Sri Lanka - U.S. Department of State (.gov)

Sri Lanka, a lower middle-income country with a population of about 22 million, is navigating out of an economic crisis that led to political upheaval in 2022. While the trajectory since 2022 has been mostly positive, challenges remain that make Sri Lanka’s investment climate difficult. Since assuming office in July 2022, President Ranil Wickremesinghe has introduced sweeping financial reforms, including tax hikes and ongoing privatization of money-losing state-owned enterprises (SOEs). The IMF approved an Extended Fund Facility (EFF) in March 2023 – valued at roughly $3 billion over four years – to support Sri Lanka’s efforts to shore up financing. The EFF is contingent on Sri Lanka restructuring its debt to sustainable levels. Although the country has received agreement in principle for debt restructuring from its bilateral creditors, negotiations are expected to continue until the end of 2024. Presidential elections are slated for fall 2024, with any unforeseen political instability presenting a possible concern for the ongoing reform agenda.

The economic reform program is showing signs of recovery as real GDP grew by 1.6 percent year on year in the third quarter of 2023, the first expansion in six quarters. However, the economy contracted 2.3 percent for the year 2023. The improvement in macroeconomic conditions has not resulted in higher living standards for most Sri Lankans, many of whom face severe challenges in food security, education, and transport. The World Bank’s latest bi-annual update indicates the country still faces elevated poverty levels, income inequality, and labor market concerns.

Sri Lanka is expected to stay on a growth trajectory during 2024, although recovery will be slow, as the economic crisis has restricted consumer purchasing power. The balance of payments is weak due to contracted demand in major export categories. Apparel exports, for example, shrank by around $1 billion in 2023 from the previous year. Earnings from merchandise exports declined by 9 percent in 2023 from the previous year. Anticipated increases in fuel imports for power generation may also have negative effects on the current account. IMF disbursements, increased tourism, and remittances will ease pressure on the balance of payments and help to improve reserves. Debt repayments are due to start in 2025, which will again put pressure on the country’s reserves.

Key foreign exchange earners for the country include exports (namely apparel and tea), foreign remittances, and tourism. The country’s total exports were $14.9 billion in 2023. Tourism recovered strongly and has been a steady contributor to forex earnings with an estimated $1 billion earned between January and July 2023. Remittances recorded 57.5 percent growth between January and May 2023 compared to the same period in 2022. Out of roughly $11.8 billion in merchandise exports in 2023, apparel accounted for $4.7 billion.

The current government appears committed to achieving budget sustainability, implementing several key economic reforms via politically unpopular tax hikes. However, government expenditure remains high and revenue collection very low. Many of these reforms reflect genuine efforts to qualify for the IMF’s EFF package, which is conditioned on budget sustainability and transparency. Successful completion of these reforms and the IMF program is not guaranteed, with the political-economic landscape still uncertain. All previous IMF programs initially performed well on stabilization and faltered in implementing the required reforms for long-term economic sustainability. The anticipated 2024 presidential election has the potential to slow or even derail the reform agenda. While the government introduced an anti-corruption bill in April 2023 to tackle some of its endemic corruption issues, Sri Lanka’s track record on combatting corruption is weak, with lack of transparency and bribery continuing in unrestricted is multiple areas, despite the economic crisis. FDI, which is critical to sustained recovery, is likely to be affected as governance and accountability are major obstacles for the country to attract investment.

Foreign investment in Sri Lanka, historically below that in other comparable countries, was around $730 million in 2023. Foreign inflows to the equities market in 2023 was around $9.2 million, while inflows into government securities were around $292 million. FDI in Sri Lanka have largely been in tourism, real estate, and telecommunications in recent years. The Sri Lankan government seeks to expand investment potential in renewable energy, information technology services, agriculture, electronics, and light manufacturing. The Board of Investment (BOI) is the primary government authority responsible for attracting both foreign and domestic investment, aiming to provide “one-stop” services for foreign investors. BOI facilitates FDIs by offering project incentives, arranging utility services, assisting in obtaining resident visas for expatriate personnel, and facilitating import and export clearances.

Sri Lanka’s strategic location off the southern coast of India along the main east-west Indian Ocean shipping lanes gives it a regional logistical advantage, especially as India does not have deep-water ports comparable to Sri Lanka’s. This geographic advantage remains relatively untapped. The U.S. International Development Finance Corporation (DFC) has committed up to $553 million in financing to the Colombo West International Terminal (CWIT) for an expansion of the Port of Colombo, demonstrating U.S. government commitment to supporting Sri Lanka’s private sector growth.

Sri Lanka’s foreign investment policies are not consistent. Frequent policy changes, especially with changes of governments, cause uncertainty for investors. The country has a goal of $5 billion in FDI by 2025. Reforms to boost productivity and competitiveness are key to achieving these targets. According to the World Bank, the government needs better policies and practices, ranging from improvements to the investment climate and elimination of unnecessary regulatory burdens, to enhanced predictability of laws and responsiveness of bureaucracy to deliver effective FDI services. The current government made sweeping interventions in 2022 (including import restrictions) to arrest the fallout from diminishing official reserves, but it has since been pursuing a more market-oriented approach characterized by a floating exchange rate and a removal of subsidies. Privatization of large, deficit-ridden state-owned enterprises (SOEs) is ongoing. The government’s 2023 budget identifies attracting FDI as one of its priorities. However, FDI flows remain weak, and with upcoming elections in 2024, investors are likely to adopt a wait-and-see approach to the political uncertainty. Governance, transparency, bureaucratic delays, and implementation of contracts are serious challenges to attracting FDI and fostering growth.

The BOI ( www.investsrilanka.com ), an autonomous statutory agency, is the primary government authority responsible for investment, especially foreign investment, with BOI aiming to provide “one-stop” services for foreign investors. However, the investment agency has been plagued by inefficiencies and accountability issues and has not been able to deliver coordinated service to investors due to multiple government departments involved in obtaining clearances and approvals. BOI can grant project incentives, arrange utility services, assist in obtaining resident visas for expatriate personnel, and facilitate import and export clearances.

Importers to Sri Lanka face high barriers. According to a World Bank study, Sri Lanka’s import regime is one of the most complex and protectionist in the world. Sri Lanka restricted the import of around 1,400 items due to the economic crisis. Most of these restrictions were lifted in December 2023, with vehicle imports continuing to be prohibited.

Investors report that Sri Lanka is a challenging place to do business, with high transaction costs aggravated by an unpredictable economic policy environment, inefficient delivery of government services, and opaque government procurement practices. International companies report that lack of transparency in government procurement prevents them from competing effectively. Investors note concerns about the potential for contract repudiation, cronyism, and de facto or de jure expropriation. As of December 2023, the U.S. Embassy in Sri Lanka is not tracking any alleged instances of expropriation involving U.S. companies. Public sector corruption is a significant challenge for U.S. firms operating in Sri Lanka and a constraint on foreign investment. Although the government passed a new Anti-Corruption Act in 2023 to conform to IMF conditions, corruption and bribery continues unabated with little attention focused on implementing effective ant-corruption measures. While the country generally has adequate laws and regulations to combat corruption, enforcement is weak, inconsistent, and selective. U.S. stakeholders and potential investors express particular concern about corruption in large infrastructure projects and in government procurement. Investors point to policy inconsistency as another leading investment deterrent.

While Sri Lanka is a challenging place for businesses to operate, investors report that starting a business in Sri Lanka is relatively simple and quick, especially when compared to other lower middle-income markets. However, scalability is a problem due to the lack of skilled labor and constraints on land ownership and use. (Foreigners also report significant challenges in setting up bank accounts.) Moreover, the height of the recent economic crisis saw substantial skilled and unskilled worker migration from the country, with leading industries such as apparel, tourism, and IT particularly affected. In general, investors note that employee retention in Sri Lanka is mixed, and numerous public holidays, a lack of labor mobility, and difficulty recruiting women decrease efficiency and increase start-up times.

