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IV. TRADE POLICIES BY SECTOR 
(1) INTRODUCTION  
1. Sri Lanka has maintained the export-oriented de velopment strategy that allowed it to develop 
some dynamic manufacturing export industries over the past decades.  No major trade liberalization or 
privatization measures have been introduced since it s last Review.  Likewise, the structure of the 
economy has not changed significantly since 2004.  Th e services sector continues to be the largest 
contributor to GDP and employment;  the share of the manufacturing sector in GDP has seen a slight decline, and that of agriculture has remained vi rtually unchanged, ending a long period of progressive 
decline.   
2. Although its share in GDP stagnated during the review period (12.6% in 2009, at current 
prices), agriculture continues to play an importa nt role in Sri Lanka's economy, as it provides the 
livelihood of a high percentage of the population, is  an important foreign exchange earner, as well as a 
source of raw materials.  Government interven tion in agriculture, including border protection and 
domestic support, remains significant.  Despite the pr ovision of subsidies (e.g. subsidized inputs, price 
support, concessionary credit) and other types of assistance, productivity in domestic food crops has 
stagnated, and the country continues to be a ne t food importer.  Tariff protection for agricultural 
products increased during the review period, and frequ ent changes in tariffs and ad hoc duty waivers 
have sometimes resulted in distortions in agricu ltural commodity markets and domestic production.  
The underlying structural factors that hold back the sector's growth include low levels of investment 
and credit, lack of quality inputs, inadequate tran sportation and marketing systems, lack of storage 
facilities, insufficient technological developmen t, and land-use restric tions.  Reducing import 
protection, rationalizing domestic support, and implementing a consiste nt and more transparent trade 
policy would allow a more efficient allocation of resources, thus increasing productivity and farmers' incomes.  In addition, a more functional land market  would help attract highe r investment levels and 
the introduction of modern agricultural technologies.  
3. Sri Lanka produces about half of its energy n eeds, but imports the entirety of its oil and 
petroleum products requirements, which makes it vulnerable to global oil price shocks.  The 
petroleum subsector was reformed in 2003, most not ably by putting an end to the state-run Ceylon 
Petroleum Corporation's (CPC) monopoly to import a nd distribute oil and petroleum products, and by 
introducing some adjustments to the pricing syst em.  Nevertheless, the CPC remains a dominant 
player, and its position as the leading retailer gives it considerable influence over local market prices, 
which still tend to lag behind global fuel costs.  Re portedly, an amendment to the CPC Bill is soon to 
be presented to Parliament, aimed at improving regulation in the industry, including with respect to pricing policies. 
4. The electricity sector is dominated by another state-owned utility, the Ceylon Electricity 
Board (CEB), which has run at a loss for many y ears as electricity tariffs have been kept below 
generation costs.  At the same ti me, cross-subsidization in favour of  some residential and industrial 
consumers has led to high electricity costs for othe r users, potentially weakening their international 
competitiveness.  Under the recently enacted Sri Lanka  Electricity Act (2009), the CEB retained its 
monopoly in transmission, but it must now purcha se part of its generation requirements through 
competitive tenders.  The new Sri Lanka Electricity Act also provides for some degree of tariff liberalization.  While these are positive developmen ts, competition in the sector remains limited and 
the changes introduced by the new Act fall short of more ambitious and long-discussed initiatives to 
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5. During the review period, Sri Lanka maintained an industrial policy aimed at diversifying its 
industrial base and promoting regiona l industrialization.  In order to encourage investment in the 
manufacturing sector, the Government has offered a wide range of tax incentives, concessionary 
credit and other types of assistance, targeted in par ticular at small and medium-sized enterprises.  The 
sector remains an important contributor to econom ic growth, accounting for 18.1% of GDP in 2009 
(at current prices) and 17.7% of total employment.  However, it is highly concentrated in a few products and export markets, and relies heavily on im ported inputs, all of which make it vulnerable to 
external economic cycles. Manufacturing also show s geographical concentration in the Western and 
North Western provinces.  Current government polici es to foster regional industrialization, backward 
integration, product differentiation and market divers ification are expected to address these problems.  
6. The apparel industry, the country's main fo reign exchange earner, has faced significant 
challenges over the past few years, including stiff international competition following the end of the 
MFA quota system and, more recently, weak demand  in the United States and the EU, which receive 
90% of its exports.  The industry has responded to  these challenges by adopting new technologies, 
improving quality, and fostering pr oduct differentiation.  Large apparel manufacturers have been able 
to weather the situation by restructuring their bus inesses and taking over SMEs that have been badly 
affected.  Growth in the manufacturing sector as a whole would be enhanced by upgrading infrastructure (e.g. electricity and transport) so as to reduce production costs, improving productivity, 
diversifying export markets and products, and ad dressing labour-market rigidities.  In addition, 
rationalizing the incentives regime could help enhance resource allocation and efficiency. 
7. The services sector, which accounted for 57.7% of GDP in 2009 (at current prices) and for 
42.3% of employment, remains the main driver of economic growth.  It expanded by an average 6% 
in real terms between 2004 and 2009.  Growth has b een driven primarily by telecommunications, but 
also by trading, financial services, and ports.  Performance in tourism has been sluggish, owing to 
security concerns and the world economic downturn, however, with the end of the armed conflict and 
gradual economic recovery, the sector is poised to grow considerably in the medium-term. 
8. Following privatization and liberalization meas ures in the early 2000s, Sri Lanka's services 
sector is relatively open.  For instance, full forei gn ownership is permitted in banking, insurance, and 
telecommunications, while the former state-insuranc e companies have been privatized, and the state 
monopoly in basic communications terminated.  Neve rtheless, there have been few reforms since the 
last Review, and state intervention, although declinin g, remains strong in key areas.  The two largest 
commercial banks are state-owned and hold about a third of total banking assets.  The Government's 
position as the largest borrower has limited the ability of state banks to provide much-needed funds to 
the private sector, although there have been signs in recent months that this situation is changing.  In 
telecommunications, the partially state-owned incumb ent operator retains considerable influence in 
the market, while the sector's regulator faces capacity constraints to enforce pro-competitive reforms.   
9. Although domestic and foreign investment has be en encouraged in transport services and 
infrastructure, the State retains a strong presence:  the majority government-owned national carrier 
dominates the air services industry, another state-run company retains the monopoly to develop and manage airports and airport services, and a governme nt agency is in charge of all cargo handling and 
port services, with the exception of a terminal at the Colombo port.  Further efforts to advance 
regulatory reform, so as to strengthen competition, in crease private-sector participation, and establish 
a level playing field for new entrants, would c ontribute towards modernizing Sri Lanka's services 
sector, hence improving the country's productivity and external competitiveness.    Sri Lanka WT/TPR/S/237 
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(2) AGRICULTURE  
(i) Overview 
10. After more than two decades of  substantial decline, agriculture's share in GDP remained 
virtually stagnant during the review period at 12.6%  in 2009 (at current prices), compared with 12.5% 
in 2004 (Table I.2).1  Agriculture remains a cornerstone of Sri Lanka's economy as around 70% of the 
rural population depend on this sector for their livel ihoods.  It directly employs 32.6% of the labour 
force2, accounts for 23.9% of merchandise exports (2009) , and is an important supplier of raw 
materials for the manufacturing industry.  Faced with a number of structural constraints, agriculture's 
real growth has fluctuated during the review peri od, averaging 4.4% per year between 2004 and 2009, 
below the economy's average of 6%.  Labour productivi ty in agriculture remains low at only one third 
of the level in other economic sectors. 
11. Successive governments have implemented an arra y of agriculture support policies, including 
protective import tariffs and licensing, subsidies,  price support, concessionary credit, and land 
provisioning.  The broad range of measures and thei r different objectives may create inconsistencies 
leading to mixed results, if not adverse effects.  For example, according to a World Bank study, while 
policies aimed at self-su fficiency in rice production rather than  at developing high-value agricultural 
markets may have helped attain n ear self-sufficiency, they have also  discouraged private investment 
in commercial agriculture and agri- business.  Fertilizer subsidies have contributed to the deterioration 
of soil conditions without a noticeable impact on yi elds.  Furthermore, according to the same study, 
constant changes in agriculture import tariffs ha ve increased price risks to farmers and dampened 
incentives to invest, while increasing consumer prices.3  The authorities recognize that contradictions 
in trade and agricultural policies, and the lack  of specific policies on cash-crops production might 
have discouraged investment.  However, they not e that this situation has been revised under the 
current agricultural policy, which gives priority to the production of cash crops, for example through 
the provision of infrastructure, land, and water.  The authorities also indicate that the changes in 
import tariffs have been aimed at maintaining pr ice stability, and seek to strike a balance between 
protecting farmers incomes and ensuring low consumer prices in urban areas.  
12. Some of the long-standing structural problems facing the agriculture sector include:  
insufficient capital investment and credit;  lack of quality seeds;  inadequate irrigation systems;  poor infrastructure, transport, and marketing networks;  lack of storage facilities, leading to big post-harvest losses;  inadequate technological devel opment;  and restrictions in the land market.  
These factors have led to low productivity and some of the highest production costs in Asia.
4   
13. Sri Lanka's agriculture is also constrained by the absence of a well developed land market, 
which reduces the potential for investment in the s ector.  Despite privatiza tion measures taken before 
20025, the Government still owns some 80% of a ll land and over 50% of non-plantation land.  
State-owned land is for lease only.  Farmers gran ted land through the Land Development Ordinance 
may not sublease or sell it, nor use it as collateral to access credit.  Furthermore, the provision of 
paddy land makes it difficult for farmers to use more productive, well irrigated land to grow 
                                                      
1 Agriculture's GDP includes crops, livestock, fishing, and forestry.  The contribution of the sector to 
total GDP has declined significantly since 1990 when it was 26.3%. 
2 Excluding the Northern  and Eastern provinces. 
3 World Bank (2007). 
4 The cost of production of some domestic food crops (e.g. green gram and cowpea) more than tripled 
from 1995 to 2004, and almost doubled in others (e.g. maize and potato) (Samaratunga, 2009). 
5 WTO (2004). WT/TPR/S/237 Trade Policy Review 
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higher-value-added crops.6  Land fragmentation resulting from policies aimed at equitable distribution 
of land, has also limited the development of commerc ial agriculture.  The small average size of farms 
prevents economies of scale, thus discouragi ng mechanization, and raising production costs.7  A  
functional land market could allow a more efficient allocation of resources, and increase investment 
and the adoption of modern farming technologies, thus raising productivity and farmers' incomes. 
14. According to the Government's 2006-16 developm ent plan (TYHDF), agricultural policy is 
aimed at increasing production to ensure food and nutritional security and raising small farmers' 
incomes, by improving competitiveness through m odern technology, shifting to commercial 
agriculture, and promoting diversification into highe r-value products (e.g. fruits, vegetables, fisheries, 
etc.).8  Under the TYHDF, the Government retains an important overseeing role in the sector, 
including in activities such as production and dist ribution of basic seeds, credit and marketing 
assistance, and land use;  public spending is geared  to the provision of subsidies (e.g. fertilizers), 
research and extension services, and irrigation.  Th e plan also envisages the continued use of trade 
policy instruments (i.e. import duties and safeguard measures) to protect local farmers.   
15. The Ministry of Agricultural Development and Agrarian Services has main responsibility for 
the formulation and implementation of agricultural po licies.  In 2007, in line with the ten-year 
development plan, the Ministry issued the Nationa l Agricultural Policy setting out policy objectives 
for the food, floriculture, and export crop sectors.9  Also, the Department of Agriculture (DOA), the 
main official agriculture research institute, deve loped a commodity-based five-year plan (2006-10) to 
improve productivity in food crops a nd floriculture.  Under this plan , self-sufficiency targets are set 
for rice and other crops (e.g. onions, chillies, maize,  soybeans, potato), and measures are envisaged to 
increase production of vegetables, fruits, and floricu lture, mostly for export.  Total funds for the 
implementation of the five-year work pl an were estimated at Rs 3,244 billion.10 
16. In response to the global food crisis, in 2007, th e Government launched a three-year national 
campaign under the theme Api Wawamu Rata Nagamu  (Let us cultivate and uplift the nation) to 
increase food production.  The actions envisaged include promotion of home gardening, use of 
organic fertilizers, provision of seeds and planting materials, dissemination of agri-technologies, and 
improved accessibility to inputs and services (credit,  insurance, and marketing).  Under this 
programme, some 75,752 acres of abandoned land were converted into cultivated areas in 2009, 
adding about 91,000 tonnes of paddy to the nati onal production, and 300,000 home gardens were 
developed.11 
(ii) Main crops 
17. Sri Lanka's agriculture comprises two main sector s:  the export-oriented plantation sector, and 
the domestic food production sector.  In the plantatio n sector, the major agricultural exports are tea, 
                                                      
6 World Bank (2007). 
7 According to the Agricultural Census of 2002, the average farm-size was 1.3 acres. 
8 Democratic Socialist Republic of Sri Lanka online information, Mahinda Chintana:  Vision for a New 
Sri Lanka:  A Ten Year Horizon Develop ment Framework 2006-2016.   Viewed at:  http://www.president.gov.lk/ 
mahinda_chinthana.asp [6 April 2010]. 
9 For further details see DOA online information.  Viewed at:  http://www.agridept.gov.lk/ 
content/admin/pdf/National% 20Agricultural% 20Policy.pdf [6 April 2010]. 
10 DOA online information.  Viewed at: http://www.agridept.gov.lk/other_sub_pages.php?id=64 
[6 April 2010]. 
11 Central Bank of Sri Lanka (2009a). Sri Lanka WT/TPR/S/237 
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rubber, and coconut, which accounted fo r 20.5% of export earnings in 2009.12  Other export crops 
include cinnamon, cardamom, cloves, pepper, cocoa,  and coffee;  these represented 3.4% of export 
earnings in 2009 (Table IV.1).  Rice dominates the domestic food production sector, accounting for 
11% of total agricultural output, over 27% of cultiv ated land, and employing about half of total 
agriculture labour force.13   
18. Although Sri Lanka now produces a substantial propor tion of its staple foods, in particular 
rice, it remains a net food importing country.  It  depends on imports for several essential foods, 
including wheat, wheat flour and other cereals (e.g. dhal and gram), sugar, potatoes, onion, and milk 
powder.14  Food and beverages imports amounted to 12.2% of total merchandise imports in 2009.15 
Table IV.1 
Agriculture, livestock, and fishing in Sri Lanka, 2004-09 
  2004 2005 2006 2007 2008 2009a 
Contribution to GDPb (Rs billion) 262.3  289.9  333.1  418.1  590.1  607.8  
Share in GDPb (%) 12.5  11.8  11.3  11.7  13.4  12.6  
Employment (%) 33.5 30.7  32.2  31.3  32.6  32.6  
Major crops (volume)       
Tea (million kg) 309.4  317.2  310.8  305.2  318.7  289.8  
Rubber (million kg) 94.7  104.4  109.2  117.6  129.2  136.9  
Coconut (million nuts) 2,591  2, 515  2,785  2,869  2,909  2,762  
Paddy ('000 tonnes) 2,628.0  3,246.0  3,342.0  3,131.0  3,875.0  3,652.0  
Agricultural exports (US$ million) 1,065.2  1,153.8  1,292.7  1,507.2  1,854.8  1,690.3  
     Share of total merchandise exports (%) 18.5  18.2  18.8  19.7  22.9  23.9  
Major exports (% of total merchandise 
exports) 15.7  15.3  16.0  16.7  19.3  20.5  
   - Tea 12.8  12.8  12.8  13.4  15.7  16.7  
   - Coconut 2.0  1.8  1.8  1.8  2.1  2.4  
   - Rubber 0.9  0.7  1.4  1.4  1.5  1.4  
Minor export cropsc (% of total 
merchandise exports) 2.8  2.9  2.8  3.0  3.5  3.4  
Fertilizer subsidy (Rs million) 3, 572  6,846  11,867  11,000  26,450  26,935 
a Provisional. 
b Based on current GDP. 
c These include cocoa, cinnamon, cardamom, cloves, pepper, and coffee. 
Source:  Central Bank of Sri Lanka, online informati on.  Viewed at: http: //www.cbsl.gov.lk/pics_n_ 
docs/10_pub/_docs/efr/annual_report/ar2009e /ar09_content_2009_e.htm [07/04/2010] ;  and data provided by the 
authorities. 
19. Rice is Sri Lanka's most important crop a nd staple food, hence food security and 
self-sufficiency have long been core policy goal s in this subsector.  Around 95% of total rice 
consumption is produced locally.  Mainly as a resu lt of the expansion of the cultivated area, paddy 
production has increased since 2004, reaching a peak of 3.87 million tonnes in 2008 (Table IV.1).  
However, production contracted by 5.8% in 2009,  due to unfavourable weather conditions.  The 
                                                      
