Sri Lanka seeks Indian FDI as it restructures state corporate sector

INTERNATIONAL DESK: Sri Lanka is taking steps for economic revival in the backdrop of the first tranche of the bailout package from the International Monetary Fund (IMF) and this would open up opportunities for Indian corporate sector.

One of the measures the Lanka will pursue is restructuring of its State-owned enterprises. As part of its economic recovery and fiscal consolidation plan, the Sri Lankan government has shown interest in divestment in the airlines, hotels and hospital sectors among others and this would open up opportunities for Indian investors, ET has learnt.

Sri Lanka received USD 330 million as the first tranche of the IMF bailout programme worth USD 2.9 billion on March 22. It is being seen as a means to pave the way to achieve better “fiscal discipline” and “improved governance and give a fresh impetus and momentum to Sri Lanka’s post Covid economic recovery efforts.”

ADB forecasts Sri Lanka’s economic growth to dip to 2.4% in 2022 and improve marginally to 2.5% in 2023. The forecast indicates a better prospect for the economy now that what the World Bank had forecast in October 2022. According to Word Bank October 2022 forecast, Sri Lanka’s real GDP was expected to fall by 9.2 percent in 2022 and a further 4.2 percent in 2023.

But economic recovery would require much more, especially boosting its lead sectors including airline services, hotel and hospital industry which in the past generated huge amount of foreign exchange and direct and indirect employment, sources said.

The likely divestment move of Sri Lanka opens up huge opportunities for the Indian investors in the sectors proposed for divestment, ET has learnt.

India’s leading industrial house the Tata Enterprises which recently acquired the government owned Air India could be seen as a potential investor in Sri Lankan Airways, a Colombo based source told ET.

For divestment in Sri Lankan Airlines, the Sri Lankan government has appointed a ‘State-Owned Enterprise Restructuring Unit’ to help privatise or restructure the enterprise. It must be noted that Sri Lankan Airlines was a very profitable airline when it was privatized. Forty percent of its shares were sold to Emirates Airlines, which ran the management of the airline.

However, Sri Lanka’s national airline was renationalized in 2008. Since then, it has recorded cumulative losses of 302 billion rupees and not shown a single year of profit since 2008. In dollar terms, the accumulated losses of the Sri Lankan Airlines are estimated at USD 1.5 billion.

In a bid to attract more Indian customers, Sri Lankan Airlines is reportedly planning to start operations from additional three cities in India including Ahmadabad. At present, it flies out of nine Indian cities. Many of the Sri Lankan flights are routed through India and vice versa and it makes a sense for Indian air service providers to go into collaboration with the Sri Lankan service provider.

Another important part of the Sri Lankan strategy of economic recovery hinges on revival of its tourism industry. Reportedly, two of the finest Sri Lankan hotels are under consideration for divestment, viz., the Grand Hyat Colombo and Hilton Hotel Colombo. After completion of about 60% work for its modernization and adding more facilities, about USD 103 million is required over and above USD 56 million already invested for the purpose. It also requires USD 30 million to settle its overdue debt liabilities, a Colombo based source told ET.

In case of the Hamilton Hotel Colombo, Sri Lankan government’s GOSL that owned it is planning to divest stakes for mobilisation of funds to renovate it and upgrade its services.

Sri Lankan hotels are a good investment for the Indian hotel groups. Investment in Sri Lanka’s tourism and hotel sector is profitable proposition.

Tourism in Sri Lanka accounts for almost 12 percent of the country’s GDP and is the third-largest source of foreign exchange reserves—behind worker remittances and the apparel industry. However, the 2019 Easter Sunday Bombings marked the beginning of the collapse of this industry. This was followed by the double-whammy of the COVID-19 pandemic and the Ukraine–Russia conflict amidst the current economic crisis in Sri Lanka.

According to the Sri Lanka Tourism Development Authority, SLTDA, over 1.25 lakh tourist arrivals have been recorded in March 2023, in comparison to the 1.06 lakh reported in March 2022. Further, the tourist arrivals for the month of March from India jumped 38 percent to about 19,000 compared to February when around 13,700 Indian tourists had visited the island. India is now the second-largest source market for Sri Lanka, following Russia for the year 2023.

Another lead sector where Indian investors could seek opportunity in Sri Lanka’s divestment move is Sri Lankan hospital industry. Many analysts feel that there is no sound reasoning in government’s control over hospitals like Lanka Hospitals PLC whose 51.34% stake is owned by Sri Lankan government. While the government has taken up the task of rationalisation of its economic activities and undertaking fiscal consolidation, it could offload its shares in the hospital.

Indian investors from hospital industry could add capital, quality and brand if the sector is opened up for joint ventures and collaboration by Sri Lanka, according to Colombo based sources. (ET)