With Sri Lanka recently coming under new rule, measures including tax increases and the scrapping of major tourism projects have taken companies by surprise.
But there is also a sense of optimism for the business outlook, with experts saying that the country could emerge much stronger in the long run under a more transparent and fairer government.
“In the short term there is a large amount of uncertainty and penalisation for some of the larger companies in the country,” says Murtaza Jafferjee, the chief executive of JB Securities, a brokerage based in Colombo.
The former president, Mahinda Rajapaksa, was last month toppled from power by Maithripala Sirisena in an unexpected election result. Mr Rajapaksa’s rule had been widely criticised for becoming increasingly authoritarian amid allegations of with corruption and nepotism.
Change and unpredictability have rattled investors. The interim government, which has pledged to stamp out corruption, will complete 100 days before parliamentary elections take place. Mr Sirisena, in his first budget, slapped a one-off 25 per cent “super gain” tax on companies that made more than 2 billion Sri Lankan rupees (Dh55 million).
The finance minister, Ravi Karunanayakec, said this would “help reverse the ill-gotten gains of these companies back to the general public”.
The new government also scrapped casinos planned under the previous administration because of concerns about moral decline in the largely Buddhist nation. This resulted in the Australian billionaire James Packer’s Crown Resorts dropping plans for a high-profile and controversial $400m project in Colombo.
And on Friday, the government said it planned to conduct a review of the $1.4bn Chinese-backed Colombo Port City development. The project, which is to include a Formula One racetrack, had been approved by cabinet on Thursday. But one day later, the new prime minister, Ranil Wickremesinghe, said that upon inspecting files related to the project, he found a “deficiency” in the environmental impact assessment.
Such measures have sent confusing signals to investors, and stock markets reacted badly. The main index on the Colombo Stock Exchange fell to a five-month low after the announcement of the tax and has yet to recover from that slump.
It closed on Friday 4.4 per cent lower than its close on election day, January 8.
“The political parties are talking about wide-scale constitutional changes – moving from a presidential system to a parliamentary system,” says Mr Jafferjee. “They also want to strengthen institutions, improve rule of law, depoliticise the public administration and pursue liberal economic policies. It is expected that a national government will be formed after the election for at least two years to try to solve many of the intractable problems that have bedevilled the country for many decades.”
Investors are expected to remain wary until there is certainty over the political set-up. But, there are hopes that greater democracy will ultimately result in a more favourable business environment.
“If they are even partially successful with their initiatives, the medium-term outlook for the economy remains encouraging,” says Mr Jafferjee.
Sri Lanka in 2009 emerged from a civil war that lasted almost three decades. Since the end of the conflict, the country has been improving its infrastructure, including the launch of new motorways that have improved connectivity. Stock markets have surged. The country’s tourism industry has been growing rapidly in recent years, with the number of tourist arrivals reaching more than 1.5 million last year compared to 447,890 in 2009. Chinese finance has flowed heavily into the country to fund projects.
“The general business outlook will take a dip in the short run and have a quantum leap in the long run,” says KR Bijimon, the chief general manager of Muthoot Finance, an Indian gold financing company, which last year bought a 30 per cent stake in the Sri Lankan firm Asia Asset Finance for $2.1m. He cited the exit of the Crown Resorts project and the uncertainty over Colombo Port City as major factors that would hurt sentiment in the near term.
Despite all that, he still believes that the new government is generally “more investor-friendly and business orientated”.
Mr Bijimon says: “With the new government’s policy of anti-corruption and transparency, any business entity with good corporate ethics, good governance and transparency will benefit. “Also, the improvement of hitherto strained foreign relations with western countries and countries such as India will improve the trade relationships.”
He says that economic growth in Sri Lanka could pave the way for Muthoot to invest in other industries such as hospitality.
Asim Younoos, the chief executive of Avirate, a Sri Lankan fashion retail brands is also cautiously optimistic.
“As of now it is too soon to give an opinion about the market and how it will fare going forward, but it has a positive vibe,” he says.
“The new government will be hopefully better for business, as they have a fair-play policy and not a very tight economy and restrictions that are imposed on to businesses.”
There is an opportunity for growth in Sri Lanka, regardless of the government in power, Mr Younoos believes.
“Sri Lanka is rapidly developing post civil war and the tourism industry is booming,” he says. “As a retailer, the more people coming in to the country the better it is for the business. Sri Lanka in general is a smaller market in comparison to India, but with the help of tourism we see a golden opportunity, and we need to capitalise on it to ensure we get a better market share than what we have.”
There are a wide array of opportunities in Sri Lanka for development of tourism infrastructure, ports and roads, which could create more opportunities for investors under a new administration, experts say. Sri Lanka is expected to move beyond its dependence on China to develop a more global foreign policy.
“Political influence on the private sector is expected to come down, which will have a positive impact on many sectors,” says Rajesh Yagnik, the regional practice head for reinsurance and aviation at JLT Independent Insurance Brokers.
He explains that many businesses are looking forward to being able to operate in a fairer environment with “less political interference and in a transparent manner”.
Celkon Mobiles, an Indian mobile phone manufacturer that operates in Sri Lanka, believes the market has enormous potential for its business because the new government is expected to boost trading relations with India. India’s prime minister, Narendra Modi, on Tuesday tweeted that he looked forward to welcoming Sri Lanka’s new president this month.
“There are a lot of new opportunities coming up as the market is expanding,” says Murali Retineni, the executive director of Celkon Mobiles.
Sushil Mohta, the director of Indocean Developers, which is developing a luxury condominium project in Colombo, says the next few months are likely to be difficult in the run up to the elections in April. But the economic fundamentals in the country are favourable, he adds.
“From the real estate perspective, there is a feeling of optimism and a positive outlook over the mid and long term,” he says.
“The election of the new president and appointment of the new government have been welcomed by the vast majority in the island country as a restitution of democracy and good governance, which was sorely lacking.”
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