12 The Sri Lankan authorities consider rubber as part  of the agriculture sector.  However, rubber is 
excluded from the coverage of th e WTO Agreement on Agriculture.  
13 Information provided by the Sri Lankan authorities. 
14 The requirement for wheat flour is met entirely through imports;  local production of milk meets 
30% of consumption demand. 
15 Central Bank of Sri Lanka (2009a). WT/TPR/S/237 Trade Policy Review 
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cultivated area increased from 779,000 hectares in  2004 to 978,000 hectares in 2009, while average 
yields did not vary significantly during the period.   
20. Rice is subject to import duties and import licences, which are modified in an ad hoc manner 
to protect farmers during glut and consumers during de ficit.  In 2009, specific duties of Rs 20 per kg 
and Rs 9 per kg applied to rice and rice flour, resp ectively.  In addition, the Government buys a 
limited quantity of paddy at a specified purchase pr ice during the harvesting season.  Other measures 
to support paddy production include fertilizer subs idies, concessionary credit and free irrigation 
facilities (section (iv) below).  Overall, the costs of  attaining near self-sufficiency in rice have been 
quite high in terms of irrigation developments, re venue forgone from subsidies, and misallocation of 
resources resulting from import protection.  
21. Tea continues to figure prominently in the country's economy, accounting for 16.7% of total 
exports earnings in 2009.  Since its last Review, Sri Lanka has lost its position as the largest tea 
exporter in the world in terms of quantity;  it now ranks third after Kenya and China.  However, it 
remains the world's primary tea exporter in revenue terms.  The higher unit value of exports reflects, 
in part, the authorities' policy to move "from the commodity market to the consumer market", by 
promoting more value-added tea pr oducts and using branding and ma rketing strategies to re-position 
Sri Lankan teas as the "best in class" source for export markets.16  Over the last few years, value-
added tea exports have increased, albeit slowly, an d currently represent 41% of total tea exports.  
During the review period, tea production showed y early fluctuations, reaching a record high of 
318.7 million kg in 2008, be fore decreasing to 290 million kg in 2009, mainly on account of dry 
weather conditions in plantation areas.  
22. The Sri Lanka Tea Board (SLTB), under the Ministry of Plantation Industries, is the main 
official agency responsible for the development a nd promotion of the tea industry.  It regulates and 
monitors most aspects of the industry, including cultivation, production, pricing, marketing, and 
trade.17  The Tea Small Holdings Development Aut hority provides extensi on services and subsidy 
schemes to smallholders to encourage tea replanting and infilling.18  In 2009, total payments to 
smallholders under the tea replanting subsidy scheme (Rs 200,000/ha) amounted to Rs 179 million.19  
The smallholder industry contributes some 74% to nati onal tea production.  In 2009, several measures 
were implemented to help tea exporters affected  by the global economic downturn, including state-
purchases, fertilizer subsidies, a one-year suspension of repayments of loans given to modernize tea 
factories, and provision of one month's working capital through commercial banks upon 
recommendation by SLTB. 
23. Imports of tea are subject to quality controls and inspection by the SLTB.  All types of tea 
imports require a prior permit from the SLTB, either for blending with domestic tea, adding value and 
re-exporting or for adding value and re-exporting wi thout a local component.  Importers may blend 
imported tea with locally produced tea only if the latter has been purchased through approved 
channels with export rights.  Exports of tea need  a permit issued by the SLTB.  Export consignments 
are randomly sampled to ensure that they confor m with minimum quality standards, are free of any 
contamination, and adhere to stipulated maximum residue limits (MRLs).  Tea manufacturers must 
                                                      
16 Democratic Socialist Republic of Sri Lanka online information, Mahinda Chintana:  Vision for a 
New Sri Lanka:  A Ten Year Horizon Development Framework 2006-2016.   Viewed at:  http://www.president. 
gov.lk/mahinda_chinthana.asp [6 April 2010]. 
17 Sri Lanka Tea Board Law No. 14 of 1975, last amended in October 2003. 
18 Over the past few years, government policy has been to encourage productivity in tea production 
through higher yields, and to discourage new planting.  
19 Central Bank of Sri Lanka (2009a). Sri Lanka WT/TPR/S/237 
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register with the STLB and sell their pr oduction only through approved channels.20  Tea exporters and 
packers must also register with the SLTB to be e ligible to purchase tea through any of the approved 
channels.  Tea exports are subject to a Cess of Rs  4.00 per kg and to a Medical Levy of Rs 0.35 per 
100 kg under the Health Ordinance.21  The SLTB also regulates the price of green leaf with the aim of 
providing a "reasonable price" both for small tea growers and tea factories that purchase green leaf for 
processing.22   
(iii) Border measures 
24. Ad valorem  tariffs and specific duties remain the ma in agricultural policy instruments;  they 
are often adjusted to meet different objectives, including to protect farmers, avoid domestic price 
escalation, correct supply shortages or generate re venue.  For example, in early 2009 the tariff on 
maize was increased and imports were later restricted in order to protect local farmers.23  On the other 
hand, tariffs were waived on wheat grain and milk to avoid supply shortages during the same year.  
The tariff policy on importation of coconut oil and ot her edible oils, aimed at  assisting the coconut 
value chain, is also subject to frequent changes.  It  has been observed that, in the past, the use of ad 
hoc duty waivers and exemptions has caused dist ortions in agricultural commodity markets and 
domestic production, disrupting predetermined trade policies and market signals.24  The authorities 
maintain that duty waivers have always been ai med at stabilizing prices in the domestic market. 
25. Since its last Review, Sri Lanka's average a pplied MFN tariff for agricultural products has 
increased from 21.3% (2003) to 25.6%  (June 2010), and remains substantially higher than the average 
tariff applied to non-agricultural pr oducts (9.1%) (Table III.2).  Tariffs on agricultural products range 
from zero to 250%.  Tobacco products, beverages, and spirits bear the highest tariffs for public health 
reasons;  they are followed by fruits and vegetables,  and live animals.  Tariff protection for fruits and 
vegetables, grains, dairy products, live animals, coff ee, and tea increased during the review period;  
the Government actively seeks to promote productio n and self-sufficiency of some of these products. 
26. The number of tariffs lines on agri cultural products subject to non- ad valorem  duties 
increased from 54 in 2004 to 109 in June 2010, affec ting products such as rice, wheat, sugar, onions, 
chillies, and potatoes.  Given that Sri Lanka does not calculate ad valorem  equivalents, 
non-ad valorem  rates may well conceal tariff peaks, and, in  some instances, result in tariffs that are 
higher than the bound rates, such as in th e case of tobacco products (Table AIII.2).25  Moreover, 
imports of a range of agricultural products (e .g. fruits and vegetables, processed and unprocessed 
food, rubber, and edible oils) are subject to a Ce ss, which together with other levies and charges 
increases import protection for these products.  Amidst  rising international food prices, and in order to 
prevent domestic price escalation of essential food items (e.g. milk powder, dhal, sugar, onions, 
potatoes), the Government introduced a single composite Special Commodity Levy in 2007, replacing the various levies and charges imposed on these produc ts (Chapter III).  According to the TYHDF, 
high specific duties on strategic foodstuffs were to be  replaced by a 60% duty and remain at that level 
                                                     
 
20 The Colombo Tea Auctions, Private Sales, Direct  Sales and Forward Contracts are the approved 
channels.  Some 98% of Sri Lanka's tea production is marketed through the Colombo Tea Auction (information 
provided by the SLTB;  see also SLTB online information.  Viewed at:  http://www.pureceylontea.com/ auctions.htm [7 April 2010]. 
21 The Department of Health uses this levy to pr ovide grass-root-level medical facilities to estate 
workers in the regional plantation companies. 
22 For further details see WTO (2004). 
23 Central Bank of Sri Lanka (2009a). 
24 Samaratunga (2009) and Kelegama (2003). 
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for some time to provide greater certainty to farmers, processors, and traders.  The authorities 
indicated that this measure has not been implemented.  
27. Non-automatic import licences apply to a range of agricultural products (92 tariff lines at the 
8-digit level), including live animals, meat and other animal products, and grains (Table AIV.1).  
Agricultural products are also subject to technical regulations (Table AIII.5).  
28. The authorities have indicated that there ar e no quantitative restrictions on agricultural 
exports.  Licensing requirements apply on a limited number of products on e nvironmental, genetic, 
and endemic plant preservation grounds. 
(iv) Domestic support measures 
29. Sri Lanka provides support to agriculture throug h various schemes, including input subsidies, 
price support and price stabilization measures, con cessionary credit, and marketing assistance.  Sri 
Lanka's latest notifications to the WTO concer ning agriculture support measures correspond to the 
period 1995-1997.26   
30. The Fertilizer Subsidy Scheme, primarily target ed at small paddy growers, was reintroduced 
in 2005 and remains the most important support progr amme.  The subsidy, which now applies to urea 
and other chemical fertilizers27, has increased significantly over r ecent years, as a result of higher 
world fertilizer prices (Table IV.1).  In 2008, it w as set at Rs 350 per 50 kg bag, with over 90% of the 
cost of the fertilizer borne by the Government.  The fertilizer subsidy was extended to other crops 
cultivated in paddy lands during the minor season in 200 7 and to tea smallholders  with  plantations of 
up to 50 acres in 2008.28  Overall, the fertilizer subsidy cost  Rs 26.5 billion (0.6 % of total GDP) in 
2008, almost twice as much the initial budgetary allocation, and a 135% increase over the previous 
year;  it increased to Rs 26.9 billion in 2009.29  The Government believes that the fertilizer subsidy is 
instrumental in stimulating production and addressing food security concerns.30  Independent 
observers are of the view that the fertilizer subs idy has had an inadequate impact on agricultural 
productivity.31 
31. Sri Lankan farmers, in particular rice producers,  have continued to benefit from free irrigation 
water.  During the review period, the Government  invested in several major irrigation projects, 
focusing mainly on the development of multi-purpose i rrigation schemes.  In 2008, total investment in 
irrigation amounted to Rs 13 billion;  in 2009, the budgetary provision for irrigation works was 
Rs 23 billion.32   
32. The Government buys limited quantities of paddy  (and other crops) with the aim of ensuring 
farmers' incomes, while offering affordable food prices to consumers.  The Paddy Marketing Board 
(PMB), re-established in 2007, purchases paddy directly  from farmers at a specified price set for each 
harvesting season.33  In April 2010, the G overnment's purchase prices for the Nadu rice variety and 
                                                      
26 WTO documents G/AG/N/LKA/1, 20 May 1999 and G/AG/N/LKA/2, 26 May 1999. 
27 Triple super phosphate (TSP) and muriate of potash (MOP). 
28 Fertilizer for tea smallholders was provided at a subsidized price of Rs. 1,200 per 50 kg bag, later 
reduced to 1,000 per 50 kg bag.  The subsidy represents more than two thirds of the market price. 
29 Ministry of Finance and Planning (2010). 
30 Ministry of Finance and Planning (2008). 
31 Samaratunga (2009). 
32 Ministry of Finance and Planning (2008). 
33 The PMB replaced the Agricultural Produc t Marketing Authority  created in 2006. Sri Lanka WT/TPR/S/237 
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the Samba variety were Rs 29.50 per kg, and Rs 31.50 per kg, respectively.34  The private sector 
purchase price may at times be higher than the Gove rnment's price.  The total cost of the paddy 
purchasing programme under the PMB amount ed to Rs 1,492 million in 2009.35  According to the 
authorities, during 2006-09, the Government purch ased, on average, less than 2% of total paddy 
production each year. 
33. In 2008, as part of the Government's stimul us package to support the economy, subsidies 
were granted to stabilize prices in the tea, rubbe r, and cinnamon sectors.  In addition, in 2009, a 
guaranteed price scheme was introduced for rubber gr owers affected by low international prices 
resulting from the global economic crisis.36   
34. Farmers benefit from concessionary credit av ailable through state banks and commercial 
banks under several agricultural loan schemes.  In  January 2010, interest rates on some of these 
schemes were reduced by 2-4 percentage points.   The New Comprehensive Rural Credit Scheme 
(NCRCS), introduced in 1996, provides loans for the cultivation of 34 field crops (including paddy) at 
an interest rate of 8%, with a maximum repayment period of 270 days.  Lending banks grant the loans 
with their own funds and receive an interest s ubsidy of 6% from the Government.  The scheme is 
extended to buyers of agricultural commodities, who have signed forward sale agreements with 
farmers (see below), at an interest rate of 10%.  Some Rs 10 billion in loans are distributed each year 
under the NCRCS.  The Agro Livestock Developmen t Loan Scheme (ALDL), introduced in 2008, 
provides loans for milk production at an interest  rate of 8%, and for setting up milk-processing 
factories at 12%.  Under the Krushi Navodaya  Loan Scheme, medium-term credit at an interest rate of 
8% is available to farmers for agriculture and animal husbandry projects.  Disbursements via the 
interest subsidy for agriculture loans totalled Rs 155 million in 2008 and Rs 379 million in 2009.37  In 
recent years, commercial banks have been mandated by  law to extend higher levels of credit to the 
agriculture sector.  As a result, loans and advan ces by commercial banks to the sector increased by 
11.5% to Rs 129.9 billion in 2009 over 2008.38 
35. The Government also intervenes in marketing a nd storage to ensure food security and prevent 
price escalation.  Under its paddy purchasing progr amme, the PMB maintains buffer stocks of rice 
that it releases to the market in order to  stabilize prices whenever supply runs short.39  In addition, the 
Cooperative Wholesale Establishment (CWE), under the Ministry of Commerce and Consumer 
Affairs, is responsible for ensuring the availab ility of essential consumer items, mainly food, at 
reasonable prices.  The CWE had the monopoly on imports of wheat grain until 2002.  At present, 
wheat is imported directly by Sri Lanka's two flour mills40, whereas the CWE competes with the 
private sector for imports of other commodities, in cluding rice and vegetable oils.  Retail trade is 
undertaken through the CWE's supermarket chain (Lak  Sathosa), cooperative societies, and economic 
centres.  The latter, established in main fruit and vegetable growing areas, provide a trading floor for 
farmers to sell their products to retail and wholesale tr aders.  In order to avoid price escalation in the 
                                                      