Sri Lanka permits businesses with 100 percent foreign ownership in most sectors and grants them equal status with local investments. National interest testing is not mandated in most instances. To promote local industries and protect national security, sectors such as tea, rubber, coconuts, cocoa, rice, sugar and spices, timber-based industries, deep-sea fishing, mass communication, education and freight forwarding require some level of Sri Lankan participation. Long-term leases are unrestricted, although transfer of freehold title to foreigners is restricted to a few exempted areas. Foreigners can invest in company shares, debt securities, government securities, and unit trusts. Many investors point to land acquisition as the biggest challenge for starting a new business. Generally, Sri Lanka prohibits the sale of public and private land to foreigners and to enterprises with foreign equity exceeding 50 percent. However, on July 30, 2018, Sri Lanka amended the Land (Restriction of Alienation) Act of 2014 to allow foreign companies listed on the Colombo Stock Exchange (CSE) to acquire land. Foreign companies not listed on the CSE—but engaged in banking, financial, insurance, maritime, aviation, advanced technology, or infrastructure development projects identified and approved as strategic development projects—may also be exempted from restrictions imposed by the Land Act of 2014 on a case-by-case basis.

Sri Lanka has a long history of problematic land policies. Many legal amendments have not adequately addressed land-use changes that affect environmental sustainability or changing economic priorities of the country. The land sector has several weaknesses that include a complex policy and regulatory framework governing land use, fragmented and complex land administration processes, land scarcity, tenure insecurity, land fragmentation and degradation, deforestation, land encroachment, and land disputes. The government owns about 80 percent of the land in Sri Lanka, including the land housing most tea, rubber, and coconut plantations. These plantations are leased out, typically for 50-year terms. Private land ownership is limited to 50 acres per person. Although state land for industrial use is usually allotted on a 50-year lease, the government sometimes approves 99-year leases.

The government allows up to 100 percent foreign investment in commercial, trading, or industrial activity except for these heavily regulated sectors: banking, air transportation; coastal shipping; large scale mechanized mining of gems; lotteries; manufacture of military hardware, military vehicles, and aircraft; alcohol; toxic, hazardous, or carcinogenic materials; currency; and security documents. A few strategic sectors such as railway freight transportation and electricity transmission and distribution are closed to any foreign capital participation. Foreign investment is also not permitted in pawn brokering, retail trade with a capital investment of less than $5 million, and coastal fishing.

Foreign investments in the following areas are restricted to 40 percent ownership: production for export of goods subject to international quotas; growing and primary processing of tea, rubber, and coconut; cocoa, rice, sugar, and spices; mining and primary processing of non-renewable national resources; timber based industries using local timber; deep-sea fishing; mass communications; education; freight forwarding; travel services; and businesses providing shipping services.

In areas where foreign investments are permitted, sometimes Sri Lanka treats foreign investors differently than domestic investors, with renewable energy an example of overseas investors being offered dollar tariffs, while local investors are paid in rupees. Corruption may make it difficult for U.S. firms to compete against foreign bidders not subject to the U.S. Foreign Corrupt Practices Act when competing for public tenders.

Sri Lanka has not undergone any investment policy reviews in the last five years by multilateral agencies or civil society organizations. Local and foreign media published short op-eds and articles in 2021-2022 highlighting flagship foreign investments, including the Colombo Port City project. In 2021, the Colombo Port City Special Economic Zone (SEZ) and the Colombo Port City Economic Commission (CPCEC) were established. CPCEC is the one-stop-shop (Single Window Investment Facilitator) that registers and issues licenses, authorizations, and approvals to engage in business within, and invest in, the SEZ. CPCEC is encouraging and promoting global and regional investments in international trade, shipping, logistics operations, offshore banking and finance, IT and business process outsourcing, establishment of corporate headquarters, regional distribution operations, and tourism. The main investor in Port City so far is the China Harbor Engineering Company (CHEC).

2004 UNCTAD Report: https://investmentpolicy.unctad.org/publications/82/investment-policy-review-of-sri-lanka

The Department of Registrar of Companies ( www.drc.gov.lk ) is responsible for business registration. Online registration ( http://eroc.drc.gov.lk/ ) is available, and processing usually takes four or five days. In addition to the Registrar of Companies, businesses must register with the Inland Revenue Department to obtain a taxpayer identification number (TIN) and with the Department of Labor for social security payments.

The government supports outward investment, and the Export Development Board offers subsidies for companies seeking to establish overseas operations, including branch offices related to exports. Sri Lankan companies, partnerships, and individuals can invest in shares, units, debt securities, and sovereign bonds overseas subject to limits specified by the July 2023 updates to the Foreign Exchange regulations. Sri Lankan companies are also permitted to establish overseas companies. Investments over the specified limit require the Central Bank Monetary Board’s approval. All investments must be made through outward investment accounts (OIA). Licensed commercial banks can open and maintain OIAs for resident investors in the domestic banking unit of a Licensed Commercial Bank in any designated foreign currency subject to the terms and conditions set out in government gazette no. 2045/56 from November 11, 2017. All income from investments overseas must be routed through the same OIA within three months of payment.

In July 2023, the Central Bank of Sri Lanka issued a new order under Section 22 of the Foreign Exchange Act, which relaxed limitations on outward remittances for capital transactions and removed the restrictions on current transfers of emigrants, while continuing the other suspensions and limitations which were imposed under the previous order.

Sri Lanka has signed investment protection agreements with 26 countries, including the United States. This treaty came into force in May 1993. Pursuant to the Constitution, investment protection agreements enjoy the force of law, and legislative, executive, or administrative actions cannot contravene them.

Sri Lanka signed a bilateral taxation treaty with the United States in 1985, which was amended in 2002. Information about the treaty can be found at: https://www.irs.gov/businesses/international-businesses/sri-lanka-tax-treaty-documents

The United States-Sri Lanka Trade and Investment Framework Agreement (TIFA) is the primary forum for bilateral trade and investment discussions, including the protection of worker rights.

Sri Lanka has signed free trade agreements (FTAs) with India, Pakistan, Singapore, and Thailand and is negotiating an FTA with China. The country has announced plans to engage Bangladesh next on a bilateral FTA. It also seeks to resume negotiations to establish an Economic and Technology Cooperation Agreement (ETCA) with India – which would expand the existing FTA to include IT services, among others.

The FTAs with India and Pakistan only cover trade in goods. They provide for duty-free entry and duty preferences for manufactured and agricultural goods. A domestic value addition of 35 percent is required to qualify for concessions granted pursuant to the FTAs.

The Singapore-Sri Lanka FTA came into force on May 1, 2018, but implementation was unilaterally slowed by domestic opposition in Sri Lanka. Sri Lanka has renewed its implementation efforts as of January 1, 2023. The agreement covers investment, goods, services, trade facilitation, government procurement, telecommunications, e-commerce, and dispute settlement. Sri Lanka eliminated customs duties on 50 percent of tariff lines, which will progressively increase to 80 percent over 14 years. Sri Lanka will not reduce or eliminate duties on the remaining 20 percent of tariff lines.

Sri Lanka is a member of the South Asian Free Trade Area (SAFTA) and the Asia-Pacific Trade Agreement (APTA).

Sri Lanka has signed less comprehensive bilateral trade agreements with 43 more countries.

Sri Lanka passed an Inland Revenue Act in 2017 and amended it in April 2023. The law, which came into force on April 1, 2018, provides a tax framework to provide increased certainty to investors and taxpayers; modernize rules related to cross-border transactions to address tax avoidance; broaden the tax base; and expand income tax sources. A three-tier corporate tax structure was also introduced with a 40 percent rate for businesses in the liquor, tobacco, and gambling industries. The law also introduced capital gains tax and fines and/or imprisonment for tax evasion and personal liability for company directors. In an attempt to raise government revenue, the Value Added Tax (VAT) rate on applicable goods and services increased from 15 to 18 p ercent as of January 1, 2024. This brought 97 previously VAT-exempt goods and services under the tax umbrella, including fuel, gas, telecommunication services, food products manufactured using locally cultivated grains, locally manufactured coconut milk, and certain dairy products. Sri Lanka is not a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting.

