the Finance Ministry emphasises that foreign direct investment (FDI) is expected to play a key role in overcoming the country’s current economic distress.

Sri Lanka heavily focuses on FDI to bridge the country’s investment-savings gap and to support balance of payment (BOP). But historically, the actual FDI inflow into the country has not been sufficient and the country’s investment case is seen rapidly changing. The government appears to be betting on the Port City project and Hambantota Port to act as catalysts in attracting FDI in the short to medium term.

The Hambantota Port has good potential to support to overcome the country’s short to medium-term economic hurdles, as there is a strong case for port-related industries. The sale of the Hambantota Port to Chinese investors also helped Sri Lanka to overcome the BOP crisis in 2017/18. However, the expected contribution from the Port City project in attracting FDI and to support BOP in the short to medium term appears not as significant as the port.

The root cause of Sri Lanka’s economic problems is the country’s inability to attract/ retain sufficient foreign exchange to sustain itself. Sri Lanka has been facing cyclical BOP problems, which act as a growth constraint. The BOP problem magnifies during internal and external shocks such as the COVID-19 disruption experienced at present.

FDI could help fix this problem, if FDI result in generating sustainable foreign exchange to the country from stable and diversified sources and if FDI ventures utilise significant local input or value addition.

FDI is not all foreign funds coming to country