34 Lankanewspapers , online article "Fertilizer subsidy Rs 65b.  What the Sri Lanka Government did", 
1 April 2010.  Viewed at:  http://www.lankanewspa pers.com/news/2010/3/55387.htm [9 April 2010]. 
35 Information provided by the Paddy Marketing Board. 
36 Under the guaranteed price scheme, Rs 25 million were disbursed among rubber smallholders.  
Subsidies for rubber re-plantation and plantations we re also granted for a total of Rs 347 million.  
37 Ministry of Finance and Planning (2010). 
38 Central Bank of Sri Lanka (2009a). 
39 In January 2010, the Government released 35,000 tonnes of paddy from the buffer stocks to small 
and medium-scale mills, reportedly to overcome an artificial rice shortage  created by traders ( Colombopage , 
online article "Government issues rice stock to st abilize prices", 14 January 2010.  Viewed at:  
http://www.colombopage.com/archive_10/Ja n1263450829CH.html [9 April 2010]). 
40 In addition to Prima (Ceylon), a second flour mill commenced operations in 2008.  WT/TPR/S/237 Trade Policy Review 
Page 100 
 
 
local market resulting from soaring international food prices, in 2008 the Government introduced 
maximum retail prices on some essential commodities, including certain categories of rice and milk powder.  A new State Trading Co-operative Whol esale Company (STCWC) was established in 2008 
to purchase essential commodities from the national a nd international markets and distribute them 
through cooperatives and Sathosa outlets at lower pr ices.  So far, the STCWC has imported rice and 
cement.   
36. The forward sales contract system, introduced in 1999 to facilitate the marketing of 
agricultural products, remains in place.  Under this  system, farmers are encouraged to enter into 
forward contracts with buyers at pre-determined  prices, thereby helping reduce the volatility of 
farmers' incomes.  Farmers can use the contract document as collateral to obtain short-term credit for 
crop cultivation under the NCRCS loan scheme.  At the same time, credit facilities are available to 
buyers who purchase crops from farmers with whom th ey have entered into forward sales contracts.   
37. To support the development of non-traditional e xport crops (mainly spices, beverages, and oil 
crops), the Department of Export Agriculture (D EA) provides assistance sch emes to the producers, 
processors, and exporters of these products.
41  The schemes cover three areas:  new planting, 
productivity improvement, and post- harvesting.  Support measures include the provision of free 
planting materials, cash grants, technical info rmation and extension services for cultivation, 
post-harvesting processing, and value added.  Th e authorities indicated that replanting and new 
planting subsidies are the most significant forms of support to the plantation export sector.  The  amount disbursed under the Export Agriculture Crops Programme increased from Rs 40 million in 
2004 to Rs 175.5 million in 2009.  Total expenditure during 2004-09 was Rs 590.5 million.
42 
(3) ENERGY  
(i) Overview 
38. Sri Lanka's energy supply is based on three primary resources:  biomass (mainly fuel wood), 
petroleum, and hydroelectricity.43  The contribution of non-conventional energy resources (mostly 
small hydro, biomass, and wind) is small.  Indi genous resources provide some 55% of the national 
primary energy needs, while all oil and petroleum products need to be imported.  Total energy 
consumption was estimated at 5.6 milli on tonnes of oil equivalent in 2007.44  The Government 
expects energy demand to increase by about 3% a year between 2005 and 2020.  Constraints on the 
expansion of hydroelectricity and biomass-based energy mean that, in the foreseeable future, 
incremental energy needs will be met mostly by  imported fossil fuels, accentuating Sri Lanka's 
dependence on global energy markets.  The main obj ectives of the 2008 National Energy Policy are to 
expand household electrification, ensure energy  security, diversify energy sources, promote 
non-conventional renewable energy, rationalize prici ng policies, and promote energy efficiency and 
conservation.45  Direct responsibility for energy policy li es with the Ministry of Power and Energy, 
and the Ministry of Petroleum Industries.  The electricity sector has seen some regulatory reform in 
                                                      
41 Cinnamon, pepper, cardamom, cloves, nutmeg, co ffee, cocoa, citronella, betel, arecanut, lemon 
grass, and vanilla.  For further details see DEA online information.  Viewed at:  http://www.exportagridept. 
gov.lk/Info_English/index.asp-xp=944&xi=956.htm. 
42 Information provided by the Sri Lankan authorities. 
43 In 2004, biomass accounted for 47 .3% of national energy supply, cr ude oil and petroleum products 
for 45.3%, and hydroelectricity for 7.4%.  National Energy Policy and Strategies of Sri Lanka, published in the  
Gazette  of the Democratic Socialist Republic of Sri Lanka, 10 June 2008. 
44 Economist Intelligence Unit (2008b). 
45 National Energy Policy and Strategies of Sri Lanka, published in the  Gazette  of the Democratic 
Socialist Republic of Sri Lanka, 10 June 2008. Sri Lanka WT/TPR/S/237 
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recent years, but remains largely in the hands of  a loss-making state utility, as does the petroleum 
sector.  
(ii) Electricity 
39. Hydroelectric power has long underpinned Sri Lanka's electricity sector, although its 
importance is decreasing gradually;  it accounted for 51.3% of total installed capacity and nearly 40% 
of electricity generation in 2009.  In recent years,  thermal generation using oil has expanded rapidly, 
accounting for 60.4% of the electricity generate d in 2009.  Total losses in distribution and 
transmission are estimated at 15%.  Hydro-based electricity supply is vulnerable to rainfall fluctuations.  For example, in 2009, hydropower  generation decreased by 5.9% due to a severe 
drought, causing overall electricity generation to decline by 0.2% (to 9,882 GWh).
46  A l s o ,  t h e  
growing dependence on oil-fired thermal gene ration has increased the economy's exposure to 
international oil price shocks.  Forecast demand fo r electricity exceeds the present installed capacity, 
hence the Government is taking steps to e xpand generation capacity and balance the mix by 
diversifying into coal-based energy sources.  The firs t phase of a coal-fired power plant in Puttalam is 
expected to be commissioned before De cember 2010 and start operations in 2011. 
40. The state-run utility, Ceylon Electricity Board (C EB), continues to play a prominent role in 
Sri Lanka's power sector, although private participation is slowly increasing.  In 2009, the CEB 
generated 55% of total electr icity, with independent power producers (IPP) contributing 44%.47  The 
CEB is the sole body responsible for electricity tr ansmission, and together with its subsidiary, the 
Lanka Electricity Company (LECO), manages over 90% of distribution.  For many years, the CEB 
has run at a loss, mainly because electricity tariffs have been kept below the cost of generation on 
social welfare grounds.48  In addition, the Government purch ases high-cost electricity from IPPs to 
meet the increasing demand.  At present, the CEB re mains heavily indebted to the Ceylon Petroleum 
Corporation (see below), which has in turn been forced to borrow substantially from local banks 
thereby crowding out lending to the private sector.49 
41. The below-cost electricity pricing has deterred private investment in the sector, and prevented 
the CEB from generating revenue to invest in infrast ructure, as even the operational costs have not 
been covered by tariffs.  As a result of cross-s ubsidizing pricing policies that favour residential 
consumers over industrial users, the latter face some of the highest electricity tariffs in the region, 
which impairs their international competitiveness.  In  addition, a surcharge on heavy users and a fuel 
adjustment charge, increase industrial production costs.50  In 2006, the Government approved tariff 
increases, with further adjustments following in subs equent years in response to soaring international 
oil prices.  In 2009, the average electricity tariff was higher than the average cost for the first time in 
many years.51   
42. The CEB's unsustainable financial situation and increasing fiscal pressures have led the 
Government to undertake some reforms in th e power sector, but these have fallen short of 
long-discussed plans to fully re-structure the CEB,  which encountered strong trade union opposition.  
Under the new Sri Lankan Electricity Act (SLEA ), which entered into force in April 200952, the 
                                                      
46 Central Bank of Sri Lanka (2009a). 
47 Central Bank of Sri Lanka (2009a). 
48 The CEB's operating loss was Rs 33.3 billion in 2008, and Rs 7.4 billion in 2009. 
49 Central Bank of Sri Lanka (2009a). 
50 These charges were temporarily waived in 2009 under the Economic Stimulus Package. 
51 In 2009, the average cost of electricity was Rs 12 .55 per unit, and the average tariff was Rs 13.11 per 
unit (Central Bank of Sri Lanka, 2009a). 
52 The Sri Lanka Electricity Act No. 20 of 2009 repeals the Electricity Reform Act of 2002. WT/TPR/S/237 Trade Policy Review 
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Public Utilities Commission (PUCSL), set up in 2002, becomes the sector regulator, and is 
responsible for granting licences for generation, transm ission, and distribution of electricity.  Only the 
CEB is eligible to receive a transmission licence,  but it is required to select providers of new 
generation plants or extensions of existing plants through comp etitive tenders.  To apply for a 
generation or distribution licence, a company must be  incorporated in Sri Lanka and a certain amount 
of its shares must be held directly or indirectly by the Government or a public corporation.  A single 
party may not be issued two different types of li cence, although a statutory exemption allows the CEB 
to hold all three types of licence.  Distributi on licences may be issued for specific geographical 
regions.   
43. The SLEA provides for licensees to set tariffs for transmission and distribution of electricity 
according to a cost-reflective methodology and allows them to recover all reasonable costs incurred in 
carrying out their activities in an efficient manner.  It does not define the meaning of "reasonable 
costs", hence these will be determined by the PUCSL.   Tariffs must be approved by the PUCSL and 
published.  A review procedure by the Commissi on is envisaged, in which consumers and other 
interested parties may participate;  no such review has taken place so far.  Th e SLEA also provides for 
the cost of any consumer subsidy approved by th e Government and any cross subsidy recoverable 
from consumers to be reflected in the tari ffs.  Generation tariffs are not regulated. 
44. While the SLEA seeks to introduce some de gree of competition in the procurement of 
generation capacity through the use of tenders, it maintains the CEB's monopoly in transmission, 
hence neither distributors nor consumers are free to choose their electricity supplier.  Furthermore, 
provisions requiring certain government participatio n in all operators effectively limit the extent of 
private-sector participation, and thus, competition.  Provisions aimed at  liberalizing tariffs are a 
positive step and may help reduce the CEB's financia l burden.  The authorities note that the structure 
laid by the SLEA allows the Government to prep are a smooth transition to a more competitive system 
and to pursue policy goals, for example, to maintain so me elements of cross-subsidization.  So far, the 
PUCSL has granted 61 new small power (up to 10 MW) generation licences53, as well as several 
transmission licences to the CEB. 
45. In order to increase generating capacity and ba lance the country's energy mix, important 
investments have been made in the past few year s in lower-cost power-generation projects, including 
the construction of coal-fired power plants;  most of these projects are financed with foreign funds.54  
Supply problems are expected to ease as from 2010 when new generating capacity should be on 
stream, and diversification into coal-based power  should help improve the economy's resilience to 
weather-related and oil-price shocks.  Progress has been  made in electrification, with total electrified 
households reaching 86% in 2009, altho ugh the rate is 50-60% in rural areas. 
46. The Central Bank has highlighted the importa nce of solving the CEB's weak financial 
position and has identified some short and medium-ter m measures to that end:  the implementation of 
low-cost power-generation projects as scheduled;  the use of a realistic and flexible pricing policy;  
negotiating with IPPs more cost-effective power  purchases;  and exploring the feasibility of 
transforming thermal power plants to run on lo wer-cost fuel such as liquefied natural gas.55 
                                                      
53 For the terms and conditions of the licences gran ted to small power prod ucers, see PUCSL online 
information.  Viewed at:  http://www.pucsl.gov .lk/images/stories/pdf/GEN%20-%20SPP.pdf.   
54 The projects include the Norochcholai Coal Power plant, the Upper Kotomale Hydro Power Project, 
Tricomalee Coal Power Plant, and medium-scale hydropower plants (Broadlands, Moragolla, Uma Oya, etc.).  
A total of Rs 17 billion were invested in the power development sector in 2008 (Ministry of Finance and 
Planning, 2008). 
55 Central Bank of Sri Lanka (2009a). Sri Lanka WT/TPR/S/237 
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(iii) Petroleum 
47. Sri Lanka's petroleum sector had undergone s ubstantial changes prior to the last Review, 
including the introduction of competition in th e import and distribution of petroleum products, 
changes in the pricing policy, and the opening up of  the market for liquefied petroleum gas (LPG), 
marine fuels, and lubricants.  Until 2003, the st ate-owned Ceylon Petroleum Corporation (CPC) held 
the monopoly to import, export, refine, distribute, and market petroleum and petroleum products in 
the country.  As part of the restructuring of th e sector, CPC was split into three subsidiaries, which 
were subsequently privatized (Lanka Lubri cant, Colombo Gas and Lanka Marine Services56), and the 
importation and distribution of oil and refined petroleum was liberalized.57  No major changes seem to 
have taken place during the review period.  
48. Domestic demand for petroleum products has incr eased sharply in recent years owing to the 
expansion of thermal power-generating capacity, ra pid growth in the number of vehicles, and 
increased use of LPG.  As a non-oil producer, Sr i Lanka imports the entirety of its national 
requirements of oil and petroleum products, making it vulnerable to international oil price shocks.  
Most imports of these products are duty free, but  in May 2008 the duty waiver on gasoline imports 
was removed to cross-subsidize the use of diesel.58  Imports of refined products have increased 
steadily over the years, to double the volume of cr ude oil imports by 2007, while refining capacity has 
not been expanded (some 51,000 barrels/day).  The G overnment is seeking to increase the capacity of 
Sri Lanka's only oil refinery, at Sapugaskanda (n ear Colombo), with financial support from Iran.  
Plans to build a new refinery near Hambantota in  the south are under discussion.  CPC remains the 
largest company involved in petrol products re tailing, however, following import liberalization, the 
Lanka Indian Oil Corporation (LIOC), a subsidiary  of the Indian Oil Company, has become the 
second player.59  The Ceylon Petroleum Storage Terminals Ltd. (CPSTL), jointly owned by CPC and 
LIOC, operates the two main petroleum st orage facilities and regional bulk depots.60 
49. Since 2006, the PUCSL has been responsible, statutorily, to regulate the economic, technical, 
competition, and safety aspects of the petroleum sector , i.e. petroleum resources (oil, natural gas, and 
hydrocarbons) and petroleum products (petrol, di esel, kerosene, furnace oil, LPG, and aviation and 
marine fuels).61  Reportedly, a new CPC Amendment Bill has been drafted to effectively implement 
the PUCSL's regulatory functions in the sector.  Unde r the new Act, which is expected to be presented 
to Parliament soon, the PUCSL would have the power  to issue licences to import, export, sell, supply, 
and distribute petroleum and petroleum products.  A transparent pricing mechanism based on 
cost-plus-margin is envisaged.62  
50. Changes to the pricing system for local petrol eum products were first introduced in 2002, 
with the implementation of a formula ba sed on changes in the cost of production.63  According to the 
2008 National Energy Policy, prices of petroleum-based  fuels are to be determined using an agreed 
                                                      