Many foreign and domestic investors view the regulatory system as unpredictable, with outdated regulations, rigid administrative procedures, and excessive leeway for bureaucratic discretion. According to IMF reports, legislation has prevented information sharing across agencies in ways that have hamstrung collaboration and effectiveness. High-profile corruption cases have been repeatedly abandoned due to problems in coordinating the investigation and prosecution of individuals across multiple agencies, raising concerns about whether police and judicial officers have the skills and incentives to sanction sophisticated parties, and possible direct political involvement in corruption cases.

Foreign investments in Sri Lanka have remained low compared to regional countries in recent decades due to legal, structural, and institutional shortcomings. These include labor market regulations; convoluted and inconsistent tax structures; tedious regulations regarding contract enforcement, trade facilitation, and land acquisition; and a lack of well-developed infrastructure. Lack of transparency, policy ambiguity, institutional flaws, and governance deficiencies also deter foreign investors.

Several laws govern corporate financial reporting requirements in Sri Lanka, and the Institute of Chartered Accountants of Sri Lanka (ICASL) is responsible for setting accounting standards to comply with accounting and audit standards adopted by the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB). Sri Lanka follows International Financial Reporting Standards (IFRS) set by the IASB. Sri Lankan accounting standards are applicable to all banks, companies listed on the stock exchange, and all other large and medium-sized companies in Sri Lanka. Accounts must be audited by auditors holding ICASL membership. ICASL has also published accounting standards for small companies. The Accounting Standards Monitoring Board (ASMB) is responsible for monitoring compliance with Sri Lankan accounting and auditing standards.

Transparency International Sri Lanka (TISL) conducts annual assessments of transparency in corporate reporting. The TISL 2023 report shows five companies achieving a full score for transparency in reporting, while twenty-seven companies were considered significantly transparent in corporate reporting. Companies evaluated that year had an average score of 5.85 out of 10. This marks a slight overall improvement compared to the previous year’s assessment, reflecting advancements in corporate transparency and reporting practices.

Overall legislative authority lies with Parliament. Line ministries draft bills and, together with regulatory authorities, are responsible for drafting regulations, which may require approval from the Cabinet and/or Parliament. Bills are published in the government gazette ( http://documents.gov.lk/en/home.php ) at least seven days before being placed on the Order Paper of the Parliament (the first occasion the public is officially informed of proposed laws) with drafts being treated as confidential prior to this. Any member of the public can challenge a bill in the Supreme Court if they do so within one week of its placement on the Order Paper of the Parliament. If the Supreme Court orders amendments to a bill, they must be incorporated before the bill can be debated and passed. Regulations are drafted by administrative agencies and published in a government gazette, but the process is less transparent than that for legislation. In addition to regulations, some rules are made through internal circulars, which may be difficult to locate and subject to interpretation.

Research on trade facilitation shows that Sri Lanka is not only falling behind other middle-income countries but is also trailing behind the least developed countries (LDCs). Over the last six years, Sri Lanka has made less progress than LDCs in making the country’s import and export procedures more efficient, more transparent, and less costly. Sri Lanka, despite being a lower middle-income country, has claimed that it has less capacity than the LDCs to improve its systems. Opaque, complex, time-consuming, costly manual export and import procedures discourage businesses from engaging in international trade and undermine their international competitiveness. These problems could be mitigated significantly by simplifying, streamlining, and automating import and export procedures and making them more transparent. Some customs officials do not want to streamline trade, however, as they fear losing bribery income.

Sri Lanka is a member of the World Trade Organization (WTO) and has made WTO notifications on customs valuation, agriculture, import licensing, sanitary and phytosanitary measures, the Agreement on Technical Barriers to Trade, the Agreement on Trade-Related Investment Measures, and the Agreement on Trade-Related Aspects of Intellectual Property Rights. Sri Lanka ratified the WTO Trade Facilitation Agreement (TFA) in 2016 and a National Trade Facilitation Committee was tasked with undertaking reforms needed to operationalize the TFA.

Sri Lanka’s legal system reflects diverse cultural influences. Criminal law is fundamentally British-based, while civil law is based largely on Roman-Dutch legal principles – a legacy of Sri Lanka’s colonial history under the Netherlands. Laws on marriage, divorce, inheritance, and other issues can also vary based on religious affiliation. Sri Lankan commercial law is almost entirely statutory, reflecting British colonial law, although amendments have not kept pace with subsequent legal changes in the United Kingdom. Several important pieces of legislation regulate commercial issues: the BOI Law; the Intellectual Property Act; the Companies Act; the Securities and Exchange Commission Act; the Banking Act; the Inland Revenue Act; the Industrial Promotion Act; and the Consumer Affairs Authority Act. However, weak enforcement of contracts is a major obstacle to growth and investment.

Sri Lanka’s court system consists of the Supreme Court, the Court of Appeal, provincial High Courts, the Courts of First Instance (district courts with general civil jurisdiction), and Magistrate Courts (with criminal jurisdiction). Provincial High Courts have original, appellate, and reversionary criminal jurisdiction. The Court of Appeal is an intermediate appellate court with a limited right of appeal to the Supreme Court. The Supreme Court exercises final appellate jurisdiction for all criminal and civil cases. Citizens may apply directly to the Supreme Court for protection if they believe any government or administrative action has violated their fundamental human rights.

The International Commission of Jurists (ICJ) stated that parliamentary actions undermine judicial independence. In March 2023, a Member of Parliament (MP) asked the Speaker of Parliament to investigate Supreme Court judges for their interim order on Local Government Elections, claiming it breached Parliamentary Privileges. The Supreme Court ordered the release of funds for local elections, but the President instructed the Ministry of Finance to ignore this order. The Speaker then referred the matter to the Parliamentary Committee on Ethics and Privileges. The ICJ and other legal bodies view these actions as a serious encroachment on judicial independence. There are concerns that some judges avoid ruling against the government due to pressure and past unfavorable decisions against the state and ruling party MPs.

Foreign investment in Sri Lanka is regulated under Foreign Exchange Act number 12 of 2017 (the “FE Act”). The FE Act puts responsibility for promoting and regulating foreign exchange with the Central Bank of Sri Lanka (CBSL). The Foreign Exchange (Classes of Capital Transactions undertaken in Sri Lanka by a Person Resident Outside Sri Lanka) Regulations number 2 of 2021 as amended by the Gazette Extraordinary No 2235/22 dated July 6, 2021 (the “FE Regulations”), issued under the FE Act, specify investments that any party outside Sri Lanka may make. These investments must be made in compliance with the FE Regulations, including the means of moving investment funds into or out of Sri Lanka.

There are many financial and regulatory incentives for foreign investors in Sri Lanka. Additional protections and concessions such as protection from nationalization and expropriation, duty concessions for importation of project-related items during the construction period, and facilitation of work visas are available for companies established with the approval of the Board of Investment (BOI).

Political risk and uncertainty – including the risk of expropriation, nationalization, and political force majeure – is moderate in Sri Lanka, but investment agreements and treaties supported by constitutional guarantee provide adequate protection for foreign investors against such risks. Such agreements enjoy the force of law, and legislative, executive, or administrative action cannot be taken to contravene a bilateral investment agreement, except on grounds of national security.

