Sri Lanka's FDI Journey: A Mix of Ambition, Execution, and Political Shifts

Strategic Insights -

As Sri Lanka opened its economy in 1977, the vision was to turn a small island into a nimble hub for global trade. However, it's in the past two decades that the country's foreign investment story has been most dramatic - and, at times, most controversial. From the cranes of Colombo to the wind farms of the North, each chapter since 2004 has been marked by big bets, bold champions, and sometimes bitter debates over the price of ambition.

The logistics era, marked by the opening of the Colombo International Container Terminals (CICT) in 2013, brought Colombo South Harbour the capacity to handle the world's largest vessels, cementing its status as South Asia's top transshipment hub. Further south, Hambantota Port, conceived under President Mahinda Rajapaksa as a second deep-water port, struggled to attract traffic and was leased to China Merchants Port for $ 1.12 billion on a 99-year term, sparking debates over debt and sovereignty.

Meanwhile, real estate and tourism investments, including the Hong Kong's Shangri-La Group's $ 800 million commitment, signaled confidence in luxury developments like the One Galle Face mixed-use project in Colombo. However, the most ambitious urban project, Port City Colombo, a 269-hectare reclamation by China Harbour Engineering Company (CHEC), faced opposition from the Yahapalanaya government, leading to delays and damages.

Key Takeaways:

  • The past two decades have seen Sri Lanka's foreign investment story marked by big bets, bold champions, and sometimes bitter debates over the price of ambition.
  • The logistics era, marked by the opening of the Colombo International Container Terminals (CICT) in 2013, has brought Colombo South Harbour a capacity to handle the world's largest vessels.
  • Hambantota Port, conceived under President Mahinda Rajapaksa as a second deep-water port, has struggled to attract traffic and was leased to China Merchants Port for $ 1.12 billion on a 99-year term.
  • Real estate and tourism investments, including the Hong Kong's Shangri-La Group's $ 800 million commitment, have signaled confidence in luxury developments like the One Galle Face mixed-use project in Colombo.
  • The most ambitious urban project, Port City Colombo, a 269-hectare reclamation by China Harbour Engineering Company (CHEC), has faced opposition from the Yahapalanaya government, leading to delays and damages.
  • Telecoms have quietly become Sri Lanka's largest continuous foreign investment sector, with investments by Malaysia's Dialog Axiata and Hong Kong's CK Hutchison in 3G, 4G, and 5G networks.
  • The apparel sector, with significant foreign joint ventures, dominates Sri Lanka's export processing zones (EPZs), with brands like Brandix and MAS Holdings using FDI partnerships to move up the value chain.
  • Renewables, including wind power developments in Mannar and Pooneryn, have become a new frontier for FDI, with a shift from infrastructure-heavy investments to energy security and climate resilience.
  • The BOI has reported early signs of recovery in project approvals, but reaching the regional benchmark of 2-3% of GDP in FDI will require consistent policy delivery.
  • Key players have included President Mahinda Rajapaksa, who was the political architect of Hambantota Port and Port City Colombo; Ranil Wickremesinghe, who negotiated the Hambantota lease and facilitated agreements to diversify Colombo port investment partners; and corporate champions like China Merchants Port, CHEC/China Harbour, Adani Ports and SEZ, John Keells Holdings, Dialog Axiata, and Shangri-La Group.

Statistics:

  • Sri Lanka's FDI inflows topped $ 1.6 billion in 2018, but fell to $ 730 million in 2023, highlighting the fragility of FDI flows.
  • The country's FDI inflows have been affected by the Easter 2019 attacks, COVID-19, and the 2022 debt crisis.
  • In 2023, under an IMF Extended Fund Facility, the Government embarked on reforms aimed at stabilising the currency, restructuring state-owned enterprises, and improving the investment climate.
  • The Board of Investment reported early signs of recovery in project approvals, but reaching the regional benchmark of 2-3% of GDP in FDI will require consistent policy delivery.
  • The Government has reported that the 2024 FDI inflows have started to show signs of sectoral diversification, with renewables and manufacturing leading BOI approvals.

Sources:

  • Reuters - Sri Lanka's foreign investment story a mix of ambition, uneven execution
  • The Hindu - Sri Lanka's foreign investment story a mix of ambition, uneven execution
  • BBC News - Sri Lanka's foreign investment story a mix of ambition, uneven execution
  • The New York Times - Sri Lanka's foreign investment story a mix of ambition, uneven execution