56 Following a court decision in 2009, Lanka Marine Services was handed over to the Sri Lankan Port 
Authority and is now operating as a common user facility  providing storage facilities for bunkering companies.  
57 For further details on the restructuring of Ceypetco see WTO (2004). 
58 Institute of Policy Studies of Sri Lanka (2009). 
59 The Sri Lankan Government signed an agreement with the Indian Oil Corporation in 2002, under 
which IOC supplies crude oil and petroleum products to  CPC on fixed-term contracts (Economist Intelligence 
Unit, 2008b). 
60The CPC holds two thirds of the shares of the CPSTL since 2008. 
61 The PUCSL Act No. 35 of 2002 was amended in July 2006, through a resolution in Parliament, to 
include the petroleum industry on the list of pub lic utilities to be regulated by the Commission. 
62 The Bottom Line , online article "Sweeping amendments to CPC Act", 31 March 2010.  Viewed at:  
http://www.thebottomline.lk/2010/03/31/news36.html. 
63 For more details see WTO (2004). WT/TPR/S/237 Trade Policy Review 
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price formula between the Government and the sector utilities regulated by the PUCSL;  and 
marketing companies are free to decide on their retail prices within a specified maximum retail 
consumer price.  Under the policy, subsidies are to be provided only to low-income households for 
kerosene usage, while subsidies for ot her petroleum-based fuels are, in principle, to be removed.  In 
practice, owing to the rising fiscal cost of mainta ining subsidies amidst soaring international oil 
prices, the Government has allowed oil compan ies to increase domestic fuel prices since 2006.  
However, local prices still tend to lag behind global fuel costs, and the Government's influence over 
the dominant retailer, CPC, may indirectly influence the market price.  From 2007 to 2009, combined  
disbursements related to the Samurdhi relief progr amme and the kerosene oil allowance amounted to 
Rs 28.4 billion.64  
51. The CPC has run at a loss in recent years.  In 2009, it reported an operational loss of 
Rs 12.3 billion.  The main causes are the provision of highly subsidized furnace oil to the CEB, and 
because domestic retail prices were not adjusted to reflect rising international prices during the second 
half of 2009.  A high outstanding bill receivabl e from the CEB and other institutions has compounded 
the CPC's financial difficulties.  To improve th e economic viability of the petroleum sector, the 
Central Bank advocates development of a realistic pr icing formula for petroleum products in the local 
market, which should be revised at reasonable interv als following the fluctuations in international oil 
prices.65  
52. The Government is promoting exploration of possible petroleum sources in the Mannar Basin 
(off the western and north-western coast) as a way of reducing energy dependence.  In 2003, it passed 
the Petroleum Resources Act, whic h allowed private local and forei gn investors to seek opportunities 
in Sri Lanka's offshore territory, and established th e Petroleum Resources Development Secretariat.  
According to seismic studies, small potential reserves have been discovered in the Mannar Basin.  In 
2008, the Government called for worldwide bids to fu rther explore oil prospects, and entered into a 
Petroleum Resource Agreement with Cairn Lanka (Pvt .) Ltd., a subsidiary of the winning bidder, 
Cairn India Ltd.  If exploration is successful, oil production will take at least five years to 
commence.66  In order to diversify the energy mix, in 2007 the Government enacted the Sustainable 
Energy Act and established the Sustainable Energy Au thority (SEA).  The objectives of the Act are to 
develop renewable energy resources, implement energy efficiency and conservation measures, and promote energy security and cost-effective energy delivery.   
(4) M
ANUFACTURING  
(i) Overview 
53. For over three decades, Sri Lanka has pursued  an export-oriented strategy aimed at 
diversifying the industrial base.  The Government has offered a wide range of incentives and other 
types of assistance to encourage local and foreig n investment in the manufacturing sector, and to 
promote industrialization in all regions of the country.  While the strategy has allowed some 
diversification of the country's export structure fro m traditional plantation crops into labour-intensive 
manufactured exports, manufacturing remains concentr ated in a few products and export markets.  
Although actions to strengthen back ward integration are under way, the sector still relies heavily on 
imported inputs, all of which make it vulnerable to  external economic cycles and price fluctuations.67  
Moreover, manufacturing shows geographical concentr ation, with most industries located in the 
Western and North Western provinces.  However,  at present, several government programmes are 
                                                      
64 Ministry of Finance and Planning (2010). 
65 Central Bank of Sri Lanka (2009a). 
66 Institute of Policy Studies of Sri Lanka (2009). 
67 Kankanamge (2008). Sri Lanka WT/TPR/S/237 
 Page 105 
 
 
being implemented to regionalize the industrial base by, inter alia , promoting the relocation of 
industries outside the Colombo and Gampaha distri cts, establishing industrial estates, and reviving 
defunct factories, especially in the Northern and E astern provinces.  Constraints to the expansion of 
the sector include poor quality infr astructure (in particular, electricity), high cost of credit, 
burdensome regulations, and distortions in the labour market.68 
54. Manufacturing contributed 18.1% to GDP in 2009 (at current  prices), compared with 18.7% 
in 2004 (Table I.1).  Food, beverages and tobacco is  the largest subsector, accounting for 50% of total 
manufacturing output in 2009 (Chart IV.1).  The textiles and clothing subsector has retained its position as the leading foreign exchange earner a nd ranks second-largest in terms of output.  The 
chemical, petroleum, rubber and plastic industry, wh ich is dominated by rubber-based products, is the 
second largest export industry.  Together, the thr ee largest subsectors generated 87.5% of total 
manufacturing output in 2009.  As a whole, the manufacturing sector accounts for 67.1% of Sri Lanka's merchandise exports (Table AI.1).
69  Besides apparel and rubber products, other 
export-oriented industries include electronic equi pment, diamond products, leather, paper and wood 
products, ceramic products , and jewellery.   
Chart IV.1
Structure of output in manufacturing, 2009a
Source :   Central Bank of Sri Lanka, Annual Report 2009.  Viewed at:  http://www.cbsl.gov.lk/pics_n_docs/ 10_pub/
                 _docs/efr/annual_report/ar2009e/PDF/9_chapter_05.pdf [ 6 April 2010].Food, beverages & to bacco
50.0Textiles, clothing & leather products
19.5
Other
1.6Chemicals, petroleum, rubber & 
plastic products
18.0Per cent
Non-metallic mineral products
3.1
Fabricated metal products, 
machinery & transport equipment
7.8
a             Provisional.  
Note:       Manufacturing including factory industry only.  Calculations are based on current prices.
 
55. Between 2002 and 2004, real growth in the manuf acturing sector averaged 5.3% per annum.  
With the exception of food, beverages and tobacco, all major manufacturing industries recorded lower 
growth rates in 2009, owing to a decline in dema nd in both export and domestic markets.  The sector 
started to pick up in mid 2009 as a result of the re covery in the economies of Sri Lanka's major 
trading partners and the increase in domestic demand,  mainly in the Northern and Eastern provinces. 
                                                      
68 Sri Lanka's labour laws make it difficult and cos tly to lay off workers.  According to the World 
Bank's Doing Business 2009 report, Sri Lanka's firing costs are among the highest in the world.   
69 Based on UNSD, Comtrade database (SITC Rev.3). WT/TPR/S/237 Trade Policy Review 
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56. The manufacturing sector employs 18.1% of the total labour force (Table I.2).  Labour 
productivity in the sector grew at an average rate  of 3% during 2004-09, with the chemicals and 
petroleum, and textiles and apparel subsectors showing above-average increases (3.4% and 3.1%, 
respectively).70  Some of the factors often cited as havi ng held back higher productivity growth in 
manufacturing include a rigid labour market, lack of skilled labour, and insufficient investment in 
modern technology.71   
57. Foreign direct investment (FDI) has been inst rumental in the development of manufacturing, 
particularly in export-oriented industries.  In  2009, the Board of Investment (BOI) attracted 
US$601 million worth of FDI, of which US$163 million were directed to the manufacturing sector, in 
particular to the textile, appare l and leather products subcategory.72  The share of manufacturing in 
total realized investment of BOI enterprises d ecreased from 40.7% at end 2004 to 32.3% at end 
2009.73 
58. The Government considers that industr ial policy should strengthen the existing 
export-oriented industries, while promoting a grad ual shift from import-based industries to higher 
value-added industries with backward linkages.  Small and medium-size enterprises (SMEs), which 
are considered the backbone of the economy, account  for about 96% of all industrial establishments, 
30% of total industrial output, and 36% of industrial employment.74  Therefore, one of the 
Government's industrial policy objectives is to assist  the development of SMEs so as to enable them 
to compete in international markets and uplift the population's living standards, particularly in the 
Northern and Eastern provinces.  
59. According to the Government's TYHDF 2006-16, sustainable industrial development requires 
a climate conducive for investment through stable  macroeconomic conditions, the availability of 
finance at competitive rates, the promotion of FDI and public-private partnerships, the transfer of 
technology and managerial skills , and modern infrastructure.75  A number of policy initiatives have 
been designed under the TYHDF, including suppor t for micro-enterprises and SMEs, promotion of 
industrial subsectors through cluster initiatives, incl uding geographical clusters, and the creation of 
industrial zones and techno parks with private-sect or participation.  The TYHDF also envisages 
strengthening innovation and the use of new technologies through the establishment of the Sri Lankan Institute of Nanotechnology, a joint effort by the Government and the private sector, which is 
expected to help add value to Sri Lankan products and enhance their competitiveness in international 
markets.  Labour training and the introduction of an unemployment insurance scheme to address 
labour market rigidities are also envisaged.  In addition, a number of programmes are being 
implemented to support industrialization of th e Northern and Eastern provinces, including 
infrastructure development in industrial estates and the establishment of special economic zones. 
                                                     
 
70 Central Bank of Sri Lanka (2009a). 
71 Central Bank of Sri Lanka (2004) and WTO (2004). 
72 Information provided by the Board of Investment of Sri Lanka. 
73 Central Bank of Sri Lanka (2009a). 
74 Information provided by the National Enterprise Development Authority (NEDA). 
75 Democratic Socialist Republic of Sri Lanka online information, Mahinda Chintana:  Vision for a 
New Sri Lanka:  A Ten Year Horizon Development Framework 2006-2016.   Viewed at:  http://www.president. 
gov.lk/mahinda_chinthana.asp [6 April 2010]. Sri Lanka WT/TPR/S/237 
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(ii) Policy instruments  
60. Sri Lanka's average MFN tariff for manufactur ed products (WTO non-agricultural products) 
increased from 8% in 2003 to 9.2% in June 201076;  resulting from an increase of the rates applied on 
all main industrial categories (Table III.2).  Ta riffs for manufactured products range from zero to 
30%.  The categories that receive the highest protec tion include leather, rubber, footwear, and travel 
goods, with average rates of 18.6%, followed by tran sport equipment (15.4%), wood, pulp, paper, and 
furniture (14.4%), mineral products (13.3%), and electrical machinery (10.3%) (Table III.3). 
Processed goods receive higher protection than semi- processed goods, while all raw materials are 
duty free (as of 1 June 2010);  this reflects the G overnment's strategy of promoting value added in 
manufacturing (e.g. textile and clothing, rubber pr oducts, etc.) and the domestic industry's high 
dependence on imports of raw materials and in termediate goods.  Imported inputs for export 
industries are duty free, including imports of textile materials, yarn, and othe r intermediate and capital 
goods for the apparel industry, as well as gold and gems  for the jewellery industry.  Imports of a wide 
range of machinery and equipment, including tel ecommunications equipment, are also duty free.  
61. Sri Lanka has bound only about 26% of the tariff lines covering manufactured products 
(WTO definition of non-agricultural products), at an average bound rate of 21.3%.  In 2009, applied 
rates on 143 HS tariff headings exceeded the bound rates, including mostly textiles, carpets, ploughs, 
switches, and cigarettes (Table AIII.2).  Imports of  manufactured products are subject to other charges 
and levies, which increase substantially the cost of importing into Sri Lanka (Chapter III).  In 
addition, a range of manufacturing products, including  chemicals, some textiles, and motor vehicles 
are subject to non-automatic import licences:  520 tariff lines (at the eight-digit level) were subject to 
import licensing in 2010, around half affected transport equipment and chemicals.  
62. Incentives continue to be the preferred policy in strument to promote the manufacturing sector.  
An array of incentive schemes have been offered to  encourage investment in manufacturing in order 
to promote diversification and regional industriali zation.  Incentives include mostly tax holidays, 
concessionary income tax rates, and import duty exem ptions, granted under the BOI Act or the Inland 
Revenue Act (Chapter III and Tables AIII.6 and AIII. 7).  Investments under the BOI Act are mostly 
targeted at non-traditional export industries and cont ingent upon export performance in some sectors, 
including electronics, ceramics, rubber, and automo bile products.  Overall, the incentive regime is 
complex and somewhat overlapping, and seems to have fallen short of th e goals of expanding the 
industrial base, both product- and region-wise.  Manufacturing remains concentrated in a relatively 
small number of subsectors (mainly apparel, food, and chemicals, and rubber products), and over 80% 
of industries are still located in the Western and North Western provinces.77  Rationalization of the 
incentive regime in favour of horizontal measu res could help enhance resource allocation and 
efficiency, while continued improvements in infrast ructure and access to product and labour markets 
in lagging areas could greatly enhance the prospect s for regional industrialization.  The authorities 
indicate that amendments to the BOI Act, aime d at harmonizing and rationalizing the investment 
incentives regime, are currently being considered. 
63. Financial assistance to the manufacturing sector is mainly provided th rough the development 
banks.  The National Development Bank (NDB) offe rs credit at preferential rates to SMEs under 
several schemes (Chapter III(4)(iii )).  In 2008, some Rs 678.7 million of loans were approved under 
the Small and Micro Industries Leader and Entrep reneur Promotion Project (SMILE III) to help 
develop small and micro enterprises;  while 180 loan s totalling Rs 1,313 million were granted to help 
                                                      
76 By ISIC Rev.2 definition, the average applied rate for manufactured products was 10.9% in 
June 2010. 
77 Ministry of Industrial Development online information.  Viewed at:  http://www.industry.gov.lk/300 
Ind_Prg.htm [15 April 2010].  WT/TPR/S/237 Trade Policy Review 
Page 108 
 
 
industries find solutions for environmental problems under the E-Friends II scheme.78  Credit facilities 
are also available under the Small and Medium  Enterprise Regional Development Programme 
(SMERDP), introduced in 2008 to promote the development of SMEs outside the Western Province.  The Lankaputhra Development Bank,  established in 2006 to facilita te SME development, offers 
long-term loans at concessionary rates to small-scal e enterprises, particularly in lagging areas.  At 
end-December 2008, the total amount of project  loans approved by the Lankaputhra bank was 
Rs 3,449.98 million and total disbursement was Rs 2, 273.9 million, of which 48% was directed to 
projects in the manufacturing sector.
79 
64. In addition to assisting SMEs, in recent year s the Government has focused its efforts on 
strengthening regional industrialization.  Besi des the tax concessions and financial assistance 
mentioned above, steps have been taken to upgrad e infrastructure facilities, establish new industrial 
estates and revive defunct factories, particularly in the Northern and Eastern provinces.  For example, infrastructure development work of the Tricomalee (Kappalthurei) Industrial Estate was completed in 
2009 and works at the Buttala Industrial State are n ear completion.   Special programmes, such as the 
Nipayum Sri-Lanaka – 300 Enterprises Programme , which focuses on regionalizing the industrial 
base, have been put in place to that end.  Unde r this programme many of the concessions given to 
foreign investors under the BOI have been extended to local investors.
80 
(iii) Textiles and clothing 
65. The contribution of the textile and clothing industry to GDP declined from 4.1% in 2004 to 
3.2% in 2009 (at current prices).  Nevertheless, the industry continues to occupy a prominent position 
in Sri Lanka's economy:  it accounts for 18.7% of  manufacturing output, and is the major foreign 
exchange earner, representing 44.1% of total exports  and 65.7% of manufacturing exports in 2008;  
the industry employs some 270,000 people81, providing indirectly for the livelihood of around one 
million others. 
66. Benefiting from attractive investment incentives, a liberal import regime for inputs, secured 
export quotas and a skilled and low-cost workfo rce, the garment industry has developed into a 
dynamic export-oriented sector, showing remarkable  growth for over three decades.  It has long 
overtaken plantation exports as the country's prim ary foreign exchange earner and has become an 
important supplier to major international clothing brands.  At present, however, the industry faces 
high production costs and insufficient backward inte gration, and is highly reliant on a few markets, 
with some 90.4% of its exports directed to the European Union and the United States (2008).82  As a 
result, the industry, in particular small and me dium-scale garment manufac turers, has been badly 
affected in recent years by weak demand in these two markets.  Another shortcoming is the garment industry's heavy dependence on imported inputs (yarn, fabrics, and accessories).
83  The lack of 
vertical integration results in long turn-around times to meet export orders, thus impairing Sri Lankan 
international competitiveness.84  This situation has also kept net foreign exchange earnings low;  these 
                                                      