The BOI Act was created in 1978 and amended in 1980, 1983, 1992, 2002, 2009 and 2012. The BOI Act and implementing regulations provide for two types of investment approvals, one for concessions and one without concessions. Under Section 17 of the Act, the BOI can approve companies which meet minimum investment criteria with such companies eligible for duty-free import concessions. The BOI acts as the “one-stop-shop” to facilitate all the requirements of the foreign investors to Sri Lanka. Investment approval under Section 16 of the BOI Act permits companies to operate under the “normal” laws and applies to investments that do not satisfy eligibility incentive criteria. From April 1, 2017, Inland Revenue Act No. 24 of 2017 created an investment incentive regime granting a concessionary tax rate (for specific sectors) and capital allowances (depreciation) based on capital investments. Commercial Hub Regulation No 1 of 2013 applies to transshipment trade, offshore businesses, and logistic services. The Strategic Development Project Act of 2008 (SDPA) provides tax incentives for large projects that the Cabinet identifies as “strategic development projects.” In May 2021, Parliament of Sri Lanka approved Port City Commission Bill to establish the Colombo Port City Special Economic Zone and Economic Commission. Until the regulatory framework of Port City is finalized and implemented, investors should exercise caution.

Section 34 of Act No. 09 of 2003 directs the Consumer Affairs Authority (CAA) to carry out investigations regarding anti- competitive practices. The CAA investigates action that restrict, distort, or prevent business competition. In practice, competition policy and antitrust enforcement has been mixed.

The BOI and other regulatory authorities may also review transactions for competition-related concerns. In March of 2017, Parliament approved the Anti-Dumping and Countervailing and Safeguard Measures acts. These laws provide a framework against unfair trade practices and import surges and allow government trade agencies to investigate unfair business practices to impose additional and/or countervailing duties.

Since economic liberalization policies began in 1978, the government has not expropriated a foreign investment, with the last expropriation dispute resolved in 1998. The Land Acquisition Act of 1950 empowers the government to take private land for public purposes with compensation based on a government valuation. There are no known instances of arbitrary expropriation of assets owned by foreign investors.

Sri Lanka is a member of the International Centre for the Settlement of Investment Disputes (ICSID convention) and a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) without reservations.

According to UN UCTAD, Sri Lanka has had five investment dispute cases since 2000, including one involving a U.S. investor. Three of the cases were settled in favor of the state and one in favor of the investor, with one case ongoing. Sri Lanka signed a Bilateral Investment Treaty (BIT) with the United States in 1991. Sri Lanka has largely demonstrated adherence to international arbitration standards in dispute settlements involving foreign investors.

Sri Lanka ranks low in international rule of law and corruption reports, as the IMF has noted. Sri Lanka ranks number 74 of 140 countries on the 2022 Rule Index of the World Justice Project and ranks poorly on contract enforcement (164 out of 190) on the World Bank’s Doing Business Indicators. As a result, many investors prefer arbitration over litigation. Sri Lanka has a community mediation system, which primarily handles non-commercial mediations and commercial disputes where the amount in controversy is less than $3,333.00. There is no mediation system for commercial disputes over that threshold amount. The Institute for the Development of Commercial Law and Practice (ICLP) ( www.iclparbitrationcentre.com ) and the Sri Lanka National Arbitration Centre ( www.slnarbcentre.com ) also help settle private commercial disputes through arbitration.

Sri Lanka began drafting an insolvency law in December 2023. An Insolvency Ordinance was issued in 1953 covering consumers and unincorporated businesses. The Companies Act of 2007 also contained bankruptcy provisions, but these provisions were insufficient to meet current needs. The Companies Act and the Insolvency Ordinance of 1953 provide for dissolution of insolvent companies, but there is no mechanism to reorganize financially troubled companies. Other laws make it difficult to keep a struggling company solvent. The Termination of Employment of Workmen Special Provisions Act (TEWA), for example, makes it difficult to fire or lay off workers who have been employed for more than six months for any reason other than serious, well-documented disciplinary problems. In the absence of comprehensive bankruptcy laws, extrajudicial powers granted by law to financial institutions protect the rights of creditors. A creditor may petition the court to dissolve a company if the company cannot make payments on debts over LKR 50,000 ($320.00). In March 2023, the Cabinet of Ministers approved suspension of foreclosure on collateral until December 2024. However, loans below LKR 5 million ($32,000) are exempt, and lenders cannot foreclose on collateral provided by guarantors to a loan.

The Inland Revenue Act of 2017, implemented April 1, 2018, includes concessionary corporate tax rates for investments in certain sectors and increased capital allowances (depreciation) on capital investments.

In the Inland Revenue Act No. 45 of 2022, the standard rate of Corporate Income Tax was increased from 24 to 30 percent. Further, the concessionary rate of 14 percent and 18 percent applicable on identified gains and profits were also increased to 30 percent. The Law removed most activities which qualify for the concessionary tax rates (exports including specified undertakings, SME, tourism, manufacturing etc.) The Capital Gains tax rate was increased from 10 to 30 percent. Certain exemptions were also withdrawn (information technology and enabled services sectors e.g.) by the new law.

For further information on investment incentives and other investment-related issues, potential investors can contact BOI ( www.investsrilanka.com or info@Board of Investment.lk .) and refer to the Inland Revenue Act 24 of 2017 ( http://www.ird.gov.lk/en/sitepages/default.aspx ).

The Women Entrepreneur Development Program of the Sri Lanka Export Development Board (EDB) seeks to engage more women participation in agriculture and manufacturing-based exporters ( https://www.srilankabusiness.com/exporters/assisting-women-in-business.html ). EDB joined SheTrades ( http://www.shetrades.com/ ) in 2016 in partnership with the International Trade Center (ITC) as a platform for women-owned businesses, organizations, companies and partner institutions to showcase their businesses, build strong networks, strike business deals, increase their credibility and connect to markets. Companies and individual buyers can use shetrades.com to include more women entrepreneurs in their supply chains by sourcing specific products and services from women-owned businesses.

Sri Lanka has 18 free trade zones, also called “export processing zones,” which are administered by the BOI. Foreign investors have the same investment opportunities as local entities in these zones. Export-oriented companies located within and outside the zones are eligible to import project-related material and inputs free of customs import duties, although such imports may be subject to other taxes.

In the past, firms preferred to locate their factories near the Colombo harbor or airport to reduce transportation time and cost. However, excessive concentration of industries around Colombo has caused heavy traffic, higher real estate prices, environmental pollution, and a scarcity of labor. The BOI and the government now encourage export-oriented factories to locate in industrial zones farther from Colombo, although Sri Lanka’s limited road network creates other challenges for outlying zones.

In 2019 the China Harbor Engineering Company (CHEC) completed the reclamation of 665 acres of land near Colombo’s port and historic downtown to form the Colombo Port City Special Economic Zone (SEZ), which government officials describe as a future international commercial and financial hub. CHEC invested $1.4 billion in the land reclamation and basic infrastructure of the Port City, in return for which it will lease 287 of the 440 total acres of marketable land on the site. The government will control the rest of the land. In May 2021 Parliament approved legislation to govern the SEZ and establish a commission to act as promoter, manager, regulator, and single window investment facilitator to attract foreign direct investment to the project. The President and Central Bank Governor plan to revisit the Colombo Port City’s (CPC’s) legislative framework to improve the investment environment in this SEZ. The legislation also includes tax exemptions and other incentives for potential investors. There are concerns remain about the risk of illicit financial flows in the project. As of December 2023, Colombo Port City remains largely undeveloped.

Sri Lanka’s State Pharmaceutical Corporation (SPC), a SOE-owned enterprise, established a dedicated pharmaceutical manufacturing zone in Hambantota. The Sri Lankan government has earmarked 400 acres of land in the Hambantota-Arabokka area and announced tax exemptions for foreign companies ready to set up manufacturing. The SPC has also approached Indian manufacturers about setting up manufacturing in the pharmaceutical manufacturing zone to produce 40 percent of pharmaceuticals for domestic needs and up to $1 billion in annual pharmaceutical exports. In addition to tax benefits, the BOI offered to supply all infrastructure facilities.

