The U.S. Department of State’s Investment Climate Statements provide information on the business climates of more than 170 economies and are prepared by economic officers stationed in embassies and posts around the world. They analyze a variety of economies that are or could be markets for U.S. businesses. The Investment Climate Statements are also references for working with partner governments to create enabling business environments that are not only economically sound, but address issues of labor, human rights, responsible business conduct, and steps taken to combat corruption. The reports cover topics including Openness to Investment, Legal and Regulatory Systems, Protection of Real and Intellectual Property Rights, Financial Sector, State-Owned Enterprises, Responsible Business Conduct, and Corruption.
Executive Summary
Sri Lanka, a lower middle-income country with a Gross Domestic Product (GDP) per capita of about $3,680 and a population of approximately 22 million, is experiencing an economic crisis stemming from an unsustainable debt load and perennial deficits on both the international balance of payments and the government budget. The island’s strategic location off the southern coast of India along the main east-west Indian Ocean shipping lanes gives Sri Lanka a regional logistical advantage, especially as India does not have deep-water ports comparable to what Sri Lanka offers. Sri Lanka is transitioning from a predominantly rural-based economy to a more urbanized economy focused on manufacturing and services. Sri Lanka’s export economy is dominated by apparel and cash-crop exports, mainly tea, but technology service exports are a significant growth sector.
Prior to the April 21, 2019, Easter Sunday attacks, the tourism industry was rapidly expanding, but the attacks led to a significant decline in tourism that continued into 2020 and 2021 due to COVID-19 and the government’s related decision to close its main international airport for commercial passenger arrivals in March 2020. After reopening to visitors early in 2021, tourism revenue for the year reached $261 million, dropping 61 percent year-over-year (YoY) compared to $682 million in 2020. Migrant labor remittances are a significant source of foreign exchange, which saw an increase in 2020 due to the collapse of informal money transfer systems during the pandemic, despite the job losses to Sri Lankan migrant workers, especially in the Middle East. However, worker remittances saw a decline of 22.7 percent in 2021, largely due to inflationary pressures and the expectation of a future depreciation of the exchange rate, which occurred in March 2022. Remittances totaled $5.4 billion for 2021 in comparison to $7.1 billion in 2020.
The administration of President Gotabaya Rajapaksa, who was elected in November 2019, has attempted to promote pro-business positions, including announcing tax benefits for new investments to attract foreign direct investment (FDI). As outlined in its election manifesto, the Rajapaksa government’s economic goals include positioning Sri Lanka as an export-oriented economic hub at the center of the Indian Ocean (with government control of strategic assets such as Sri Lankan Airlines), improving trade logistics, attracting export-oriented FDI, and boosting firms’ abilities to compete in global markets. However, COVID-19 and the subsequent lockdowns brought new economic challenges, forcing the government to adapt policies to the situation on the ground. In April 2020, the Ministry of Finance restricted imports of luxury and semi-luxury consumer products such as consumer durables, motor vehicles, and the import of certain agricultural products as a means of saving foreign reserves and creating employment in labor intensive agriculture. Further restrictions on goods deemed non-essential were added in March 2022. With the IMF estimating a public debt-to-GDP ratio at 118.9 percent (of which 65.6 percent is foreign debt), Sri Lanka is facing a liquidity crisis that is exacerbated by an increasing trade deficit. Exports have helped buoy Sri Lankas FX reserves, growing 19.9 percent in 2021. However, imports continued to outstrip this growth by a significant margin with an increase of 46.8 percent in 2021. Exports of goods increased by 24.4 percent to $12.5 billion in 2021, up from $10 billion in 2020. Exports of services for the year 2020 amounted to $3 billion, down from $7.5 billion in 2019.
In September 2021, the government committed to cease building new coal-fired power plants and achieve net-zero carbon emissions by 2050 at the United Nations International Energy Forum. Sri Lanka has set a target of achieving 70 percent of all its electricity generation from renewable sources by 2030. However, renewable energy companies accuse the Ceylon Electricity Board of being in arrears to the tune of $60 million (as of May 2022) after not paying for renewable energy supplied to the national grid since August 2021.
FDI in Sri Lanka has largely been concentrated in tourism, real estate, mixed development projects, ports, and telecommunications in recent years. With a growing middle class, investors also see opportunities in franchising, information technology services, and light manufacturing for the domestic market. The Board of Investment (BOI) is the primary government authority responsible for investment, particularly foreign investment, aiming to provide “one-stop” services for foreign investors. The BOI is committed to facilitating FDI and can offer project incentives, arrange utility services, assist in obtaining resident visas for expatriate personnel, and facilitate import and export clearances.
Sri Lanka’s GDP grew by 3.6 percent according to the International Monetary Fund (IMF) in 2021 and is expected to grow by 3.3 percent in 2022. FDI rose to approximately 0.9 percent of GDP in 2021, higher than the 0.5 percent in 2020 and 0.8 percent in 2019 and half of the 1.8 percent in 2018. The IMF projects a GDP growth of 1.2 percent in 2022.
To access the complete ICS, visit the U.S. Department of State Investment Climate Statements website.