Opinion: Attracting FDI and managing BOP?

By Indika Hettiarachchi

Retained profits or reinvested earnings of existing Foreign Direct Investment (“FDI”) backed ventures usually comprise a significant share of Sri Lanka’s (official) FDI figures. This means a significant share of reported FDI do not represent actual foreign “cash” coming into the county to finance (new) investment. In other words, an increase in profit repatriation by FDI backed ventures cause reduction in total FDI figures!  

It was reported that during the first quarter of 2025, Sri Lanka received USD 197 million as FDI. When we analyze official statistics, we can estimate that approx. USD 95 million or nearly half of reported FDI were profits made by existing FDI ventures which are not repatriated. Data show that FDI backed ventures made USD 452 million profits during the first quarter of 2025, and they repatriated USD 357 million resulting in USD 95 million being automatically added as FDI stock.  

Sri Lanka has faced high profit repatriations since 2018! 

Chart below shows profits of FDI Ventures and profit repatriations during 2012 and 2024. It clearly shows that profit payout ratio has increased since 2018! It is possible that political instability in the country contributed to this trend along with other regional and global trends.  

Rise in profit repatriation of FDI ventures suggest many underlying economic trends – first of all it is a very positive sign suggesting success of (past) FDI ventures. But at the same time it suggest that existing FDI stock have reached maturity stage, and decline in new FDI to replace maturing FDI stock. 

 Data Source: CBSL

Negative impact on Balance of Payment 

High level of profit repatriations, especially in excess of FDI inflows exert pressure on balance of payment (“BOP”) as such deficits amount capital outflow. Table below clearly shows that during the last five years, profit repatriations exceed actual FDI inflows into Sri Lanka – a condition for deterioration of capital stock in the country as well as weakening of BOP! 

Data Source: CBSL

Table above shows that during last five years USD 2.5 billion were taken out of the country as profit payouts. During the same period Sri Lanka received USD 2.3 billion (net/cash) FDI inflows causing a USD 224 million negative impact on country’s BOP (through the capital account).

Actual FDI linked negative impact on Sri Lanka’s BOP is likely to be much higher than USD 224 million. This is because FDI related debt payments. FDI (cash) inflows into the country includes both equity and debt. Historical FDI data show that debt component is significantly higher than equity component. For example out of the USD 2.5 billion actual cash FDI inflows during last five years, a significant 69 percent were in the form debt inflows. FDI debt are usually repaid when the FDI ventures start to generate positive cash flows, or when foreign debt is replaced with local debt.  

The negative impact of FDI on BOP can worsen in the medium to long term if the profit repatriating FDI ventures do not bring foreign income to the country. 

It is likely that majority of recent FDI into Sri Lanka were into non-export businesses such as retail fuel distribution, power generation, etc. and it is likely that the gap between FDI inflows and profit repatriations are likely to widen during next few years. 

Emerging Global Trends   

There are emerging views (backed by research findings) that suggest FDI in developing countries such as Sri Lanka often yields disproportionately higher benefits to FDI origin countries (which are mostly developed countries). Research findings suggest that developed countries gain substantial long term capital accumulation by investing in developing countries. The fact that many countries offer tax concessions and other benefits to attract FDI, result in countries like Sri Lanka subsidizing capital accumulation in developed countries.  These research findings challenge the traditional FDI driven economic growth model adopted by many developing and capital starved countries like Sri Lanka.  

The negative impact of high profit repatriation on FDI host countries usually exacerbate during periods of global economic slowdowns and economic uncertainty such as the situation we face at present. In July, World Bank said that global FDI into developing countries have declined to lowest level since 2005.  Interestingly India which is considered a favorite FDI destination in South Asia has recently reported sharp 98% decline in FDI amid rising profit repatriations. On the other hand countries like USA have started to enjoy historic surge in FDI in the form of reinvested earnings – the opposite of what small developing countries like Sri Lanka are experiencing!