In 2022, Sri Lanka passed the Personal Data Protection Act. This act is set to become law in March 2025, and will require companies to comply with as-yet-to-be-determined regulations governing the storage and protection of data about citizens and foreigners in Sri Lanka. The law does not require data localization, which means companies are allowed to store customer, employee, and marketing data in commercial cloud services.

Employment of foreigners is permitted when there is a demonstrated shortage of qualified local labor. Technical and managerial workers are in short supply, and this shortage is likely to continue in the medium term. Foreign laborers easily obtain work or residence permits. Sri Lanka offers dual citizenship status to Sri Lankans with foreign citizenship in seven designated countries, including the United States. Tourist and business visas are available for one or six months, and for one, two, five, or ten years. Business visas are available for six months, and for one, two, five, or ten years. Visa terms and fees changed in April 2024. Updated information is at https://www.srilankaevisa.lk/ .

Information Technology (IT): Sri Lanka has a growing IT industry, and foreign workers with specialized skills are often hired for highly technical roles.

Construction and Engineering: Infrastructure development projects often require specialized expertise, which draws foreign workers in construction and engineering.

Hospitality and Tourism: Sri Lanka’s tourism industry attracts visitors from around the world. There is a demand for foreign workers in hospitality-related roles such as hotel management, chefs, and tour guides.

Education: Sri Lanka’s education sector may hire foreign teachers and professors, especially in international schools, colleges, and universities.

Manufacturing and Apparel: Sri Lanka’s manufacturing industry, including the apparel sector, sometimes hires foreign workers to fill skill gaps in design or technical production.

Sri Lanka has no requirements for foreign information technology providers to turn over source code or provide access to surveillance. Communications intercepted for cybercrime issues are subject to court supervision under the Computer Crimes Act (CCA) of 2007. Sri Lanka became a party to the Budapest Cybercrime Convention in 2015, and safeguards based on the convention are in force. Although there is no comprehensive legislative protection of electronic data, the CCA has a provision to protect data and information. The Personal Data Protection Act of 2022 regulated the processing of personal data. The Cyber Security Bill of 2023 is pending in Parliament as of the time of this report. There is no ban on the sale of electronic data for marketing purposes.

Secured interests in real property in Sri Lanka are generally recognized and enforced ( https://www.hg.org/legal-articles/intellectual-property-law-in-sri-lanka-21205 ), but many investors claim protection can be flimsy.

There is a registration system for recording private property including land, buildings, and mortgages, although there are problems with fraud and forged documents. In 1998 the government introduced Bim Saviya Program (Title Registration) to use technology to provide clearer land ownership and to improve land utilization. This program aims to avoid disputes regarding land ownership or boundaries. Property registration requires, on average, completion of eight procedures and takes 39 days. Sri Lanka prohibits the sale of land to foreign nationals and to enterprises with foreign equity over 50 percent. Foreign investors can lease lands under the BOI. Foreigners can freely buy properties if they are willing to pay the Land Tax for foreigners at 100 percent of the property value. An alternative is to lease the land for 99 years, bringing the tax down to 7 percent.

Under current law, the Prescription Ordinance says that a person holding continuous “adverse possession” of real property for ten years without challenge is entitled to ownership of that property.

Sri Lanka is not listed in USTR’s Special 301 Report on Intellectual Property (IP) Protection and Enforcement or the Notorious Markets List. To review intellectual property owned by a target company – which could be either registered, not registered, or pending registration with the National Intellectual Property Office of Sri Lanka (NIPO) – searches are conducted at the NIPO. The process scrutinizes any existing licensing agreements, assignment deeds, transfer agreements, ongoing dispute settlements before the Director General of NIPO, or ongoing intellectual property litigation involving the target company. There are no special sectors or industries subject to other specific rules.

Patent protection is available under the IP Act. Trade secrets, business confidential information, and know-how are protected under the category of undisclosed information, which is protected under competition policy. Supplementary protection certificates are not available in Sri Lanka. Statutes protect registered trademarks, service marks, collective marks, certification marks, and geographical indications. Trade names are protected without any registration requirement. Registered and unregistered marks may also be protected under the remedies against unfair competition.

The IP Act protects copyright and related rights, including rights of performers, producers of sound recordings and broadcasting organizations, expressions of folklore, industrial designs, and layout designs of integrated circuits. Databases are protected under copyright law. There is no protection for plant varieties.

Sri Lanka is a party to major intellectual property agreements. The IP Act is intended to meet U.S.-Sri Lanka bilateral IPR agreements and Trade-Related aspects of Intellectual Property Rights (TRIPS) agreement obligations. While it is not compulsory to register a trademark, it is recommended to register a trademark for easy and effective enforcement. For registration and grant of industrial designs and patents, an applicant must file formal applications with the Director-General of Intellectual Property. Copyright protection does not require registration.

The Government of Sri Lanka is attempting to strengthen its IP regime. Observers expect a new intellectual property act in 2024 to replace the 2003 IP Act, which has not kept pace with technology. The National Intellectual Property Office (NIPO) has shown its intention to accede to the Madrid Protocol, and the Sri Lankan Parliament approved the proposal to accede to the Madrid Protocol in 2020. The necessary amendments in the existing IP Act have been initiated to facilitate Sri Lanka’s entry into the Madrid protocol. In 2019, the Sri Lankan Government amended its Information Technology (IT) policy. The amended policy requires government agencies to only use licensed or open-source software. However, the government has yet to install systems to monitor compliance with the policy. In February 2022, the Sri Lankan cabinet approved possible amendments to the IP Act. The objective of the proposed amendment is to include a fair use exemption for copyrighted audio works to be copied and edited into an accessible format (for disabled persons), and to establish Geographical Indications (GI) protection for certain products.

The government has also attempted to improve the NIPO by upgrading and modernizing its infrastructure and recruiting new examiners for both trademark and patents, which has led to a decrease in backlogs of trademark and patent examinations.

In 2010, the government established a special anti-piracy and counterfeit unit in the Criminal Investigation Division (CID) of the police to address IPR concerns. The CID is the primary investigation authority and was established in 1870. The Sri Lankan Government also established an IPR unit in the Social Protection Unit of Sri Lankan Customs to focus on IPR related issues ( https://www.customs.gov.lk/ ). The Sri Lanka Customs Department is also working towards developing a trademark database to advance IPR protection and enforcement, though it is yet to be implemented.

The overall IP ecosystem in Sri Lanka has improved in recent years. However, the lack of effective strategic policy coordination among entities involved in the enforcement of its laws, in addition to a lengthy and challenging judicial system, have enabled freely available counterfeit products in Sri Lanka. Counterfeit goods, particularly imports, are widely available, and music and software piracy are widespread. Foreign and U.S. companies in the recording, software, movie, clothing, and consumer product industries claim that inadequate IPR protection and enforcement weaken their businesses in Sri Lanka. Local agents of well-known U.S. and other international companies representing recording, software, movie, clothing, and consumer products industries continue to complain that the lack of adequate IPR protection damages their business interests in Sri Lanka.

Better coordination on intellectual property among enforcement authorities and government institutions – such as the NIPO, Sri Lankan Customs, Sri Lankan Police, along with additional trained staff and resources – is needed to strengthen Sri Lanka’s IPR regime. Although infringement of intellectual property rights is a punishable offense under the IP law with criminal and civil penalties, Sri Lanka does not track and report on seizures of counterfeit goods.