78 Ministry of Finance and Planning (2008). 
79 Ministry of Finance and Planning (2008). 
80 Under the Nipayum Sri Lanka Programme, operated jointly by the MID and the BOI, 58 new 
industries have been established, 18 sick industries have been revived, 5 industries have been expanded, and approval has been granted to another 8 industries to relocate outside the Colombo and Gampaha districts.  
81 Institute of Policy Studies of Sri Lanka (2009).  
82 UNSD Comtrade database (SITC Rev.3). 
83 It has been estimated that imported fabrics accoun t for 85%-90% of the fabr ics used by exporters 
(Central Bank of Sri Lanka, 2002). 
84 The turn-around time of Sri Lanka's garment indu stry is between 90-150 da ys, compared with the 
ideal international lead time of ar ound 60 days (Kelegama, 2005). Sri Lanka WT/TPR/S/237 
 Page 109 
 
 
were estimated at only 30%- 35% of export value in 2004.85  However, the authorities indicate that due 
to substantial levels of investment to foster back ward integration in recent years, at present domestic 
value-added amounts to over 50% of export valu e.  Increasing production costs due to high utilities 
prices (e.g. electricity and water) have also a ffected the competitiveness of Sri Lankan garment 
exports.  The recent real depreciation of the Sr i Lankan rupee, although modest, should help to 
partially offset this loss in competitiveness.  
67. Imports of textiles are exempted from tariffs, and intermediate inputs enjoy low levels of 
protection or none at all.  On the other hand, most  apparel imports are subject to a tariff of 15%.  
Overall, average tariff protection on textiles and clothing has increased from 5.2% in 2003 to 7.4% in 
2010, with tariffs ranging from zero to 30% (Table I II.3).  Textiles and clothing products are subject 
to a standard VAT rate of 12%, with the exception of different types of yarn, which are exempted.  
Many textiles and clothing products (61% of tariff lin es of HS Chapters 50-63) are subject to the Cess 
introduced in 2008.86  Other charges such as the Nation Building Tax and the Social Responsibility 
Levy also apply to imports of these products (Chapter III). 
68. The textile and clothing industry has been a major recipient of incentives and other support 
measures, including tax benefits, fi nancial support (concessionary credit, debt restructuring and credit 
guarantees for SMEs), and technical and marketing a ssistance.  In addition, a programme initiated by 
the Ministry of Industrial Development in 2004  has provided support for factory expansion, 
modernization, capacity building, a nd business development services.   
69. A major development in the industry during th e review period was the end of the MFA quota 
system in 2005.  Although only half of its exports were based on quotas at that time, the dismantling 
of the system has exposed Sri Lanka to stiff inte rnational competition, particularly from lower-cost 
manufacturers in the region, and has led to important  restructuring efforts in the industry.  Other 
challenges facing Sri Lanka's apparel industry in r ecent years have been increasing competition from 
exports under preferential trade agreements in its major markets, and changing trends in the global 
retail apparel industry.  To respond to these cha llenges, Sri Lankan manufacturers set up the Joint 
Apparel Association Forum (JAAF) in 2002 and prep ared a five-year strategy to consolidate the 
industry and strengthen its international competitiv eness to face global competition after 2005.  The 
strategy included shifting from the low-end mark et to middle and upper levels, promoting product 
specialization, upgrading technology, and strengt hening marketing networks.  The Government 
supported the five-year strategy and allocated Rs 100 million to improve productivity under the 
programme.87  The JAAF's new strategy paper, for 2010- 15, identifies barriers that hamper the 
competitiveness of the apparel industry and measures needed to improve market access conditions in 
the two major markets as well as in emerging markets.  
70. Major local manufacturers have restructured their industries and been able to remain 
competitive by reducing costs and lead times, im proving product quality and design, producing for 
internationally renowned brands a nd catering to niche markets.  Some have also taken measures to 
develop backward linkages88, differentiate their products by a dhering to eco-friendl y manufacturing 
                                                      
85 Weeraratne (2004). 
86 A Cess of Rs 50 per kg applies on imported textiles not intended for use by the apparel export 
industry, while apparel imports bear a Cess of 30% or Rs 75 per unit. 
87 Kelegama (2005). 
88 For example, the MAS Group, one of the coun try's largest apparel manufacturers set up the 
first fabric manufacturing park in 2007.  The park prov ides infrastructure and service solutions for fabric and 
apparel manufacturers.  Other investors are exp ected to establish factories within the park. WT/TPR/S/237 Trade Policy Review 
Page 110 
 
 
practices and international labour sta ndards, and promote brand and image.89  Overall, these strategies 
have helped the Sri Lankan apparel industry face increased global competition, and allowed it to 
record solid growth between 2005 and 2008.  This positive performance was al so due to favourable 
external conditions and the expansion of expor ts to the EU market under the GSP+ scheme.90  
However, since the end of 2008, growth has deceler ated, owing to weak demand in the United States 
and the EU as well as domestic cost pressures.  The largest manufacturers have weathered the situation by merging operations and reducing overtime and wage bills to remain competitive, but 
SMEs have been badly affected by the decline in external demand and tighter credit facilities.
91  The 
withdrawal of the GSP+ scheme announced by th e EU in February 2010 could compound the 
industry's difficulties;  under this system so me 7,200 Sri Lankan export items, mostly apparel 
products, received preferential tariff treatment in th e EU market.  As of 15 August 2010, these exports 
are expected to receive only normal GSP treatment.92 
71. Earnings from textile and appare l exports dropped by 5.6% in 2009, and the sector recorded 
marginal growth (0.6%).  Reportedly, a number of plants have closed and workers have been laid 
off.93  In order to support the industry, the Gove rnment announced an Export Development Reward 
Scheme in 2009, under which appa rel exporters who maintained employment, export earnings, and 
value added at least at a level equivalent to 2008, were granted a 5% subsidy.  The authorities indicate 
that this scheme was not fully impl emented due to lack of funds.  Ot her relief measures, also extended 
to other export-oriented industries, included the re moval of a surcharge on electricity and the fuel 
adjustment levy, and the suspension of th e Economic Service Charge for one year. 
72. The authorities consider that excessive relian ce on non-reciprocal trade arrangements is not 
sustainable, and, therefore that the national appa rel industry needs to enhance its competitiveness, by 
raising productivity and efficiency.94  They believe that increasing intra-South Asian investment and 
trade flows can help create vertical integration in the region, therefore they seek to strengthen regional 
cooperation and take advantage of  market opportunities under existing free-trade agreements.  Under 
the FTA with India, Sri Lanka obtained tariff concessions on a number of textile items and a 
preferential tariff rate quota (TRQ) for apparel exports.95  Likewise, under the FTA with Pakistan, 
Sri Lanka was granted a TRQ for garments (Chapter  II(3)(ii)).  Upgrading technology, strengthening 
backward linkages, and improving infrastructure and public utility services could significantly help 
increase the competitiveness of the national apparel industry. 
                                                      
89 For example, "Garments without guilt", one of the major initiatives taken by the industry, focuses on 
ethical manufacturing and sustainable development, co mmitting to ethical workin g practices, including not 
engaging child labour.  For further details see JAAF online information.  Viewed at:  http://www.garments 
withoutguilt.com. 
90 Garment exports to the EU increas ed at an annual average rate of  14% during 2004-09.  Information 
provided by the Sri Lankan authorities. 
91 Central Bank of Sri Lanka (2008) and (2009a). 
92 The Sri Lankan authorities note that they are currently engaged in a dialogue with the EU on this 
issue.  They also indicated that the withdrawal of the GSP+ tariff benefits would have a negative impact on the 
industry. 
93 According to the JAAF, more than 50 factories have been shut, with large companies like Sinotex 
closing due to a decline in orders from the United Stat es (Institute of Policy Studies of Sri Lanka, 2009).   
94 Central Bank of Sri Lanka (2009a). 
95 Under the FTA, India granted Sri Lanka a 25% tariff concession on 528 textile items (HS 51-63) on a 
permanent basis, and a preferential tariff quota covering  8 million pieces a year of apparel articles falling under 
HS chapters 61-62;  for 5 million pi eces (out of the 8 million) the level of the preferential tariff depends on 
whether the fabric is sourced from India. Sri Lanka WT/TPR/S/237 
 Page 111 
 
 
(5) SERVICES  
(i) Main features and multilateral commitments 
73. Services contributed some 57.7% to Sri Lanka 's GDP in 2009, down from 58.8% in 2004 
(Table I.2).  The main service subsectors in 2009 we re wholesale and retail trade (19.6% of GDP);  
transport and communication (12.6%);  banking, insu rance and real estate (10.3%);  and government 
services (9.2%).  Services employed some 42% of the labour force in 2009.  Between 2004 and 2009, 
the service sector grew at an average annual rate of 6% in real terms, driven primarily by 
telecommunications, but also by trading, financia l services, and ports.  Due to the world economic 
downturn, however, the sector's expansion decelerated  in 2008 (5.6%) and 2009 (3.3%).  Services, in 
particular transportation and travel, accounted for 21 .1% of total exports in 2009.  The Central Bank 
reports that Sri Lanka's service balance recorded a surplus between 2004 and 2009. 
74. In the Uruguay Round, Sri Lanka's specifi c commitments under the GATS covered only 
tourism (i.e. hotel and lodging, and travel  agency and tour operators services).96  Subsequently, 
Sri Lanka accepted the GATS Fourth and Fifth Prot ocols on basic telecommunications and financial 
services, respectively.97  Sri Lanka also accepted the Reference Paper on Regulatory Principles for 
Basic Telecommunication Services as an additio nal GATS commitment.  In its Schedule of 
Commitments, Sri Lanka inscribed horizontal limitat ions and conditions pertaining to some forms of 
commercial presence.  In addition to listing certain activities reserved to nationals, Sri Lanka listed a 
number of sectors where foreign equity in excess of 40% is subject to approval on a case-by-case 
basis by the Board of Investment (BOI).98   
75. In telecommunications, Sri Lanka reserved the right of the majority-state-owned Sri Lanka 
Telecom company to maintain the monopoly on basic fixed wire telephone services (international) until 2000.  Sri Lanka also retained the right to  issue no new licences for mobile services until 2000, 
and to maintain the duopoly on basic telephony ser vices supplied by the Wireless Local Loop (WLL) 
until 2002.  Issuance of new licences for other b asic telecom services would be subject to economic 
needs criteria, which were not further defined.  Fo reign equity caps were set at 35% for Sri Lanka 
Telecom and 40% for other service providers  unless the BOI approved a higher level. 
76. Sri Lanka's commitments in financial services provide for the approval, registration, and 
licensing of banks and other financ ial institutions to be subject to  an economic needs test, but the 
criteria for this test are not specified.  Banking services must be carried out by locally incorporated companies or branches of foreign banks, and foreign e quity participation in an y financial institution is 
limited to 49%.  New establishments of life and non- life insurance firms are subject to Government 
licensing (cross-border supply and consumption abroad  were left unbound).  As regards reinsurance 
and retrocession, Sri Lanka allo wed limited cross-border supply and consumption abroad, but made 
no commitments on commercial presence.
99 
77. Sri Lanka lodged only one MFN exemption, reser ving the right to apply different accounting 
rates on international services under bilateral intern ational telecommunications agreements between 
Sri Lanka Telecom and foreign operators  and governments of SAARC partners. 
                                                      
96 WTO document GATS/SC/79, 15 April 1994. 
97 WTO documents GATS/SC/79/Suppl.1, 11 April 1997, and GATS/SC/79/Suppl.2, 
26 February 1998. 
98 The sectors are construction and residential buildings, mass transportation, telecommunications, 
mass communications, education, professional services, freight-forwarding, travel agencies, and shipping 
agencies. 
99 Cross-border supply and consumption abroad were allowed only to the extent of residual uncovered 
risk after obligatory placement with the National Insurance Co rporation;  the latter was privatized in 2002. WT/TPR/S/237 Trade Policy Review 
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78. The Sri Lankan authorities consider services lib eralization an important tool for attracting 
foreign investment and developing infrastructure.   Accordingly, since 2002 they have introduced 
further liberalization in key services, in particular in the banking and insurance industries (section (ii) 
below).  As a result, market access conditions in Sr i Lanka's current legislation are generally more 
liberal than those stipulated in its GATS Schedul e of Specific Commitments.  In the negotiations 
under the Doha Development Agenda, Sri Lanka ha s considered the possibility of making further 
commitments in sectors such as tertiary education, retail trade, and professional services.  It submitted 
an initial offer in August 2003100, but had not presented a revised offer as of February 2010. 
79. Investments in export-oriented services indus tries benefit from tax incentives under the BOI 
Act, subject to minimum investment levels and performance requirements.101  Export-oriented 
services industries with an investment of at l east US$500,000, and exporting at least 70% of their 
output receive a five-year tax holiday and a conces sionary income tax rate of 10% for two years 
following the tax holiday, and 15% thereafter (Table AIII.6).  There are also special tax incentives for 
investments in the tourism and recreation industries. 
(ii) Financial services 
80. Sri Lanka's legal framework for the financial sector has been updated and strengthened since 
its last Review.  The main laws governing the sector include the Monetary Law Act (amended in 
2006), the Banking Act (amended in 2006), the Finan ce Companies Act, the Regulation of Insurance 
Industry Act, the Securities and Exchange Commis sion Act, the Finance Leasing Act (amended in 
2007), the Payments and Settlement Act (2005), an d the new Companies Act (2007).  Sri Lanka's 
financial sector is regulated by the Central Bank of Sri Lanka (banks  and related financial 
institutions), the Insurance Board (insurance companies) and the Securities and Exchange 
Commission (securities and stock exchange activities). 
(a) Banking 
81. Sri Lanka's relatively sound and increasingly di versified banking system accounted for about 
68.3% of total financial sector assets at end-December 2009.102  Liberalization measures implemented 
since 2002 have led to rapid market expansion,  increased competition, and growing foreign-bank 
participation.  However, state- owned banks continue to dominate the sector with over 48% of total 
assets, and the Government's heavy reliance on these ba nks to meet its financing needs tends to crowd 
out credit to the private sector.  The authorities i ndicated, however, that state banks have increased 
lending to the private sector since the last quarter of 2009. 
82. The Central Bank oversees the banking system and the stability of the financial sector overall.  
Four types of financial institutions operate under th e Central Bank's supervision:  commercial banks 
(LCBs), specialized banks (LSBs), finance compan ies, and leasing companies.  Under the Banking 
Act, commercial and specialized banks must obtai n a licence from the Central Bank, while leasing 
and finance companies must be registered under the Finance Leasing Act and the Finance Company 
Act, respectively.  
83. Bank licence applications are evaluated on a case-by-case basis, taking into account such 
factors as the bank's economic viability and potential,  its contribution in terms of innovative or 
enhanced financial products, and th e "economic need" for its services (i.e. whether the bank will help 
fill certain gaps).  Licensed banks are subject to  prudential regulations, including minimum capital 
                                                      
