Last week, a team of Korean experts, who had been tasked with making recommendations on five policy areas for Sri Lanka (including SME development), submitted their final report to the authorities. I was particularly interested when I heard of this visit as I just completed a Visiting Fellowship at the KDI where my key research area was industrial policy in Korea, with a focus on SMEs. In the final research paper, I put forward some aspects of Korea’s SME development that may hold lessons for Sri Lanka. This article highlights some of those ideas for further debate.
Based on a new Working Paper by IPS researchers titled ‘Incentivizing Foreign Investment in Sri Lanka and the Role of Tax Incentives’, this article argues that a key medium-term challenge facing the country is to find a balance between providing a competitive tax incentives regime to attract FDI and keeping tax foregone to a minimum in order to preserve domestic revenue.
With stimulated economic activity in post-war Sri Lanka and the heightened investment in connective infrastructure islandwide there is no doubt that the logistics sector will have a key role to play in supporting growth. Budget 2012 has indeed brought in proposals that give the logistics sector a ‘shot in the arm’. But it is just the beginning.
Yes, tax concessions are a vital component in the SME-strengthening effort, and the Budget 2012 has much to offer for SMEs. But tax concessions should not be thought of as the panacea for the struggles of Sri Lanka’s SMEs. Other issues are often equally constraining, and more needs to be done about them. Ministry of Finance has delivered; it is now time for SME-mandated government institutions to sharpen their focus and address the vital issues
Speak to any major industrialist in Sri Lanka, and they will tell you that electricity is a critical constraint on their operations. It is unlikely that the concerns of the industrial sector could be effectively addressed amidst the attempts by the CEB to make the power sector financially viable. It seems that the industrialists would have to continue to grapple with their electricity issues at least until financial viability is restored to the sector by 2015, assuming the tariff rebalancing exercise is executed on schedule.