Sri Lanka expects Foreign Investment Quadrupling as Civil War Ends

June 2 (Bloomberg) -- Sri Lanka expects foreign direct investment to more than quadruple to $4 billion by 2012 as the end of a 26-year-old civil war leads to political stability.

“Interest in Sri Lanka is tremendous now,” Dhammika Perera, chairman of the Board of Investment of Sri Lanka, said in an interview in Colombo yesterday. “The end of the war has put the country on the radar of global companies.”

Clothing manufacturers and hotel operators are scouting the nation for investment opportunities after the military defeated rebel Tamil Tigers last month, Perera said without naming the companies. President Mahinda Rajapaksa may still have to find a settlement to the separatist demands of the ethnic Tamils to secure lasting peace and build investor confidence.

“We think there are great untapped opportunities, however many challenges remain,” said Prakriti Sofat, a Singapore-based economist at HSBC Holdings Plc. “The government needs to create the right post-conflict environment by not only ensuring law and order for the broader civilian population but most importantly finding a political solution to the ethnic problem.”

An estimated 300,000 people have been displaced by fighting in the north, the previous stronghold of the Liberation Tigers of Tamil Eelam, which fought for a separate Tamil homeland and at one point controlled a third of the island’s territory.

Rajapaksa on May 16 declared victory over the LTTE. The president said his government will implement a power-sharing plan for the north based on a 1987 constitutional amendment that arose from a peace accord with India.

Attractive Investment

The plan will establish a provincial council to assume some of the central government’s role. The LTTE had rejected the amendment in 1988, saying the proposal was meaningless because the national parliament retained the power to rule on matters allocated to provincial authorities.

Still, Sri Lanka, without war, is an “attractive investment” proposition as the country improves its power, ports and other infrastructure and streamlines procedures for business, said Perera. He said he won’t name the companies that are planning investments in Sri Lanka until contracts with them have been signed.

Sri Lanka moved up to 29th position in 2008 from 47th place in 2007 for ease with which to start a business in the country, according to the World Bank. The island allows 100 percent ownership to foreign investors in all businesses and places no restriction on repatriation of earnings, Perera said.

Stocks Gain

Malaysian companies invested $150 million in Sri Lanka in 2008, making the country the biggest foreign direct investor in Sri Lanka during the year, according to the Board of Investment. India ranked second with $126 million as Bharti Airtel Ltd., the nation’s largest mobile-phone company, started operations in Sri Lanka. China was placed ninth with $27 million of investments.

Sri Lanka’s benchmark stock index, the Colombo All-Share Index, has climbed 16 percent since the government overran Tamil Tigers, taking its gains this year to 47 percent.

The central bank last month raised its growth forecast for the nation’s $32 billion economy to between 4 percent and 5 percent, compared with an April estimate of 2.5 percent.

Investor Jim Rogers said May 21 that he sees “wonderful opportunities” in Sri Lanka and that he would like to go to Sri Lanka to see “great, cheap” opportunities because of “dramatic” changes in the country.

To contact the reporter on this story: Cherian Thomas in Colombo at Cthomas1@bloomberg.net.