Despite a tragic past and a long, painful civil war, Sri Lanka remains one of the oldest democracies in Asia, and an intriguing launchpad for potential economic growth. The run-up to this month’s presidential election has brought to light many of the country’s most pressing issues, but for some candidates, few are more important than planting the seeds for economic development and foreign investment.
Former defense secretary Gotabaya Rajapaksa, the current frontrunner, has made encouraging growth and rebuilding Sri Lanka after a decades-long armed conflict a cornerstone of his campaign. Although he is known primarily as a leading figure behind the end of the civil war, Rajapaksa has stated forcefully that his administration would focus on driving foreign investment and innovation within the country. This includes repairing strained relationships with allies and creating the right ecosystem for startups and small businesses to thrive.
The country, which is already considered a high-potential market, could definitely use a catalyst. As election day nears, Sri Lanka’s economic future will gain a larger spotlight, conceivably differentiating the leading candidates.
Finding ways to move forward
The Sri Lankan economy has been in recovery mode during 2019 after steady economic growth over the past five years stalled, falling to 1.8% quarterly expansion in early 2019, and not rebounding since. Moreover, there are wide regions that were severely impacted by the war and have yet to recover fully. After years of unrealized government promises, these areas are quickly falling behind the rest of the country in terms of development.
Despite a stable rate of economic growth over the past decade, the country remains largely un-urbanized, with only 19% of the population residing in urban centers. Similarly, even with a high number of mobile-phone subscriptions, only a third of Sri Lankans have access to the Internet. In today’s rapidly evolving digital world, this could pose an immediate threat to Sri Lanka’s economic prospects.
Indeed, Sri Lankan executives see the need for a more tech-savvy population, as well as the benefits therein. BoardPAC chief executive officer Lakmini Wijesundera noted that while the current ICT workforce in the country numbers 80,000, she believes the information and communications technology sector will require at least 400,000 workers by 2020 to meet its massive revenue target of US$5 billion in sales by 2025.
Sri Lanka also remains a difficult place to do business according to figures compiled by the World Bank. The country ranks 100th in the “Doing Business Index,” and it ranks 83rd in terms of ease of starting a business (though to its credit, Sri Lanka did rise 11 spots from 2018’s list). The country also has some major success stories, with Creately and 4Axis both founded in and operating from Sri Lanka.
In a recently released campaign manifesto, Rajapaksa lays out specific policies that would undoubtedly have an impact on the economy. He plans to reduce the income tax on productive enterprises from 28% to 18%, and scrap the economic service charge (ESC) and withholding tax (WHT). In addition, Rajapaksa wants to introduce a simple value added tax of 8%, replacing both the current VAT of 15% and the nation building tax (NBT) of 2%.
Such maneuvers would likely spur the growth of the startup sector.
However, the rate of investment remains dangerously low, resulting in a slowdown in innovation. According to a PwC report for 2019, 60% of startup founders claim to be self- or family-funded, while only 4% claim venture capital as a source of funding. More important, 64% believe that lack of government support remains one of the biggest hurdles facing startups, while 57% believe Sri Lanka’s position as an investment hub in the region (and the world) is a major challenge.
For Rajapaksa, sparking a rebound begins by emphasizing economic growth, development and stability as central tenets of his presidential platform. One of the big drivers Rajapaksa believes will help usher in these components is re-establishing friendly ties with regional hegemon China. Sri Lanka’s relations with China have plateaued for the majority of current President Maithripala Sirisena’s term, but the Asian powerhouse was quite open about its desire to invest in Sri Lankan infrastructure in the past.
Rajapaksa also listed promoting the establishment of regional headquarters for multinational corporations within Sri Lankan borders, as well as removing many of the existing barriers to start new businesses, as means of encouraging greater investment across the country. Other points on the candidate’s agenda include improving technology infrastructure as well as advancing high-speed Internet access and investing in key sectors like the Internet of Things and artificial intelligence.
Still, building a better ecosystem requires more than simply investing in tech. The country, while displaying remarkably low unemployment, remains far behind where it needs to be. For instance, the national computer-literacy rate remains at 23%, while IT literacy ranges from 37% in urban centers to as low as 9% on estates. Moreover, tertiary education levels are low – only 3.5% of individuals aged 15 years or older have a university degree or similar certification.
Pushing for a new model of national success
Sri Lanka is teetering on the brink of an economic downturn, but there remains time to pull back from the precipice. Despite the difficulty of doing business in the country, Sri Lankan startups have uncovered ways to access funding, but now they require more assistance. The government must prioritize innovation and tech literacy from a young age, all while providing the support needed for businesses to thrive and obtain the capital they require.
Rajapaksa has promised that he will revolutionize the economy after years of inefficient governance and claims of corruption. With elections right around the corner, the frontrunner has a chance to bring his vision to life, but Sri Lanka will require a patient and measured approach to blossom into an attractive regional hub for startups and tech.