Sri Lanka Offers Opportunity to Foreign Companies as China Becomes Expensive - President Rajapaksa to Wall Street Journal

22nd September 2010, online.wsj.com, By Gabriella Stern

NEW YORK -- Sri Lanka's president said Wednesday that rising labor costs in China present an opportunity for his South Asian country to attract foreign companies seeking an alternative low-cost manufacturing base.

President Mahinda Rajapaksa, in New York for the United Nations General Assembly, told The Wall Street Journal that the once war-torn country has enjoyed a 15-month period of peace during which his government has focused on rebuilding roadways and

railroads in the ravaged North and East, expanding the availability of electricity and clean water, and providing homes, among other things.

He said Sri Lanka--with a literate population, relatively low labor costs, and a sizeable corps of trained accountants--is drawing the interest of outsourcing firms, including major Indian business-process outsourcing companies seeking ways to expand outside India, where wages also have been rising.

In addition, European and U.S. retailers are increasingly turning to Sri Lanka to produce apparel at costs below those in China, Mr. Rajapaksa added. His country faces a labor shortage in the apparel sector as a result of this interest, he added.

Ashroff Omar, chief executive of apparel exporter Brandix Lanka Ltd., said it currently costs about $150 a month to employ a "trained" Sri Lankan apparel worker, compared with $400 in China. In a couple of years, he said, the cost in China will be about $600, compared with around $200 in Sri Lanka.

Mr. Omar and about two dozen business leaders and government ministers accompanied President Rajapaksa to the U.S.

Tourism is growing in his country, as Indian travelers gravitate to a peaceful Sri Lanka, and interest among European tourists--particularly Scandinavians--picks up, Mr. Rajapaksa said. Agriculture and fisheries are also key drivers of economic growth.

President Rajapaksa acknowledged that Sri Lanka still suffers from a lingering perception that it remains a war zone, but said there have been "no incidents" for more than a year and foreign governments have generally removed advisories warning travelers to stay away.

The country's economy grew 8.5% in the second quarter, compared with 7.1% year-on-year growth in the first quarter, according to Fitch Ratings. Inflation, at just under 6%, is under control, Sri Lanka's president said. The International Monetary Fund recently said a Central Bank of Sri Lanka rate cut was appropriate policy and projected a continuation of single-digit inflation for the year.

The president said his biggest worry is "protectionism" by other Asian countries at a time when Sri Lanka hopes to tap into the region's unprecedented economic expansion.

Sri Lanka, with a population of 20 million, emerged from a three-decade civil war in May 2009 with the defeat of the Tamil Tigers.

Email gabriella.stern@dowjones.com