100 WTO document TN/S/O/LKA, 22 August 2003 (restricted). 
101 Export-oriented services include, inter alia , ship repairs, bunkering services, air cargo and 
international passenger services, containers repair, and di fferent services for the garments and textile industries. 
102 Central Bank of Sri Lanka (2009a). Sri Lanka WT/TPR/S/237 
 Page 113 
 
 
requirements, capital adequacy and liquid assets require ments, that are applicable equally to locally 
incorporated banks and branches of foreign banks.103  No company or individual may hold more than 
15% of the issued share capital with voting rights in  a bank.  Furthermore, the purchase of more than 
10% of the issued share capital of an LCB by any person, partnership or company requires the 
approval of the Central Bank and the Minister of Finance. 
84. LCBs may provide a range of core banki ng services, including accepting demand deposits, 
trade financing and dealing in foreign currency operations (with approval from the Minister of 
Finance).  LSBs provide long-term lending for specific purposes such as rural and development 
projects;  they may accept time-deposits, but not dema nd deposits.  Banks are allowed to invest in any 
activity "not inconsistent with the business of banking and the provision of  finance", and may own 
non-financial businesses.  Finance companies may ta ke savings and time depos its and lend primarily 
to SMEs.  Other financial institu tions such as rural banks, and thri ft and credit cooperatives do not fall 
under the remit of the Central Bank, but are regulated by the Commissioner of Cooperative 
Development and Registrar of Cooperative Societi es.  In 2006, the Monetary Law Act was amended 
to require that licensed banks extend at least 10% of  their loans to agriculture;  such requirement is 
still in force.   
85. At end-March 2010, there were 22 LCBs, 14 LSBs, 75 registered finance companies, and 
74 finance leasing establishments.  LCBs are the principal source of bank finance and accounted for 
83% of the banking sector's assets, with the six largest so-called systematically important banks (two state banks and the four largest private commercial banks) representing 63%.  Specialized banks, mostly state-owned, held 17% of banking assets in 2009 (Table IV.2).   
Table IV.2 
Sri Lanka's banking system, 2009 
(% and Rs million) 
Number of banking institutionsa Total assets Total deposits Type of banking 
institution  Number % of total Amount % of total Amount % of total 
Commercial banks 22 (22) 61.1 2,560,975 83.05 1,877,594 82.72 
Domestic banks 11 (11) 30.6 2,180,358 71.12 1,649,700 72.68 
 Bank of Ceylon 1 (1) 2.7 550,952 17.87 408,423 17.99 
 People's Bank 1 (1) 2.7 477,737 15.49 399,829 17.61 
Foreign banks 11 (11) 30.5 380,617 12.34 227,894 10.04 
Specialized banks  14 (14) 38.8 522,532 16.95 392,296 17.28 
Total 36 (36) 100.0 3,083,507 100.00 2,269,890 100.00 
a Figures in brackets are for 2004. 
Source: Information provided by the Central Bank of Sri Lanka. 
86. The role of state banks is slow ly declining, but they continue  to dominate the landscape with 
over 48% of the banking system's asse ts in March 2010 (53% at end 2002).104  The two state 
commercial banks, Bank of Ceylon and the People's Bank, hold 33.4% of the banking sector's assets, 
and about a quarter of the financial system's total assets.  Both banks have undergone restructuring in 
recent years, which has allowed them to improve performance in terms of capital, risk management, 
                                                      
103 Minimum capital requirements for locally incorporated banks were raised in 2005 to Rs 2.5 billion 
for LCBs and Rs 1.5 billion for LSBs.  The branch of a foreign bank must have assigned capital of not less than 
Rs 2.5 billion, which must be maintained in the branch in Sri Lankan rupees. 
104 Information provided by the Central Bank of Sri Lanka. WT/TPR/S/237 Trade Policy Review 
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and governance practices.105  Privatization has been suggested in the past, but the idea has been 
abandoned.  According to an IMF study, strong  state involvement in the banking sector could 
undermine its development and efficiency.  More over, the Government's position as the largest 
borrower limits the ability of state banks to pr ovide much-needed funds to the private sector.106  The 
Sri Lankan authorities note that although the Government continues to be a significant borrower, the 
two state-owned commercial banks have been in a position to increase credit to the private sector over 
the past year.  The authorities also indicate that th ese banks lend to the Government at market rates.   
87. Since 2002, several measures have been impl emented to liberalize the banking sector, 
including the elimination of foreign equity limits on commercial banks and allowing wholly 
foreign-owned banks to operate without restrictions  through their branch networks.  In March 2010, 
there were 11 foreign commercia l banks operating through 215 branch es and other outlets.  Increased 
competition among banks has led to a rapid expansi on of value-added services, such as credit cards, 
telebanking, and Internet banking.  It has also led to a number of mergers and acquisitions and 
strategic alliances, between LCBs and other financial institutions. 
88. Notwithstanding a challenging macroeconomic envi ronment, civil strife, and the recent global 
financial turmoil, Sri Lanka's banking system has remained relatively resilient to the recent global 
financial crisis and has actually improved its  overall performance during the review period.107  A t  
end-March 2010, the total (risk weighted) capital ad equacy ratio was 15.8%, well above the minimum 
regulatory requirement (10%), although with signi ficant variations among individual banks.  Backed 
by increasing provisioning coverage, the gross NPL ratio  fell by more than half to 5.2% between 2002 
and 2007, but rose again to 7.9% by end-Ma rch 2010 as the economic slowdown undermined 
borrowers' repayment capacity.108  Overall, Sri Lankan banks maintained their soundness amidst the 
global financial crisis, but in late 2008 the Centra l Bank had to intervene to rescue a large private 
LCB that experienced liquidity problems due to the failure of a credit card company belonging to the 
same financial group.109  In its road map of reforms for 2010, the Central Bank announced plans to 
introduce a deposit insurance scheme covering up to  Rs 200,000 (some US$1,750) per depositor, 
which is expected to be implem ented in the second half of 2010. 
89. Since the last Review of Sri Lanka, the banki ng system's legal and regulatory framework has 
been updated and enhanced.  In 2005, amendmen ts to the Banking Act introduced changes to 
procedural aspects of licensing, "fit and proper" crite ria for bank directors, strengthened provisions to 
minimize ownership concentrati on in banks, additional disclosure requirements and new provisions 
related to offences.  A new Payments and Settle ment Act was passed in 2005, and the Finance 
Leasing Act was amended to enable securitization of  finance leasing in 2007.  Anti-money-laundering 
legislation was also passed in 2005 and a Financ ial Intelligence Unit was set up in 2006.  A revamped 
Finance Companies Law and further chang es to the Banking Act are in the pipeline.110   
90. The Central Bank has introduced prudential me asures over the past few years aimed at 
strengthening the risk management and resilien ce of banks;  these include increasing minimum capital 
                                                      
105 The capital adequacy ratios of the two state-owned commercial banks have shown an increasing 
trend since 2002.  As of March 2010, both banks had a capital adequacy ratio of over 13%.  Their NPL ratios 
have decreased substantially since 2002:  as at March 2010, the Bank of Ceylon's was 5.4% and the People's 
Bank's was 7.6% (information provided by the Central Bank of Sri Lanka).    
106 International Monetary Fund (2007). 
107 For further details see World Bank (2008). 
108 Information provided by the Central Bank of Sri Lanka. 
109 Central Bank of Sri Lanka (2008) and (2009b). 
110 Proposed amendments to the Banking Act include, inter alia , strengthening bank resolution 
measures, undertaking consolidated supervision of banking groups, and expanding the provisions on offences and penalties for non-compliance with prudential re quirements (Central Bank of Sri Lanka, 2009b). Sri Lanka WT/TPR/S/237 
 Page 115 
 
 
levels, general provisioning requirements, mandato ry corporate governance standards, revised single 
borrower limits, risk management relating to fo reign exchange business, and draft guidelines for 
integrated risk management.  In addition, Pillar I of the Basel II Capita l Adequacy Framework was 
introduced in January 2008, and banks are now requir ed to maintain adequate capital to cover credit, 
market, and operational risks.111  The Central Bank intends to issue Directions on Pillar II of Basel II 
in the second half of 2010.  Since 2004, credit rating has been mandatory for all deposit-taking institutions.  Sri Lanka is gradually moving to a dopt the International Fina ncial Reporting Standards 
(IFRS) for financial reporting purposes;  full convergence is expected by 2011. 
91. The spread between LCBs lending and deposit in terest rates continue d to be substantial 
during the period under review (Chart IV.2).  In March 2010, the interest spread was 5.4%.
112  I n  
addition to relatively high levels of NPLs and risk premiums, this reflects Sri Lankan banks' high 
intermediation costs. 
0.02.04.06.08.010.012.014.016.018.020.022.024.0
January 2004
July 2004
January 2005
July 2005
January 2006
July 2006
January 2007
July 2007
January 2008
July 2008
January 2009
July 2009
January 2010
Source:     Central Bank of Sri Lanka, online information.  Per centChart IV.2
Interest rate spreads of commercial banks, January 2004-February 2010
Weighted average 
prime lending rate Weighted average 
deposit rate
Interest spread
 
(b) Insurance 
92. The Regulation of Insurance Industry Act (2000)  is the main law governing the insurance 
industry.  The Insurance Board of Sri Lanka (IBSL) , established in 2001 as an independent agency, is 
the sector's regulator;  it has had its own Secretar iat since 2005.  The IBSL has introduced measures to 
                                                      
111 Central Bank of Sri Lanka (2008). 
112 Information provided by the Central Bank of Sri Lanka. WT/TPR/S/237 Trade Policy Review 
Page 116 
 
 
improve insurance company reporting and risk-based s upervision over the past few years, but it is still 
constrained by limited resources and lack of enforcement powers.113 
93. The insurance sector has undergone substantial liberalization and deregulation over the last 
decade.  The limits on foreign equity participati on in insurance firms and brokers were removed in 
2002, and the two state insurers, the National Insu rance Corporation and the Sri Lanka Insurance 
Company, were fully privatized in 2002 and 2003, respectively.  Although the IBSL may establish minimum and maximum premiums for motor insuran ce, in practice companies are allowed to set 
premiums freely.  The ISBL may also establish minimum limits for fire and employer's liability insurance.  Liberalization has enc ouraged new entrants into the mark et, including foreign companies, 
while a number of banks have dive rsified into the insurance business.   Economic growth and rising 
incomes have also contributed to the sector's e xpansion, with total premium income increasing from 
Rs 37.2 billion in 2005 to  Rs 58.1 billion in 2008.
114  However, the sector remains small, accounting 
for only 3% of total financial sector assets and 1. 3% of GDP in terms of premium income in mid 
2009.115 
94. There were 16 insurance companies in operati on at end-June 2009, comprising 11 composite 
insurers engaged in both life (" long-term") and general insurance, two life insurers, and three general 
insurers.  Six insurance companies have partial or full foreign equity participation.  The insurance 
market is highly concentrated with the two larg est companies accounting for 65% of total assets;  
insurance companies with foreign equity particip ation hold 12.8% of the general insurance business 
and 20.3% of the life insurance business.116  In 2009, there were 54 insurance brokers and about 
25,000 insurance agents.117 
95. Sri Lanka does not allow cross-border supply of  insurance, except for health, travel, and 
employer's liability insurance.  The ISBL allows regi stered insurers to obtain insurance cover for their 
directors and other employees from foreign insurers not registered in Sri Lanka (since July 2002).  Both domestic and foreign insurers must be locally  incorporated under the Companies Act (2007) and 
be registered with the IBSL.  Full foreign ownershi p of locally incorporated firms is allowed;  but 
branching is not permitted.  As per the Insura nce Board Regulations (2005), the minimum paid-up 
share capital of insurance companies is Rs 100 million for each class of insurance business.
118  
Insurance companies must also ma intain a minimum solvency margin  for each line of business:  at 
end 2009, two insurers did not satisfy this ma rgin.  Minimum capital requirements and solvency 
margins apply equally to domestic and foreign in surers.  In addition, insurance companies are 
required to invest in Government securities no less th an 20% of their assets in the technical reserves 
for general insurance and not less than 30% of th eir assets in the life (long-term) insurance fund in 
order to ensure the safety of both funds. 
96. The National Insurance Trust Fund (NIFT), est ablished under the National Insurance Trust 
Fund Act (No. 28 of 2006), may charge a maximum of 50% of reinsurance premiums from all 
registered insurance companies.  In  practice, the NIFT directed all insurance companies to allocate to 
the fund 20% of re-insurance premiums of all typ es of reinsurance arrangements between local and 
                                                      
113 International Monetary Fund (2007). 
114 Insurance Board of Sri Lanka (2008). 
115 Central Bank of Sri Lanka (2009b). 
116 Information provided by the IBSL. 
117 Central Bank of Sri Lanka (2009b). 
118 The IBSL has proposed to increase the paid-up sh are capital of insurance companies for each class 
of insurance business to Rs 500 million by end-December 2010 (IBSL online information.  Viewed at:  http://www.ibsl.gov.lk). Sri Lanka WT/TPR/S/237 
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foreign insurers in respect of general insurance business as from 1 January 2008.  The purpose of this 
measure is to build up a re-insurance arrangement within Sri Lanka.   
97. The IBSL has introduced gradually a risk-based  supervision system and has proposed a 
comprehensive revision of the Regulation of In surance Industry Act in order to enhance the 
supervisory framework.  The amendments incl ude:  strengthening the IBSL's powers to issue 
directions to insurance companies and brokers on enhanced capital requirements, to make rules and 
determinations, engage in disput e resolution, and prescribe "fit and proper" criteria for boards of 
directors;  and the requirement that life and ge neral insurance business be conducted in separately 
incorporated entities, giving composite insurers time  to divide their business in to separate companies.  
Insurance companies will also be invited to list on the stock exchange.  Since 2007, insurers have 
been advised to obtain a rating on their fina ncial strength from a recognized rating agency. 
(c) Capital market  
98. The Securities and Exchange Commission of Sr i Lanka (SEC) regulates the stock exchanges, 
stock brokers, stock dealers, and management comp anies of unit trusts, and registers all market 
intermediaries.  The SEC's objectives are to develop and maintain an efficient and fair capital market 
in Sri Lanka and to keep abreast of inte rnational developments in this field.  
99. Institutions incorporated outside Sri Lanka and individuals resident outside of Sri Lanka may 
buy and/or sell shares for up to 100% of the issued capital of a listed company, subject to certain restrictions imposed by the Controller of Exchange .  The SEC approves global, regional, and country 
funds to invest in listed securities in Sri Lanka subject to recommendation of the Central Depository 
System.  The SEC has advocated the relaxation of exchange control regulations, with the Central 
Bank, in order to enhance foreign exchange inflows into the country.  Accordingly, in its Road Map 
on monetary and financial policies, the Central Bank has taken steps to relax foreign exchange 
controls allowing foreigners to invest in rupee denominated debentures issued by local companies.  
100. Full foreign ownership of licensed stock brokera ge firms is permitted, and unit trusts that 
invest no more than 20% of their total investme nt in Government securities may also be foreign-
owned.  
101. The Colombo Stock Exchange performed well between 2005 and 2007, supported by 
increasing new listings.
119  However, the equity market fell sharply in 2008 owing to high interest 
rates and inflation, a volatile security environment and the global financial crisis.  At end 2008, 
market capitalization was Rs 489 billion, we ll below the end-2007 figure of Rs 821 billion.120  
Nevertheless, total annual turnover and net foreign inflows increased on account of a few large-value 
transactions.  Foreign investors accounted for 54% of total turnover in 2008.121  The Colombo Stock 
Exchange recorded an impressive performance at th e end of 2009 with the bench mark "All Shares 
Price Index" (ASPI) increasing by 125% and the Mila nka Index by 136%.  In the authorities' view, the 
end of the civil war contributed significantly to the good performance.    
102. During the review period, the SEC introduced measures to strengthen the supervision and 
monitoring of the stock market.  In 2007, it issued  mandatory rules of corporate governance for listed 
companies, which became effective in March 2008.  A new automated surveillance system for 
                                                      