Resources for Intellectual Property Rights Holders: John CabecaU.S. Intellectual Property Counselor for South AsiaEmbassy of the United States of America – New DelhiUnited States Patent and Trademark Office email: john.cabeca@trade.gov website: https://www.uspto.gov/ip-policy/ip-attache-program/regions/india tel: +91-11-2347-2000

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at Information by Country: Sri Lanka (wipo.int)

Local lawyers list: https://lk.usembassy.gov/services/#legal-medical

The Securities and Exchange Commission (SEC) regulates capital markets, financial institutions, public securities offers, and financial intermediaries in Sri Lanka under the authority of the SEC Act of 2021. The SEC also regulates the CSE, unit trusts, stockbrokers, listed public companies, margin traders, underwriters, investment managers, credit rating agencies, and securities depositories ( https://cse.lk/ ). Foreign portfolio investment is encouraged. Foreign investors can purchase up to 100 percent of equity in Sri Lankan companies in permitted sectors. Investors may open an Inward Investment Account (IIA) with any commercial bank in Sri Lanka to bring in investments. As of May 14, 2024, 284 companies representing 20 business sectors are listed on the CSE. As stock market liquidity is limited, investors need to manage exit strategies carefully.

In accordance with its IMF Article VIII obligations, the government and the CBSL generally refrain from restrictions on current international transfers. When the government experiences balance of payments difficulties, it tends to impose controls on foreign exchange transactions.

High budget deficits have caused interest rates to rise and resulted in higher inflation. Sri Lanka recorded unprecedented inflation levels in late 2022, and began stabilizing basket good prices in 2023.

Retained profits finance a significant portion of private investment in Sri Lanka with commercial banks as the principal source of bank finance and bank loans as the most widely used credit instrument for the private sector. Large companies also raise funds through corporate debentures. Credit ratings are mandatory for all deposit-taking institutions and all types of debt instruments. Local companies can borrow from foreign sources. FDI finances about 6 percent of overall investment. Foreign investors can access credit on the local market and are free to raise foreign currency loans.

Sri Lanka has a diversified banking system. In terms of physical access to outlets, Sri Lanka also enjoys high levels of banking penetration, with bank branch density at 17 per 100,000 adults, compared to the South Asia regional average of 10.2. There are 25 commercial banks: 13 local and 12 foreign. In addition, there are seven specialized local banks. Citibank N.A. is the only U.S. bank operating in Sri Lanka. Several domestic private commercial banks have substantial government equity acquired through investment agencies controlled by the government. Banking has expanded to rural areas, and by end of Q3 of 2022 there were more than 6,711 commercial bank branches and over 6,000 ATMs throughout the country. Both resident and non-resident foreign nationals can open foreign currency banking accounts. However, non-resident foreign nationals are not eligible to open Sri Lankan rupee accounts. A foreign individual can open a Personal Foreign Currency Account (PFC account). This is a special type of account that can be opened in foreign currencies carried by the overseas client. Just like an ordinary bank account, this type of account gives interests on deposits, but it requires approval from the CBSL.

The CBSL ( https://www.cbsl.gov.lk/ ) is responsible for supervision of all banking institutions and has driven improvements in banking regulations, provisioning, and public disclosure of banking sector performance as well as setting exchange rates, which shifted regularly during the economic crisis. Credit ratings are mandatory for all banks. CBSL introduced accounting standards corresponding to International Financial Reporting Standards for banks on January 1, 2018, and the application of the standards substantially increased impairment provisions on loans. The migration to Basel III capital standards began in July of 2017 on a staggered basis, with full implementation on January 1, 2019. Some banks had to boost capital to meet full implementation of Basel III requirements. In addition, CBSL instituted new minimum capital requirements for banks in late 2022.

Under the Banking Act of 1988 (as amended) (the “Banking Act”), written approval from both the Merchant Bank of Sri Lanka (MBSL) and the Sri Lankan Minister of Finance is required for the merger of a licensed commercial bank or a branch with any other licensed commercial or specialized bank. The Banking Act prohibits any entity buying more than 10 percent interest in a licensed commercial bank without the prior written approval of the MBSL and the concurrence of the Sri Lankan Minister of Finance.

Banking Sector stability in the near term will depend on its ability to manage the increase in Non-Performing Loans (NPLs) exacerbated due to economic contraction and personal income tax hikes and the impending restructuring of domestic debt, which the banking sector collectively holds nearly 50 percent.

In October 2019, Sri Lanka was removed from the Financial Action Task Force (FATF) gray list after making significant changes to its Anti-Money Laundering/Countering the Finance of Terrorism (AML/CFT) laws. CBSL is exploring the adoption of blockchain technologies in its financial transactions and appointed two committees to investigate the possible adoption of blockchain and cryptocurrencies.

Sri Lanka has a rapidly growing alternative financial services industry that includes finance companies, leasing companies, and microfinance institutes. In response, CBSL has established an enforcement unit to strengthen the regulatory and supervisory framework of non-banking financial institutions. Credit ratings are mandatory for finance companies as of October 1, 2018. The government also directed banks to register with the U.S. Internal Revenue Service (IRS) to comply with the U.S. Foreign Accounts Tax Compliance Act (FATCA). Almost all commercial banks have registered with the IRS.

In accordance with its Article VIII obligations as a member of the IMF, Sri Lanka liberalized exchange controls on current account transactions in 1994 and, in 2010-2012, the government relaxed exchange controls on several categories of capital account transactions. The rupee-dollar exchange rate was de facto pegged until 2022, when the country ran out of currency defending the overvalued rupee. Since March 2022 until the time of this report, the exchange rate is generally categorized as floating with minimal central bank intervention.

A new Foreign Exchange Act came into operation in 2017 and further liberalized capital account transactions to simplify current account transactions. Foreign investors are required to open Inward Investment Accounts (IIA) to transfer funds required for capital investments but there are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment through an IIA in any foreign currency designated by CBSL.

Rules require exporters to convert the remaining balance of export proceeds into Sri Lankan Rupees before the seventh of the next month, for following authorized payments:

Sri Lanka’s remittances tracked by the Central Bank increased 57 percent to $5.97 billion in 2023, up from $3.8 billion a year earlier, helped by an improved exchange rate and better monetary policy. 2022 remittances were the highest annual inflows from Sri Lankan expatriates since 2019. In December 2023, Sri Lanka received $569.7 million from official channels, up 19.7 percent from $475.6 million in the same month a year earlier, according to official data. The tourism sector has improved significantly and has helped to stabilize forex reserves.

In late 2023, Sri Lanka lifted the remittance restrictions it had imposed in 2022 at the height of the economic crisis, and which had precipitated the forex crunch. There are no central bank-imposed waiting period for remitting investment returns, interest, and principal on private foreign debt, lease payments, royalties, and management fees, provided there is evidence to prove the original funds were remitted into the country through legal channels. Exporters must repatriate export proceeds within 120 days.

Sri Lanka does not have a sovereign wealth fund. The government manages and controls large retirement funds from private sector employees and uses these funds for budgetary purposes (through investments in government securities), stock market investments, and corporate debenture investments.

The Government of Sri Lanka owns 527 State-Owned Enterprises (SOEs), with 55 deemed strategically important. Only 11 SOEs have published financial data up to 2022, obscuring their losses and employment figures. SOEs are active in transportation (buses and railways, ports and airport management, airline operations); electricity; petroleum imports and refining; water supply; retail; banking; telecommunications; television and radio broadcasting; newspaper publishing; and insurance. SOEs hold monopoly positions in utilities and petroleum/refining. Following the end of the civil war in 2009, Sri Lankan armed forces began operating domestic air services, tourist resorts, and farms, crowding out some private investment.

The government is divesting shares in flagship SOEs that have been running deficits in recent years. Seven strategic SOEs have been identified for divesture on a priority basis, with the bidding process closed for six SOEs. The SOE Reform Unit is dedicated to finalizing the divesture process before 2024 fall elections. Past attempts under previous governments were unsuccessful and mostly ended at conceptual discussions. SOE labor unions and some opposition political parties oppose privatization and are particularly averse to foreign ownership. Privatization through the sale of shares in the stock market is likely to be less problematic. Sri Lanka has been receiving multilateral technical assistance on SOE divestitures for smoothing its transition process, but the future remains unknown.

