The end of Sri Lanka’s civil war in 2009 brought to a close 26 years of conflict that had severely deterred foreign investors from entering the country. Since then, the nation’s business profile has been transformed from a low-performing third-world nation to one of the most exciting Asian markets within which to do business.
According to the World Bank, Sri Lanka’s strengths are multifold, including its high-performing economy (growing between 6% and 7% annually since 2009), its geographical position (situated between Southeast Asia and India, the Middle East and Europe), its highly literate workforce (over 92% of the population), and the fact that the use of English is widespread. In 2011, the World Bank ranked Sri Lanka higher than any other nation in South Asia for ease of doing business.
Opportunities
The current economic vibrancy of Sri Lanka dates back to reforms made in 1977, when the nation’s government made a conscious decision to shift away from a more socialist orientation. Since this period, the nation has continued to open up its economy through numerous reforms, though economic growth since the late-1970s has been somewhat sporadic, largely due to the civil war and changes in the nation’s leadership.
According to the CIA World Fact Book, the nation’s exports topped US$10 billion in 2011, with the majority of these pertaining to the nation’s core industries. These include the production of rubber, tea, tobacco and numerous other agricultural commodities; precious stones; textiles and clothing; pharmaceuticals; telecommunications; shipping and logistics; tourism; petroleum refining; and construction.
The nation’s imports, on the other hand, topped US$20 billion in 2011, which – should you be considering setting up a business in Sri Lanka – point towards potential gaps in the domestic market. Sri Lanka’s principal imports include: textile fabrics; mineral products; petroleum; and, the provision of machinery and capital equipment.
The World Bank and the UK’s Department of Trade and Investment (DTI) view infrastructure development, tourism, and health services as areas with the most potential for foreign investors. In addition to this, since March 2010 the Asian Development Bank (ADB) has awarded over US$880 million in the form of loans and grants aimed specifically at improving the nation’s infrastructure, as disclosed by the ADB’s website.
The UK’s DTI additionally believes substantial opportunities also exist in education and training, business services outsourcing, information and communications technology development, and other niche technology projects. These can either be run on the ground in Sri Lanka or operated from overseas. The World Bank claims the nation’s burgeoning small and medium enterprise (SME) sector is ideal if one is looking for local partners, as the sector accounts for over 90% of the nation’s 18,000 registered companies.
Workforce and recruitment
One of the nation’s greatest strengths is its skilled and readily available labour force.
According to the CIA World Fact Book, the Sri Lanka has a literacy rate of over 92%, which is higher that other South Asian nations and one of the highest across the Asia Pacific region. English is widely spoken – particularly in the business community and government bodies – with an estimated two million speakers across the nation, according to The Cambridge University Press Encyclopedia of the English Language. Employee wages are highly competitive, and are between 35% and 40% less expensive than other developing markets in Asia with similar literacy rates, such as Thailand, China and Malaysia, according to the World Bank.
The main method of recruitment is through newspaper. Several business consultancies recommend use of a specialist recruitment company to vet applications, as they are likely to be plentiful in number. Some highly technical roles may prove challenging to fill; this is especially true in industries new to Sri Lanka. However, Sri Lankans are very enthusiastic about new training opportunities. As such, these must be a key component of any job description.
Challenges
Despite the plethora of positives Sri Lanka offers to foreign entities, it comes with its own challenges. According to research conducted by the World Economic Forum, the nation’s tax rates are significantly higher than neighbouring nations. According to data supplied by the International Finance Corporation, Sri Lanka’s total tax rate stands at 105.2%, compared to the South Asian average of 44.4% and that of OECD nations of 42.7%.
In addition, inflation is also very high: between 2004 and 2011, the nation’s inflation rate averaged over 10% annually, according to Tradingeconomics.com. In a bid to counter such high tax rates, the Sri Lankan government rolled out in early 2012 the concept of ‘tax holidays’ that can be anywhere between four and 12 years depending on the nature of the business to be conducted. For more information, visit the Board of Investment of Sri Lanka’s website at Investsrilanka.com.
Government inefficiencies and bureaucracy, policy instability and corruption are frequently cited as major barriers to doing business in Sri Lanka. A recent white paper published by Standard Chartered Bank, entitled Sri Lanka – Improving the climate for investment and trade, claimed the state’s strong presence – particularly in the large-corporate space via the nation’s multitude of state-owned enterprises – has proved to be more of a hindrance than a vehicle of economic growth. In addition, despite the nation’s acclaim of access to electricity 24/7, blackouts are becoming more frequent due to a burgeoning demand for power, grid inefficiencies, and faulty power plants.
Financing has traditionally also been an Achilles’ heel for Sri Lankan businesses, particularly in the private sector. However, in an attempt to counter this, the World Bank recently approved a US$57.4 million credit facility aimed at strengthening the nation’s SME sector.
