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 $60 million (as of May 2022) after not paying for renewable energy supplied to the national grid since August 2021.
FDI in Sri Lanka has largely been concentrated in tourism, real estate, mixed development projects, ports, and telecommunications in recent years. With a growing middle class, investors also see opportunities in franchising, information technology services, and light manufacturing for the domestic market. The Board of Investment (BOI) is the primary government authority responsible for investment, particularly foreign investment, aiming to provide “one-stop” services for foreign investors. The BOI is committed to facilitating FDI and can offer project incentives, arrange utility services, assist in obtaining resident visas for expatriate personnel, and facilitate import and export clearances.
Sri Lanka’s GDP grew by 3.6 percent according to the International Monetary Fund (IMF) in 2021 and is expected to grow by 3.3 percent in 2022. FDI rose to approximately 0.9 percent of GDP in 2021, higher than the 0.5 percent in 2020 and 0.8 percent in 2019 and half of the 1.8 percent in 2018. The IMF projects a GDP growth of 1.2 percent in 2022.
|TI Corruption Perceptions Index||2021||102 of 180||http://www.transparency.org/research/cpi/overview|
|Global Innovation Index||2021||95of 132||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2020||USD $165 million||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2020||USD $3,720||https://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
3. Legal Regime
4. Industrial Policies
5. Protection of Property Rights
6. Financial Sector
7. State-Owned Enterprises
SOEs are active in transport (buses and railways, ports and airport management, airline operations); utilities such as electricity; petroleum imports and refining; water supply; retail; banking; telecommunications; television and radio broadcasting; newspaper publishing; and insurance. 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. In total, there are over 400 SOEs of which 55 have been identified by the Sri Lanka Treasury as strategically important, and 345 have been identified as non-commercial.
8. Responsible Business Conduct
The concept of Corporate Social Responsibility (CSR) is more widely recognized among Sri Lankan companies than Responsible Business Conduct (RBC). Leading companies in Sri Lanka actively promote CSR, and some SMEs have also started to promote CSR. CSR Sri Lanka is an apex body initiated by 40 leading companies to foster CSR. The Ceylon Chamber of Commerce actively promotes 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 in order to establish good corporate governance practices in Sri Lankan capital markets. Separate government agencies are tasked with protecting individuals from adverse business impacts in relation to labor rights, consumer protection, and environmental protections, although the effectiveness of these agencies is questioned by some. 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.
While Sri Lanka has generally adequate laws and regulations to combat corruption, enforcement is often weak and inconsistent. U.S. firms identify corruption as a major constraint on foreign investment, but generally not a major threat to operating in Sri Lanka once contracts have been established. The business community claims that corruption has the greatest effect on investors in large projects and on those pursuing government procurement contracts. Projects geared toward exports face fewer problems. A Right to Information Act came into effect in February of 2017 which increased government 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 reportedly made little progress pursuing cases of national significance. The law states that a public official’s offer or acceptance of a bribe constitutes a criminal offense and carries a maximum sentence of seven years imprisonment and fine. Bribery laws extend to family members of public officials, but political parties are not covered. A bribe by a local company to a foreign official is also not covered by the Bribery Act and the government does not require private companies to establish internal codes of conduct that prohibit bribery of public officials. 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 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 developed a number of 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 of 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.
10. Political and Security Environment
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.
Public opposition to the current government and growing outrage over power, fuel, and food shortages morphed into a largescale protest movement in March 2022. Since then, peaceful protests have been noted nearly every day both in Colombo and across the country, including an ongoing encampment in central Colombo next to the Presidential Secretariat. As public concern grows, some protests have turned violence due to clashes with pro-government protesters or security forces, such as a confrontation between protesters and police on April 19 in a city about 100 km from Colombo. In addition, protesters have surrounded and entered (or attempted to enter) the residences and offices of MPs and officials, and police have sometimes used tear gas and water cannons to disperse protesters. The worst violence occurred on May 9, when attacks by pro-government supporters on two major protest sites in Colombo triggered a wave of retaliatory violence in which anti-government protesters set fire to or vandalized approximately 100 homes and other properties around the country belonging to or affiliated with government MPs and officials. Violence continued into the next day, with busses and cars burned on the streets and dozens of people seriously injured. Declaring a state of emergency, the government worked with the military to restore order to the streets. While subsequent protests have mostly been peaceful, the situation remains volatile and ongoing shortages of essentials and power cuts continue to cause distress.
11. Labor Policies and Practices
Both local and international businesses have cited labor shortages as a major problem in Sri Lanka. In 2020, 8.1 million Sri Lankans were employed: 46 percent in services, 27 percent in industry and 26 percent in agriculture. Approximately 70 percent of the employed are in the informal sector. The government sector also employs over 1.4 million people.
Sri Lanka’s labor laws afford many employee protections. Many investors consider this legal framework somewhat 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 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 and English. The average worker has eight years of schooling, and two-thirds of the labor force is male. The government has initiated educational reforms to better prepare students for the labor market, including revamping technical and vocational education and training. While the number of students pursuing computer, accounting, business skills, 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” employment, 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, accountancy 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.
Women face workforce restrictions such as caps on overtime work, limits on nighttime shifts and restrictions from certain jobs. In 2021 the labor market was characterized by high female unemployment and low female labor force participation: an estimated 55 percent of public sector employees were men and 45 percent women while 70 percent of employees outside the public sector were men and only 30 percent women.