Corporate Social Responsibility (CSR) is the preferred term for Responsible Business Conduct (RBC) in Sri Lanka. Leading companies in Sri Lanka actively promote CSR, and some SMEs have also started to promote CSR. CSR Sri Lanka is an organization started by 40 leading companies to foster CSR. The Ceylon Chamber of Commerce and AmCham Sri Lanka actively promote CSR among its membership. The SEC, together with the Institute of Chartered Accountants of Sri Lanka, published a Code of Best Practices on Corporate Governance to establish good corporate governance practices in Sri Lankan capital markets. Separate government agencies protect people from adverse business impacts in labor rights, consumer protection, and environmental protections, although the effectiveness of these agencies is questioned. The government has not launched an initiative to promote RBC principles, such as the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights. The government also does not participate in the Extractive Industries Transparency Initiative (EITI), although Sri Lanka has mineral resources including graphite, mineral sands, and gemstones.

Sri Lanka has committed to cease building new coal-fired power plants and achieve net-zero carbon emissions by 2050. The government has prioritized renewable energy generation and is restructuring the CEB. This is expected to have a significant positive effect on foreign investment in the energy sector. However, high capital cost for energy transformation remains a challenge. The main renewable resources available in Sri Lanka are biomass, hydropower, solar, and wind. The 2015-25 power goals in the Sri Lanka Energy Sector Development Plan will require private investment to meet renewable energy goals.

The Sri Lanka Sustainable Energy Authority (SEA) manages the government’s ambitious 70 percent renewables target by 2030. The SEA is tasked with increasing investment in renewable energy, but the economic crisis in Sri Lanka has made this difficult. However, the CEB remains the most important entity in energy investments.

Electricity tariffs are time-based tariffs for residential customers. There are two tariff categories – block tariffs and time of use (ToU) tariffs. The block tariff charges residences on an incremental basis based on monthly power consumption. The Public Utilities Commission of Sri Lanka increased tariffs by an average of 66 percent in February 2023 and 18 percent in October 2023. In March 2024, tariffs were reduced by 18 percent. According to World Bank, foreign direct investment in the power sector has declined in recent years due to policy uncertainty and the risk of currency depreciation.

Imports of equipment for renewable energy, including solar panels and storage batteries, are exempt from the national building tax and the ports and airport levy.

Sri Lanka announced plans to ban internal combustion engine car sales by 2040. Import of three-wheelers powered by two-stroke petrol engines, as well as spare parts for such engines, has been banned since 2008. Sri Lanka has a low share of hybrid and electric vehicles because of import restrictions on vehicles. Strict and aggressive vehicles taxation that provides tax reductions for hybrids imported into the country since 2010 and for electric vehicles since 2015 has resulted in about 80,000 hybrid vehicles and 2,400 fully electric vehicles in the country.

Sri Lanka’s climate policy also aims to stabilize agricultural productivity and household incomes. Sri Lanka would benefit from increased investment in climate-smart agriculture and food systems innovation.

While Sri Lanka has laws and regulations to combat corruption, enforcement is often weak or non-existent. U.S. and other global firms note corruption as a major limiting factor in securing large scale infrastructure projects as well as foreign investment. Unsolicited proposals and tenders designed to favor a particular company are routine even if prohibited by law. Projects geared toward exports face fewer problems, although government officials often solicit favors to facilitate such projects. A Right to Information Act came into effect in February 2017, but government transparency remains a problem. The government also passed a major anti-corruption bill in July 2023 to strengthen the enforcement arm of anti-corruption regulations, as well as to satisfy IMF EFF conditions on transparency.

The Commission to Investigate Allegations of Bribery or Corruption (CIABOC or Bribery Commission) is the main body responsible for investigating bribery allegations, but it is widely considered ineffective and has made little progress pursuing cases of national significance. The law says a public official’s offer or acceptance of a bribe is a criminal offense and carries a maximum sentence of seven years imprisonment and a fine. Thus far, the Bribery Commission has focused on minor cases such as bribes taken by traffic police, wildlife officers, and school principals. These cases reportedly follow a pattern of targeting low-level offenses, with prosecutions occurring years after the offense followed by the imposition of sentences not always proportionate to the conduct (i.e., sometimes overly strict, other times overly lenient).

Government procurement regulations contain provisions on conflicts of interest in awarding contracts or government procurement. While financial crime investigators have investigated a few cases involving the misappropriation of government funds, these cases have often not moved forward due to lack of political will, political interference, and lack of investigative capacity. Sri Lanka signed and ratified the UN Convention against Corruption in March 2004 and the UN Convention against Transnational Organized Crime in 2006. Sri Lanka is a signatory to the OECD-ADB Anti-Corruption Regional Plan but has not joined the OECD Anti-Bribery Convention.

Contact at the government agency responsible for combating corruption:

Commission to Investigate Allegations of Bribery or Corruption No 36, Malalasekara Mawatha, Colombo 7 T+94 112 596360 / 2595039 M+94 767011954 Email: ciaboc@eureka.lk or dgbribery@gmail.com

Contact at a watchdog organization:

Transparency International, Sri Lanka 5/1 Elibank Road Colombo 5 Phone: 94-11- 4369783 Email: tisl@tisrilanka.org

Sri Lanka is scheduled to hold elections in 2024, with presidential elections expected to take place in September or October.

The government’s military campaign against the Liberation Tigers of Tamil Eelam (LTTE) ended in May 2009 with the defeat of the LTTE. During the civil war, the LTTE had a history of attacks against civilians, although none of the attacks were intentionally directed against U.S. citizens. On April 21, 2019, terrorist attacks targeted several churches and hotels throughout Colombo and in the eastern city of Batticaloa, killing more than 250 people, including over 40 foreigners, five of whom were Americans. In the aftermath of the attacks, the government imposed nationwide curfews and a temporary ban on some social media outlets. There have not been nationwide social media or online public forum shutdowns since, though there were anecdotal reports alleging social media platform shutdowns during the 2022 protests during the height of the economic crisis under the previous government. There have been no significant reports on shutdowns under the current government. The 2024 Online Safety Act creates new authorities for the government to restrict information on the internet, ostensibly to combat online abuse and misinformation, but businesses and human rights organizations have criticized the act as potentially infringing on free speech.

The economic situation has improved since 2022. Tax hikes under the current government in an effort to meet IMF conditions led to vocal opposition and protests, though far from the scale of the mass protests during the 2022 financial crisis. Cost of living has increased significantly, and many people are facing challenges in food security, educational costs, and utility payments. According to a 2023 WFP report, nearly two-thirds of the population are adopting livelihood-based coping strategies, such as borrowing money or dipping into savings to feed their families.

Both local and international businesses have cited labor shortages as a major problem in Sri Lanka. Migration of skilled workers in key sectors such as tourism, apparel, IT, and engineering is a major problem. In 2022, 8.1 million Sri Lankans were employed: 47 percent in services, 26.5 percent in industry, and 26.5 percent in agriculture. Approximately 70 percent of the employed are in the informal sector. The government sector is the country’s largest employer with over 1.3 million people.

Sri Lanka’s labor laws afford many employee protections. Many investors consider this legal framework rigid, making it difficult for companies to reduce their workforce even when market conditions warrant doing so. The cost of dismissing an employee in Sri Lanka is calculated based upon a percentage of wages averaged over 54 salary weeks, one of the highest costs in the world. There is no unemployment insurance or social safety net for laid off workers.

Labor is available at relatively low cost, though higher than in other South Asian countries. Sri Lanka’s labor force is largely literate (particularly in local languages), although weak in certain technical skills. The average worker has eight years of schooling, and two-thirds of the labor force is male. The government has enacted educational reforms, including revamping technical and vocational education. While the number of students pursuing computer, accounting, business, and English language training programs is increasing, the demand for these skills still outpaces supply, with many top graduates seeking employment outside of the country.