It is also worth noting that Internet charges are high when compared to other Asian nations and are linked to high licence fees currently imposed by the Sri Lankan government. Plus, getting connected can take anywhere between two weeks and two months, as oppose to two days as found in many other Asian countries.
The Future
With its plethora of future opportunities that span multiple business sectors, the economic future of Sri Lanka looks extremely bright. Added to this, the nation’s workforce, by virtue of being highly literate and displaying a continued enthusiasm to learn, makes Sri Lanka greatly attractive to companies looking to set up a business on the island. As the nation’s rural areas become increasingly interconnected and as transport systems become more modern – both the World Bank and Asian Development Bank are planning multiple infrastructure projects over the coming decade – the attractiveness of Sri Lanka to foreign players will gain equity.
However, what is also clear is that the nation’s tax structure needs to be modernised and to become more in line with not only competing Asian nations, but with the rest of the world at large. Admittedly, the Sri Lankan government has introduced short-term incentives in order to encourage foreign investment; however, from a mid- to long-term perspective, the nation’s tax regime still appears unattractive.
As with other South Asian states, the Sri Lankan government must push through reforms that cut state bureaucracy and tackle corruption. Without such moves, the nation will always fall short of attracting the necessary levels of both private and foreign investment needed to make the nation a real force on the global stage.
These facts point towards the use of local partners when doing business in Sri Lanka – at least at present – rather than the incorporation of a foreign-owned subsidy.
Practical tips in Sri Lanka
Starting a business
Registering a business with the nation’s Registrar of Companies takes a minimum of six working days. The cost of registration is LKR 8,850 (around US$70) and it is widely advised that you go through an accredited accountant to get your company registered. The amount of upfront capital required to form a business varies considerably depending on the nature of one’s business. This ranges from LKR 25 (US$0.20) to LKR 3,000 (US$23).
Banking
Sri Lanka houses an array of local and foreign banks that offer standard banking services. The nation’s leading banks include Bank of Ceylon, People’s Bank, and Union Commercial Bank. In addition, most leading foreign banks have a presence in Sri Lanka, so as a foreign entrant it may be possible to use your ‘home’ bank. Foreign banks with a large market share in the SME and corporate banking space include HSBC, Standard Chartered Bank, Citibank and ICICI Bank.
Going to market
Going to market is not as straightforward as forming a business, as highlighted by the DTI, which claims this area to be largely unsophisticated – especially for businesses that target the general public. However, most international advertising agencies – such as Saatchi and Saatchi, Leo Burnett and McCann Erickson – have working arrangements with local agencies that are familiar with digital, print and other forms of media with which to advertise one’s business. According to Bloomberg, foreign consumer brands that have enjoyed much success in Sri Lanka include Aviva, BMW, Heineken and PepsiCo.
If targeting businesses, the DTI recommends initially sending an email or fax addressed to the company’s chairman or managing director that gives a brief overview of your products and services. Following this, the DTI recommends a follow-up call within two to three days. Ensuring you have targeted the right person in any organisation is key to your success. Sri Lankan organisations can be hierarchical, complex and bureaucratic, especially government departments.
Meeting and greeting
Shaking hands is the normal greeting but occasionally women or men may prefer not to shake hands with the opposite sex, so it is better to wait and see if a hand is offered. Appropriate dress is usually shirt and tie for men and equivalent office wear for women, and initial meetings are often held at major hotels, rather than at a company’s office. And, be prepared to arrange several meetings in order to close the deal.
Getting about
Sri Lanka’s sole international airport is located approximately 35 kilometres north of the commercial capital, Colombo. Bandaranaike International Airport is well maintained and is an hour’s drive from Colombo’s centre. Use of taxis or your hotel’s shuttle service is strongly recommended by many travel guides. Most Asian national carriers airlines fly to the airport, as too do some European airlines, including British Airways and Finnair. Numerous regional budget carriers also service the airport.
Visas are issued upon arrival and are generally free of charge for stays of up to three months. However, long-term visas involve payment, the amount of which can vary greatly based on the nature of your stay and your country of origin.
Once in Sri Lanka, getting around from place to place can prove somewhat difficult. This is due to a lack of modern transportation infrastructure that connects all hubs of the island with one another.
Staying connected
The nation houses five network providers – Dialog, Mobitel, Etisalat, Airtel and Hutch. Together they service over 19 million domestic users. Internet usage in Sri Lanka is likewise low outside of Colombo, but the web is receiving increasing focus and development by virtue of the government's e-Sri Lanka initiative, which is aimed at developing Sri Lanka's digital capabilities including Internet usage.
This article was first published in HQ Asia (Print) Issue 05 (2013).