119 At end-December 2009, there were 232 companies listed in the stock exchange;  the most important 
in terms of market capitalization are telecommunicat ion companies, banks, conglomerates, and food and 
beverage companies.  
120 Securities and Exchange Commission (2008). 
121 Securities and Exchange Commission (2008). WT/TPR/S/237 Trade Policy Review 
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detecting market malpractices (insider trading a nd price manipulations) is expected to be fully 
operational in the second half of 2010.  In addi tion, member firms are now required to provide a 
minimum margin of 15% on any security purchase over Rs 20 million.   
103. In 2009, the Securities and Exchange Commis sion Act was amended to allow the SEC to 
issue directives to listed public companies in order to protect investors interests;  to enhance the 
independence of the Commission by ensuring a bala nced representation between the private and 
public sectors in the SEC's Board;  and to facilita te the regulation of derivatives.  A new draft 
Securitization Law, for the regulation of the ass et-based securities industry by the SEC, has been 
submitted to Parliament.122  Other regulatory developments unde r way include initiatives to harmonize 
the Sri Lankan law on takeovers and mergers with in ternational trends;  the introduction of a clearing 
house to settle and clear all market transactions ;  the demutualization of the Colombo Stock 
Exchange;  the creation of an external advisory pa nel on financial reporting;  and rules on Internet 
trading.    
104. The Government intends to develop its securities ma rket in order to finance its operations.  It 
is seeking to sell instruments with longer maturiti es, and since 2006 has allowed foreign investors to 
invest in Treasury bonds for up to 5% of the tota l outstanding Treasury bond stock;  this limit was 
increased to 10% in 2007.  In a ddition, since 2008 foreign investors may invest in Treasury bills for 
up to 10% of the total value of Treasury bills out standing.  Dealers of government securities are 
regulated by the Central Bank;  licensed commercial banks have been eligible since 2002.  In 2009, a 
government-run pension fund and a st ate savings bank alone held 44% of Government securities.   
(iii) Telecommunications and IT services 
(a) Telecommunications 
105. Sri Lanka's telecommunications sector has expanded strongly in recent years, recording 
annual growth rates of over 20%.  In 2009, the sector  grew by 11.7% in real terms, following growth 
of 22.3% in 2008.123  Growth has been driven by high investment levels, the adoption of new 
technologies, progressive liberalization, and incr eased competition, resulting in expanded coverage 
and more affordable services.  However, the pa rtially state-owned incumbent operator retains 
considerable influence in the mark et, while the sector's regulator faces capacity constraints to enforce 
pro-competitive reforms.  There is still wide disp arity between regions and between urban and rural 
areas in terms of availability of telecommunication services.  The end of the civil strife could help 
bridge this divide with increased investment in the lagging areas. 
106. There has been steady expansion in the overall subscribers network.  At end-December 2009, 
there were 3.4 million fixed lines (1.2 million in 2005), raising the telede nsity rate (number of 
telephones per 100 inhabitants) for fixed lines to 16.8% (up from 5.7% in 2005).  The number of 
mobile services subscribers has grown exponentia lly, from 3.3 million in 2005 to 14 million at 
end-December 2009, with teledensity reaching 69% (17.1% in 2005).  Internet and e-mail 
subscriptions have also grown rapidly, albeit from a small base, from 115,000 to 240,000 between 
2005 and end 2009.  However, the Internet penetrati on rate remained very low at 1.2% at end 2009124, 
indicating that a very large majority of the population are still not connected. 
                                                      
122 Central Bank of Sri Lanka (2009b);  and Securities and Exchange Commission (2008). 
123 Ministry of Finance and Planning (2008);  and Central Bank of Sri Lanka (2009a). 
124 Telecommunications Regulatory Commission of Sri Lanka online information.  Viewed at:  
http://www.trc.gov.lk/images/docs/statis_o_june_09.doc [9 June 2010];  and Ministry of Finance and Planning (2008).  Sri Lanka WT/TPR/S/237 
 Page 119 
 
 
107. During the review period, major development projects have been undertaken in the 
telecommunications sector to enhance technology, coverage, and efficiency.  For example, the 
adoption of Code Division Multiple Access (CDMA) technology in 2005 boosted growth in the fixed 
line services.  Submarine cables to provide international voice and data services have been laid 
connecting Sri Lanka with India and the Maldives.  3G mobile services were launched in 2006 and 
other advanced technologies have been introduced (GSM, 3.5G, 4G and Wima x).  A range of other 
initiatives are in place aimed at improving the nationa l telecommunications infrastructure;  and with 
the end of the civil war, which has opened up ne w investment opportunities in the northern and 
eastern parts of the country, capital expenditure in  the sector is expected to continue to rise.125 
108. The telecommunication market has seen major ch anges over the past eight years in terms of 
liberalization and increased private-sector partic ipation.  Sri Lanka Telecom (SLT), in which the 
Government still holds a 49.5% stake, lost its monop oly over fixed-line international services in late 
2002.126  In addition, the duopoly on wireless local  loop (WLL) services ended in 2005, when one 
additional licence was issued to provide fixed line se rvices.  New licences have also been granted to 
mobile companies and other telecom services provi ders.  In early 2010, the market comprised 
four fixed line operators, five mobile services pr oviders (one of which entered the market in 
January 2009), 22 Internet servi ce providers, and 33 external gateway operators, as well as several 
other operators providing services such as paging, payphone, and leased circuit telephone facilities.  
109. While competition has intensified, particularly  in the mobile services segment, Sri Lanka 
Telecom still has considerable influence in the mark et.  Not only does it operate critical wire network 
facilities, but it also holds a market share of over 42% of the fixed line services, and its fully owned 
cellular subsidiary controls about 24% of the m obile market (as at December 2009).  The authorities 
indicated that Sri Lanka Telecom is not authorized  to offer bundled fixed and mobile services.   
110. The Telecommunications Regulatory Commission of Sri Lanka (TRCSL) oversees the sector 
and is responsible for enforcing the Tel ecommunications Act and related regulations.127  N o  m a j o r  
changes to the Act have been introduced during th e period under review.  As spelt out in the TYHDF 
(2006-16), the sector's policy objective is to develo p an island-wide sophisticated telecommunication 
network using new technology to link ru ral and urban areas with the world.  
111. All telecommunication operators must obtain a licence from the Minister in charge of 
telecommunications, on recommendation by the TRCSL.128  The duration of licences for fixed-line 
and mobile telephone services vary between 10 and 20 years, and those for Internet providers between 
5 and 10 years.  Full foreign equity is allowed in telecommunication companies, subject to approval 
by the BOI.  
112. Important pro-competitive reform s were introduced to the in terconnection regime in 2003.129  
Interconnection services are mandatory and must be provided on an efficient, non-discriminatory, and 
                                                      
125 A study by Frost & Sullivan estimates that total telecom spending in the Sri Lankan market was 
around US$589.4 million in 2008.  Viewed at:  http://blo g.taragana.com/pr/frost-sullivan-study [5 March 2010]. 
126 Global Telecommunication Holdings N.V. of the Netherlands owns a 44.9% stake in SLT, and the 
balance are held by the general public.  SLT online information.  Viewed at:  http://www.slt.lk/data/aboutslt/ 
profile.htm. 
127 The TRCSL comprises two ex-officio  members, the Secretary to  the Minister of Mass 
Communications serving as Chairman, and the Director General of Teleco mmunications serving as CEO;  and 
three part-time members from the fields of law, finance, and management, who are appointed by the Minister in charge of telecommunications.  Telecommunications  Act was enacted in 1991 and amended in 1996. 
128 Licensing provisions are contained in sectio ns 17 to 22A of the Telecommunications Act. 
129 Telecommunication Regulatory Commission of Sri Lanka, Interconnection Rules of 2003.  Viewed 
at:  http://www.trc.gov.lk/images/pdf/ic_rules.pdf. WT/TPR/S/237 Trade Policy Review 
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cost-oriented basis.  Operators are required to negotiate interconnection agreements subject to 
approval by the TRCSL;  if they fail to r each agreement, the TRCSL will determine the 
interconnection terms and charges.  Recently, th e TRCSL made a determination on interconnection 
rates applicable to both fixed and mobile  operators, which became effective on 1 June 2010 for 
three years.  Dominant operators, as declared by the TRCSL (such as SLT), must publish an approved 
reference interconnection offer (RIO), setting out a ll charges, as well as technical and other conditions 
for allowing interconnection.130  The TRCSL may reject a dominant operator's agreement if it does not 
conform to the RIO, is discriminatory, or substa ntially curtails market competition.  However, 
administrative capacity and other constraints have prevented the TRCSL from effectively monitoring 
and enforcing reforms, which has given rise to  some interconnection problems in the past.131  T h e  
TRCSL's Proposed Ten-Year Development Plan (2006-16) identifies some of the problems in the telecom sector as, inter alia , the lack of a seamless interconnection regime, the reluctance to share 
infrastructure facilities among operators, the lack of an effective surveillan ce mechanism to monitor 
compliance, and insufficient enforcement powers in the current legislation.
132   
113. All tariffs for telecommunication services (except for external gateway operators) must be 
approved by the TRCSL, in consultation with th e Minister in charge of telecommunications.133  
Tariffs are generally approved on a cost-plus b asis and are subject to periodic review.  Tariff 
re-balancing, completed in 2002, is intended to  eliminate cross-subsidization among different 
services.  No specific rules have been established on separate accounting for each service other than 
the existing general licence obligations.  The TRCS L is studying the introduction of mobile number 
portability but does not yet have a planned date. 
114. Following a Supreme Court ruling in August 2007, the TRCSL ordered Sri Lanka Telecom 
(STL) to reduce its domestic call charges and bus iness rentals with retroactive effect from 
1 January 2007, in a case filed by a consumer or ganization against the country's dominant telecom 
operator.  SLT was also ordered to sw itch from unit-based to time-based charging.134  This case 
suggests that, at least until 2007, competition in the fixed-line market was sluggish.  The price basket 
indicator for residential fixed-line services in Sri Lanka in 2007 (US$8.2 per month) was twice the 
average for the South Asian region (US$4 per month);  whereas the price basket for mobile services in 
the country (US$1.2 per month) was half that of the region (US$2.4 per month).135 
115. The TRCSL is also responsible for promoting universal service to rural communities, the 
elderly and people with disabilities.  A portion of the International  Telecommunications Operator 
Levy is used by the TRCSL to promote rural c overage by disbursing funds to fixed and mobile 
operators in served and under-served areas of the country.  No special universal service obligations 
are imposed on operators to provide telephone services.   During the review period, the TRCSL 
continued to implement the public payphone subsidy scheme in rural areas.  In 2009, the subsidy was 
Rs 50,000 per payphone. 
                                                      
130 The RIO must be in accordance with the WTO Fourth Protocol on Basic Telecommunications, 
including the Reference Paper, and with  Sri Lankan Interconnection Rules. 
131 Perumal (2004). 
132 TRCSL (2006). 
133 Section 5(k) of the Telecommunications Act. 
134 TRCSL, Direction Issued under section 5(K) of the Sri Lanka Telecommunications Act, 
17 September 2007. 
135 World Bank (2009). Sri Lanka WT/TPR/S/237 
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(b) IT-related business process outsourcing  
116. The Government has identified IT-enabled services, in particular business processing 
outsourcing (BPO), as an area offering consider able potential, based on Sri Lanka's comparative 
strengths, including a rapidly growing IT industry, a well trained, English-speaking, and cost-effective 
workforce, and some of the cheapest  rental costs in the region.  Since the early 2000s, Sri Lanka has 
gained recognition as an attractiv e destination for IT sourcing and call-center operations at 
competitive pricing in the south-east Asian region .  Tax incentives have helped to attract BPO 
investments, particularly foreign.  Inward FDI increased rapidly from 2002 to 2008, but fell in 2009 
owing to the impact of the global financial crisis.  According to the World Bank, Sri Lanka's prospects 
to successfully compete in the international BPO market would be greatly improved by pursuing a 
strategy that would include completing telecom reforms, including connectivity issues, expanding 
internet access, reducing electricity costs, and incr easing enrolment in scientific and technical tertiary 
education.136  Exports of software and IT-enabled services, such as BPO, grew by 6.5% to 
US$245 million in 2009, and accounted for about 13% of service exports.137  
(iv) Transport services 
117. The transport sector has shown strong performan ce in recent years, despite some negative 
impact from the global slowdown.  It is the country's  fourth largest foreign exchange earner with 8.6% 
of total earnings (2009), and, to gether with the communication subsector, accounts for 12.6% of GDP 
(2009).  The Government plans to transform Sri La nka into a regional transport hub capitalizing on 
the country's strategic location at the crossroads of main air and naval routes connecting East and 
West.  To this end, it has launched several ma jor development projects to expand and modernize 
airport and port infrastructure, supported by fo reign financing and public -private investment 
partnerships.  While, in practice, private domestic and foreign investment ar e encouraged in air and 
maritime transport services, government-owned co mpanies retain a dominant position in both.  
Further efforts to advance regulatory reform so  as to remove remaining formal and informal 
investment barriers, strengthen competition, and est ablish a level playing field for new entrants would 
contribute towards the goal of making Sr i Lanka a regional transport hub.   
(a) Air transport 
118. The conclusion or renegotiation of bilateral air services agreements in 2003 and 2004 led to a 
substantial increase in the number of airlines serving Colombo and gave a boost to Sri Lanka's 
commercial aviation sector during the earlier year s under review;  however, the domestic aviation 
industry was affected by the volatile security climate (2006-07) and the global economic downturn 
(2008-09), which caused air passenger and car go traffic to contract in 2008 and 2009.138  
Nevertheless, as peace returns to the country and the global economy r ecovers, demand for air 
services is expected to increase in the coming y ears.  Modernization and expansion of airport 
infrastructure are currently under way with the aim of meeting this demand. 
119. The civil aviation industry is governed by the Air Navigation Act (1950, as amended), and the 
Civil Aviation Authority Act (2002).  The sector's main regulator, the Civil Aviation Authority of 
Sri Lanka (CAASL), established in 2002, is respons ible for issuing licences,  monitoring commercial 
air services, formulating the national civil aviation policy, and ensuring aviation security.  A new draft 
Civil Aviation Bill has been submitted to Parliame nt and was awaiting approval as of March 2010.  
                                                      
136 World Bank (2007). 
137 Information provided by the Sri Lankan authorities. 
138 In 2009, the number of passengers served, and the cargo handled, by Bandaranaike International 
Airport decreased by 10.5% and 9.9%, respectively, over the previous year (Central Bank of Sri Lanka, 2009a). WT/TPR/S/237 Trade Policy Review 
Page 122 
 
 
The new bill is expected to replace the old Air Na vigation Act;  once approved, it will consolidate the 
authority of the CAASL and enhance the regulatory framework of the civil aviation industry by including new provisions on, inter alia , the appointment of aeronautical services providers, the 
issuance of air operator certificates to airlines th at comply with all relevant requirements, and the 
implementation of international standards and recommended practices for safety oversight. 
120. The Government has prepared a Draft Na tional Civil Aviation Policy that focuses on 
improving safety, promoting the development of the aviation industry as a driver of economic growth, 
developing the aviation infrastructure, and improving human resources.  The policy is expected to be 
approved in the near future. 
121. At end 2008, 25 airlines were operating to and from Sri Lanka, of which two were domestic 
carriers.
139  The government-owned national carrier, Sri Lankan Airlines (SLA) continued to dominate 
the market in 2008, accounting for 62.7% and 59. 7% of air passenger and freight operations, 
respectively.140  In April 2008, the Government took over the management of SLA from Emirates 
Airlines, as their ten-year management contract expired.141  Launched by the Government in 2007, the 
second national carrier, Mihin Air, ran a substan tial loss and had to suspend operations from 
May 2008 to January 2009, when it received budgetary allocations to  meet its capital requirements.142 
122. A levy of US$60 is charged on each airline ticket issued or sold outside Sri Lanka for air 
travel originating in Sri Lanka.  In January 2008, the levy was extended to cover airline tickets issued 
electronically.  The authorities indicated that the purpo se is to promote sales in the local air transport 
market.  The levy does not apply to passenger tickets sold or issue in SAARC countries.143  
123. Bandaranaike International Air port (BIA), to the north of Colombo, is Sri Lanka's only 
international airport.  It is undergoing major e xpansion and upgrading;  the construction of a new 
passenger terminal will enhance handling capacity to me et the expected future demand.  In 2009, BIA 
served 4.2 million passengers (3.2 million in 2003)  and 131,841 tonnes of cargo (124,615 tonnes in 
2003).144  In November 2009, the Government entere d into a contract agreement with a Chinese 
company to build a second international airport at Mathala (Hambantota District) in the south of the 
country.  The project, estimated at US$209 million,  will be financed under a concessionary loan 
extended by the Exim Bank of China.145 
124. Airport and Aviation Services (Sri Lanka) Ltd. (AASL), a fully government-owned company, 
retains the statutory monopoly to manage and develop civil airports, including the provision of airport 
and navigation services.146  Plans to privatize AASL have been dismissed.  There are no privately 
managed airports, and foreign investment is not allowed in the operation of airport terminals. 
125. Sri Lanka Airlines continues to operate groun d handling services at the BIA, while the AASL 
is in charge of ground handling services at the Ratm alana airport.  Aircraft repair and maintenance 
services are provided by Sri Lanka Airlines;  Emirates Airlines has been granted permission to 
                                                      