Youth are increasingly uninterested in labor-intensive manual jobs, and the construction, plantation, apparel, and other manufacturing industries report a severe shortage of workers. The garment industry reports up to a 40 percent staff turnover rate. Lack of labor mobility in the North and East is also a problem, with workers reluctant to leave their families and villages for employment elsewhere.

A significant proportion of the unemployed seek “white collar” jobs, often preferring stable government jobs. Most sectors seeking employees offer manual or semi-skilled jobs or require technical or professional skills such as management, marketing, information technology, accounting and finance, and English language proficiency. Investors often struggle to find employees with the requisite skills, a situation particularly noticeable as the tourism industry opens new hotels.

Many service sector companies rely on Sri Lankan engineers, researchers, technicians, and analysts to deliver high-quality, high-precision products, and retention is reasonably good in the information technology sector. Foreign and local companies report a strong worker commitment to excellence in Sri Lanka, with rapid adaptation to quality standards.

Only 32.1 percent of women were employed in the formal economy in 2023, despite Sri Lanka having the best record in South Asia for female education. Women are excluded from the workforce due to a mix of cultural, economic, and legal factors, including prejudices against women working in the hospitality sector, restrictions against women working at night or serving alcohol, and limited childcare and maternity leave options. Women face workforce restrictions such as caps on overtime work, limits on nighttime shifts, and restrictions from certain jobs.

According to official statistics, 311,056 Sri Lankans registered for foreign employment in 2022, a significant increase from previous years. Remittances from migrant workers averaged $5.96 billion in 2023, making them Sri Lanka’s second-largest source of foreign exchange. In 2022, this dropped to $3.78 billion, in part due to the economic crisis, as well as more people relying on informal channels to send remittances back to Sri Lanka. Most of this labor force is unskilled (i.e., housemaids and factory laborers) and is located primarily in the Middle East. Sri Lanka is also losing many of its skilled workers to more lucrative jobs abroad. Approximately 6,000 Sri Lankans work in Bangladeshi garment factories.

Sri Lanka has seen a gradual rise in foreign workers. Most foreign workers are from India, Bangladesh, and the PRC. Many are reportedly without proper work visas or other documentation.

About 9.5 percent of the workforce is unionized, but union membership is declining. There are more than 2,000 registered trade unions (many of which have 50 or fewer members), and several federations. About 18 percent of labor in the industry and service sector is unionized. Most of the major trade unions are affiliated with political parties, creating a highly politicized labor environment. This is not the case for private companies, which typically only have one union or a workers’ council to represent employees. There are also some independent unions. All workers, other than police, armed forces, prison service, and those in essential services, have the right to strike. The president can designate any industry an essential service. Workers may lodge complaints to protect their rights with the Commissioner of Labor, a labor tribunal, or the Supreme Court.

Unions represent workers in many large private firms, but workers in small-scale agriculture and small businesses typically do not belong to unions. The tea industry, however, is highly unionized, and public sector employees are unionized at high rates. Labor in the export processing zone (EPZ) enterprises tend to be represented by non-union worker councils, although unions also exist within the EPZs. The International Labor Organization’s (ILO) Freedom of Association Committee observed that Sri Lankan trade unions and worker councils can co-exist but advises that there should not be any discrimination against those employees choosing to join a union. The right of worker councils to engage in collective bargaining has been recognized by the ILO.

Collective bargaining exists but is not universal. The Employers’ Federation of Ceylon, the main employers’ association in Sri Lanka, assists member companies in negotiating with unions and signing collective bargaining agreements. While about a quarter of the 660 members of the Employers’ Federation of Ceylon are unionized, about 90 of these companies (including several foreign-owned firms) are bound by collective agreements. Several other companies have signed memoranda of understanding with trade unions. However, there are only a few collective bargaining agreements signed with companies located in EPZs.

All forms of forced and compulsory labor are prohibited. The National Minimum Wage of Workers Act was amended in March 2024, increasing the minimum wage to LKR 17,500 ($57) monthly and LKR 700 ($2.10) per day. Forty-four “wage boards” established by the Ministry of Labor set minimum wages and working conditions by sector and industry in consultation with unions and employers. The minimum wages established by these sector-specific wage boards tend to be higher than the minimum wage.

Sri Lankan law does not require equal pay for equal work for women. The law prohibits most full-time workers from regularly working more than 45 hours per week without receiving overtime (premium pay). In addition, the law stipulates a rest period of one hour per day. Regulations limit maximum overtime hours to 15 per week. The law provides paid annual holidays, sick leave, and maternity leave. Occupational health and safety regulations do not fully meet international standards.

Child labor is prohibited and virtually nonexistent in the organized sectors, although child labor occurs in informal sectors. The minimum legal age for employment is 16. The minimum age for employment in hazardous work is 18.

Sri Lanka is a member of the ILO and has ratified 31 international labor conventions, including all eight of the ILO’s core labor conventions. The ILO and the Employers’ Federation of Ceylon are working to improve awareness of core labor standards and the ILO also promotes its “Decent Work Agenda” program in Sri Lanka.

A 2021 Labor Survey estimated 62 percent of the country’s workforce was employed informally. Most working in the informal economy are self-employed, and the informal sector accounts for an estimated 87.5 percent of total employment in agriculture. Those working in the informal economy lack job protections and other entitlements.

Sri Lanka and the Overseas Private Investment Corporation (OPIC) signed an agreement in 1966 and renewed in 1993. This agreement provides investment insurance guarantees for U.S. investors. DFC succeeded OPIC in 2019 and is now party to the agreement. Sri Lanka is a founding member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, which offers insurance against non-commercial risks.

DFC CEO Scott Nathan announced DFC’s $553 million financing of the Colombo West International Terminal (CWIT) during his November 7-8, 2023, visit to Sri Lanka. CWIT is a deepwater port that is a joint venture between Sri Lanka’s John Keells and India’s Adani Group. Adani’s investment in the project makes it the single largest FDI project in Sri Lanka. DFC’s broad portfolio in Sri Lanka has grown to almost $1 billion as of December 2023, making Sri Lanka the second-largest market for DFC in the Indo-Pacific region. In addition to the CWIT port deal, Nathan also announced a $30 million loan to Citizen’s Development Business Finance (CDB), which will on-lend to women-run SMEs and green energy projects.

DFC has also committed $265 million in funding to Sri Lankan banks to support small and medium enterprises (SMEs) and women entrepreneurs. The loan from DFC aims to support private sector investment and economic growth. The funding agreement directs a portion of lending to businesses that are owned by women, led by women, or provide a product or service that empowers women. In June 2022, DFC approved an additional $100 million in direct lending to the Ceylon Commercial Bank – one of the largest private banks in Sri Lanka – for SME loans to Sri Lanka. Loans from USG agencies such as DFC involve host government consultations and approval, including consultations with the Central Bank of Sri Lanka and approvals from the Department of National Planning (under the Ministry of Finance). In some cases, local recipients of USG loans have faced challenges receiving disbursements under Sri Lankan central bank regulations.

Several countries provide bilateral project loans to the government, which assist firms from their countries to win projects. The People’s Republic of China (PRC) has provided extensive loans, enabling PRC companies to engage in numerous projects in Sri Lanka, ranging from road and port construction to railway equipment supply.

https://unctad.org/topic/investment/world-investment-report * Source for Host Country Data: Central Bank Annual Report 2021. Note that the Sri Lankan government sources have widely varying estimates regarding FDI data, hence the N/A classification. The difference in Sri Lankan government and USG or international sources may be due to methodological differences (such as whether to count third-party routing of funds as source country investment or third-party investment).

Foreign Exchange Act, No. 12 of 2017 and other regulations imposed thereunder entails restrictions on capital outflows. These restrictions were tightened further with current foreign exchange crisis.

Andrew Shinn Economic Officer U.S. Embassy Colombo, Sri Lanka Phone: +94-11-202-8771 Email: commercialcolombo@state.gov

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