Photo courtesy of The Guardian

Using the policy tool of a dedicated special economic zone for services, the Colombo Port City in Sri Lanka aspires to become an international financial centre after the pandemic in a bid to emulate Dubai’s success. However, global uncertainties in the COVID-19 economic era and decision-making lags by previous governments suggests that it will take time to realize this ambition. Implementing a competitive special economic zone framework and conducive national policies will markedly improve the Colombo Port City’s chances of success and help to position Sri Lanka as South Asia’s Dubai after COVID-19.

A New Post COVID-FDI Era?

In early January 2021, President Gotabaya Rajapaksa’s Government approved the drafting of a law to set up a Commission to oversee activities at Colombo Port City (CPC), which will be a special economic zone (SEZ),and the Board of Investment (BoI) is targeting annual foreign direct investment (FDI) inflows of $1.5 billion over the next three years. These steps underline Sri Lanka’s ambitious plans to attract services FDI into the CPC in a bid to position the country as South Asia’s ‘new Dubai’ – a premier financial services hub rivaling Dubai to the West and Singapore to the East – in a post-COVID-19 world economy. UNCTAD projections suggest that global FDI flows could fall by 40 percent in 2020 from their 2019 value due to the economic fallout from the pandemic. A partial recovery in global FDI flows is expected in 2022 linked to the availability of COVID vaccines, the announcement of a large fiscal stimulus for the US by the incoming Biden Administration and improved business confidence.

Dubai v Sri Lanka

The city of Dubai is widely regarded as a developmental success story in the Middle East and globally. It powered the economic rise of the United Arab Emirates (UAE) to be a high-income economy with a per capita income in excess of US$, 40,000. Within three decades or so, Dubai has transformed itself into an enviable international hub for FDI particularly in financial services, high-end culture and tourism. It has leveraged a strategic location between Asia and Europe and developed some 30 Special Economic Zones (SEZs). Political stability, excellent branding as an investment destination, a competitive tax regime and world class infrastructure in its SEZs, an open labour market for attracting skilled workers and professionals, and consistent business-friendly economic policies help explain Dubai’s success in attracting FDI.

One of Sri Lanka’s major assets, in the eyes of foreign investors, is a strategic geographical location a few miles off India’s southern coast and close to the main Asia-Europe sea route. Favourable geography and relative port efficiency has contributed the emergence of the deep -water Colombo Port as an important trans shipment hub to India. Other national assets include the development of an increasingly high-end garment industry based on skilled labour and exceptional natural and cultural tourism endowments.

On the liabilities side, however, Sri Lanka’s small internal market of only 22 million people with a relatively small middle class of consumers could be a disadvantage for manufacturing FDI compared to larger neighbors like India or Bangladesh. The business environment in Sri Lanka is also seen as being mired in red tape and not being very friendly to foreign investors according to the World Bank’s Doing Business Indicators. More recently, ratings agencies like Moody’s have highlighted Sri Lanka’s debt repayment challenges and argue that Sri Lanka is at risk of sovereign debt distress, which is a worrisome new label for the country.

With the liabilities weighing on the country’s FDI potential, Sri Lanka’s FDI inflows remain below par in Sri Lanka which as South Asia’s first economic reformer in 1977 was expected to reap a peace dividend following the end of a thirty-year civil conflict in 2009. Between 2010-2019, FDI inflows into Sri Lanka averaged less than US$ 1 billion annually. Although FDI flows in 2020 will be less than expected due to the pandemic, this could be changing. For instance, Browns Investments signed an MoU for a $1bn mixed development project in CPC in December 2020. Furthermore, South Asia’s largest tyre factory, Ferentino Tyre Corporation (Pvt) Limited, was opened in January 2021.

The CPC as a Possible Sri Lankan Game Changer

Scenario analysis by the Lakshman Kadirgamar Institute suggests that the CPC SEZ can be a game changer for modern services development in Sri Lanka leveraging the twin advantages of a strategic geographical location and international best practices SEZ frameworks. This multi-purpose office/leisure city is an engineering marvel being developed on 269 hectares of reclaimed land from the sea by China Harbour Engineering Company Ltd (CHEC), a Chinese state-owned enterprise. Contrary to popular perceptions, it is an investment project (with an initial foreign investment by CHEC of $1.5 billion) rather than one financed by a commercial loan. The CPC SEZ could be an important project to transform the country’s services sector not only by promoting FDI but also for facilitating clustering of businesses. Notable spillovers can be gained from sharing resources and costs by locating financial and related services activities in the CPC. Price Waterhouse Coopers estimates that the economic impact of a fully operational project be significant adding as much as 10 per cent of Sri Lanka’s GDP on an annual basis. Global uncertainties in the COVID-19 era (such as questions about the effectiveness of vaccines against new COVID-19 strains) and decision-making lags by previous governments, however, suggests that it will take time for the CPC to become fully operational.

Sri Lanka should rapidly implement a CPC SEZ framework that has several best practice elements including: (1) a transparent and competitive tax regime, (2) a clear arbitration framework for parties to solve commercial disputes, (3) strong anti-money laundering rules, (4) an open international labour market, and (5) modern and cost competitive infrastructure. It also means that like the UAE, Sri Lanka’s national economic policies should transparent and predictable in the medium-term emphasizing a market-oriented economy, a neutral foreign policy, a world class education system and moves towards political and social stability. Indeed, putting in place a competitive SEZ framework and conducive national policies will markedly improve the CPC’s chances of success and help to position Sri Lanka as South Asia’s Dubai after COVID-19.