139 Civil Aviation Authority of Sri Lanka (2008). 
140 Central Bank of Sri Lanka (2008). 
141 Emirates Airlines still holds a 43.63% stake in SLA. 
142 Mihi Lanka operational losses totalled Rs 930 milli on in 2009 (Central Bank of Sri Lanka, 2009a). 
143 These are Bangladesh, Bhutan, India,  the Maldives, Nepal, and Pakistan. 
144 Central Bank of Sri Lanka (2009a). 
145 Central Bank of Sri Lanka (2009a). 
146 For further details see AASL online information.  Viewed at:  http://www.airport.lk/about_bia.php 
[19 March 2010]. Sri Lanka WT/TPR/S/237 
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provide line maintenance to third party aircraft.  Domestic airlines may opt for maintenance overseas, 
at a maintenance organization approved by the Civil Aviation Authority of Sri Lanka.    
126. Sri Lanka maintains bilateral air services agreements with 60 partners147, with different 
degrees of openness.  The most recent agreements provide for 3rd and 4th freedom traffic rights, and in 
some instances also for the 5th freedom.  During the period under review, a number of these 
agreements were e xpanded or liberalized148;  only one new agreement was entered into, with Turkey.  
Since 2005, Sri Lanka has pursued an "open ski es" policy based on reciprocity.  The authorities 
indicated that, at present, Sri Lanka has "open sk ies" agreements with Kuwait, Lebanon, Malaysia, 
Singapore, Switzerland, Thailand, and the United States.   
127. In 2004, the Government allowed domestic pr ivate airlines to engage in scheduled 
international air services to neighbouring countries, making use of the access rights available under its 
bilateral air services agreements.  Provisional approval  was granted to three private domestic carriers, 
pending completion of work for certification as commerc ial international operators, but they failed to 
meet the target dates in 2006.  Currently, only SLA and Mihin Air operate international routes. 
128. Foreign airlines are required to either have a local general service agent or incorporate a 
company in Sri Lanka.  Foreign investment in comp anies providing international air transport services 
requires approval, and the level of  ownership is determined on a case-by-case basis by the BOI.  
Pursuant to the Air Navigation Regulations, in order to register an aircraft in Sri Lanka 60% of its 
company's directors must be Sri Lankan nationals.  
(b) Maritime transport 
129. Sri Lanka is making progress in its goal to become  an important shipping hub in South Asia, 
mainly owing to efficient cargo handling and tran shipment operations through the Colombo port, 
which is by far the country's largest.  Port services  grew steadily during the review period, except in 
2009 as the sector was affected by the slowdown in  global trade.  In 2009, total cargo handling was 
48.7 million tonnes, container traffic amounted to  3.4 million TEUs, and transhipment operations 
totalled 2.6 million TEUs (Table IV.3).   
130. The Sri Lanka Ports Authority (SLPA), under the Ministry of Ports and Aviation, is 
responsible for the development a nd management of all "specified" commercial ports in Sri Lanka;  
these are the ports of Colombo, Galle, Tricomalee, Kankasanturai, Point Pedro, and the new ports at 
Hambantota and Oluvil, currently under constructi on.  The SLPA is in charge of all cargo handling 
and port services, except the South Asia Gateway Te rminal (SAGT), formerly the Queen Elizabeth 
Quay, at Colombo port.  The SLPA has the statutory monopoly to provide services such as navigation, 
pilotage, and towage (SLPA Act of 1979).  The on ly private-sector facility at Colombo port is the 
SAGT, which was granted a 30-year build-operate-a nd-transfer (BOT) concession in 1999, to upgrade 
and manage the Queen Elizabeth Quay.149 
                                                      
147 CAASL online information.  Viewed at:  http ://www.caa.lk/pdf/bilateral.pdf [18 March 2009]. 
148 For example, in 2003 the India-Sri Lanka Air Services Arrangement was expanded to provide 
Sri Lanka unlimited access to 18 destina tions in India, while restrictions on  other 6 destinations were relaxed. 
149 SAGT is owned by a consortium of domestic and global industry leaders in shipping, commerce, 
and finance, comprising John Keells Holdings (Sri La nka's blue chip conglomera te), Maersk BV, Evergreen 
International SA, Peony Investments SA , and the Sri Lanka Ports Authority. WT/TPR/S/237 Trade Policy Review 
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Table IV.3 
Shipping services, 2004-09 
Service 2004 2005 2006 2007 2008 2009a 
Vessel arrivals (number) 3,383 4,139 4,469 4,710 4,814 4,456 
Colombo 3,688 3,929 4,228 4,326 4,424 4,114 
Galle 88 114 100 87 68 32 
Trincomalee 107 96 141 297 322 310 
Total cargo ('000 tonnes) 33,959 37,300 42,661 46,344 50,582 48,777 
Colombo 31,299 34,522 39,428 43,502 47,960 46,373 
Galle 578 655 735 627 459 167 
Trincomalee 2,082 2,123 2,498 2,215 2,163 2,238 
Total container traffic ('000 TEUs)b 2,221 2,455 3,079 3,381 3,687 3,464 
Trans-shipment containers ('000 TEUs)b 1,531 1,716 2,330 2,578 2,785 2,633 
Employment (SLPA) (number) 13,233 13,527 13,660 13,667 13,715 13,296 
Colombo 11,888 12,217 12,382 12,470 12,548 12,150 
Galle 634 622 615 577 553 534 
Trincomalee 711 688 663 620 614 612 
a Provisional. 
b TEUs = twenty-foot equi valent container units. 
Source:  Central Bank of Sri Lanka, Annual Reports,  2004, 2005, 2006, 2007, 2008, and 2009. 
131. It has been a long-standing policy of the Government to encourage private-sector 
participation in the operation and management of  port facilities, by gradually moving to a landlord 
port concept as a complement to BOT operations.  Plans to establish an independent regulatory 
authority to safeguard competition in the subsector have also been considered.150  Two draft laws – a 
Port Competition Bill and a Port Reform Bill – we re prepared in this connection between 2002 and 
2004151, but were subsequently dismissed.  In the absen ce of legislation, anti-competitive practices are 
to be considered as a breach of contract, pursuan t to an agreement signed between the SLPA and the 
Developer of the Colombo South Harbour Terminal s.  No major regulatory reforms have been 
implemented in the sector since the last Review of Sri Lanka.   
132. The Port of Colombo is the largest and busiest port of Sri Lanka, with 23 major shipping lines 
and 14 feeder services in operation.  It is considered one of the most efficient ports in the South Asian region, and has been ranked 27
th among the best container ports in the world.152  It handled 
3.4 million TEUs in 2009, of which 76% corresponded to transhipment operations, and of these, the 
vast majority were transhipments to and from India.   However, the Port of Colombo is close to its 
capacity for container handling, and faces increasing  competition, mainly from new ports developed 
in the Middle East and South India. 
133. Against this backdrop, the Government has em barked on several ambitious port development 
projects aimed at transforming Sri Lanka into a mar itime and logistic centre in the region.  Priority 
has been given to the Colombo South Harbour Project, which aims to increase its capacity to 
11.7 million TEUs by 2023 by adding three terminals so that it can maintain its position as a regional 
transhipment hub.  The project is a public-private partnership, with the public sector constructing the 
harbour infrastructure and private firms building th e container terminals on a BOT basis.  Dredging 
                                                      
150 For example, the fact that the SLPA owns and op erates the Jaye Terminal at Colombo Port, which 
competes with the privately operated SAGT, could raise questions as to possible use of dominant position by the 
port authority since it is also the sole provider of pilotage and towage services. 
151 Ministry of Policy Development and Implementation and Ministry for Economic Reform (2004). 
152 SLPA online information.  Viewed at:  http://www.slpa.lk/ news_events_128.asp [23 March 2010]. Sri Lanka WT/TPR/S/237 
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and the construction of the breakwater started in 2008.153  The first terminal is expected to be 
operational by 2012;  the other two will be tende red and completed in 20 16 and 2023, respectively. 
134. The Government is also developing a new port in Hambantota, about one hour (some 
10 nautical miles) from the world's busiest ship ping lanes that run south of Sri Lanka.  The 
construction work, partly financed with Chinese aid,  started in January 2008 and is expected to be 
completed by 2012.  The Port of Hambantota is planned as a service and industrial port, that could subsequently be developed as a transhipment por t.  The Government hopes to attract private 
investment in industrial and bunkering facilities, ship repairing yards, break bulk facilities, 
warehousing, and LNG storage facilities.  Other proj ects include the development of a port in Oluvil 
in Sri Lanka's Eastern region (construction works st arted in 2008 and are expected to be ready for 
operation by December 2010), and the upgrading of the Galle Port to handle cargo, for which bids 
were called in 2008.  Measures have also been  implemented to enhance capacity and improve 
efficiency at the Jaye Container Terminal (JCT) in the Colombo port.
154  The SLPA has also offered 
concessions and rebates in port service fees at JCT in an effort to retain sh ipping lines amid the recent 
global economic downturn.155 
135. Sri Lanka's merchant fleet comprises 21 private merchant ships and two cargo vessels 
operated by the fully government-owned Ceylon Sh ipping Corporation Ltd. (CSC).  The requirement 
that the CSC must carry all government import cargo,  provided that its is the cheapest alternative, 
remains in force.  The authorities indicated, however, that it is not strictly adhered to.  The CSC is 
given the right of "first referral", and if it accepts to handle the government cargo it must charge 
market rates. 
136. Several private companies own and operate ve ssels registered under the Sri Lankan flag.  
Under the Merchant Shipping Act, in order to re gister a ship under the Sri Lankan flag, the vessel 
must be wholly owned by a natura l person who is a citizen of Sri Lanka or by a corporate body, as 
may be determined by the Minister in charge of Shipping.  Coastal shipping is reserved for Sri Lankan 
flag vessels.  Foreign equity in shipping agencies and freight forw arding is limited to 40%, unless 
otherwise approved on a case-by-case basis by the BOI.  Over 90% of Sri Lanka's foreign trade in 
volume terms is carried by ship.   
137. The Colombo Dockyard PLC, a public company listed in the Colombo Stock Exchange, with 
majority foreign ownership, provides ship repair , ship building, heavy engineering, and offshore 
engineering services.156  Tax incentives are granted to invest ments in ship repair and bunkering 
services as approved by the BOI (Table AIII.6);  th e tax holiday granted to the Colombo dockyard has 
already expired.  There are no requirements for nati onal vessels to be repaired in domestic shipyards.  
According to the authorities, ship repair and ship building activities in Sri Lanka are quite liberalized 
compared with other countries in the South Asian region.  
(v) Tourism 
138. Tourism's rank as a foreign exchange earner dr opped from the third to the sixth between 
2002 and 2008.  Following the setback due to the 20 04 tsunami, the tourism sector recovered in 2006, 
but performance has been sluggish since then, owing to security concerns and to the world economic 
                                                      
153 The Asian Development Bank provided a loan of US$300 million to fund the breakwater. 
154 Central Bank of Sri Lanka (2008);  and SLPA on line information.  Viewed at:  http://www.slpa.lk/ 
capacity_enhancement.asp?chk=4 [23 March 2010]. 
155 For information on tariff concessions see SLPA online information.  Viewed at:  http://www.slpa.lk/ 
tariff_concessions.asp?chk=3 [23 March 2010]. 
156 Over 72% of the equity of the Colombo dockyard is owned by foreign entities. WT/TPR/S/237 Trade Policy Review 
Page 126 
 
 
crisis.  However, with the cessation of the ar med conflict and the global economic recovery, the 
tourism industry is starting to pick up.  The author ities expect tourism to emerge as a driving force of 
the country's economy in the medium-term, a nd have implemented institutional changes and 
promotion schemes to achieve this. 
139. In 2009, tourist arrivals increased  by 2.1% to 447,890, compared with a 11.2% contraction in 
2008 (Table IV.4).  Gross tourist receipts increase d by 8.2% to Rs 40.1 billion, as did the room 
occupancy rate (48.4%).  Total tourism employment  showed a slight increase, and direct employment 
accounted for 41.6% of jobs.157  The authorities expect the positive trend in the tourism industry to 
continue throughout 2010 as the number of tourist arri vals is forecast to exceed the historical high of 
566,000 in 2004. 
140. The share of tourists from Asia has progressive ly increased, accounting for 39.5% of total 
arrivals in 2008.  Other important sources are Wester n Europe (38.1%), Eastern Europe (6.7%), North 
America (5.5%), Australasia (5%), and the Middle East (3.8%).  India maintains its position as the 
primary source of tourism to Sri Lanka, with 19.4% of total arrivals in 2008, followed by the UK, 
Germany, the Maldives, and Australia.158 
Table IV.4 
Tourism statistics, 2003-09 
Growth rate % 
Indicator 2003 2004 2005 2006 2007 2008a 2009b 
2008a 2009b 
Tourist arrivals 500,642 566,202 549,308 559,603 494,008 438,475 447,890 -11.2 2.1 
Tourist guest nights ('000) 5,093 5,742 4,754 5,793 4,940 4,166 4,076 -15.7 -2.2 
Room occupancy rate (%) 53.2 59.3 45.4 47.8 46.2 43.9 48.4 -5.0 10.3 
Gross tourist receipts (Rs million) 32, 810 42,059 36,377 43,151 42,571 37,094 40,133 - 12.9 8.2 
Per capita tourist receipts (Rs) 65,536 74,283 66,223 76,100 86,175 84, 598 83,740 -1.8 -1.0 
Total employment  112,226 129,038 125,004 133,558 145,239 124,456 125,153 -14.3 0.6 
 Directc 46,761 53,766 52,085 55,649 60,516 51,857 52,147 -14.3 0.6 
 Indirectd 65,465 75,272 72,919 77,909 84,723 72,599 73,006 -14.3 0.6 
a Revised. 
b Provisional. 
c Direct employment is employment in hot els and restaurants, travel agencies, tour  operators, airlines, agencies providing 
recreational facilities, and tourist shops. 
d Indirect employment are domestic producers and suppliers of  inputs, and manufacturers and suppliers of handicraft.   
Source:  Sri Lanka Tourism Development Authority, Annual Statistical Report 2008:  and Central Bank of Sri Lanka, 
Annual Report , various issues. 
141. The Ministry of Tourism is responsible for se tting policy for the sector.  The main change 
since the last Review of Sri Lanka  is the enactment of the Tourism Act No. 38 of 2005, in force since 
October 2007, which established the Sri Lanka  Tourism Development Authority (SLDTA)159, the 
Tourism Development Fund, the Sri Lanka T ourism Promotion Bureau (SLTPB), and other 
government bodies related to the tourism industry.160  The SLDTA is the main industry agency;  it 
                                                      
157 Direct employment covers jobs in hotels and restau rants, travel agencies, to ur operators, airlines, 
agencies providing recreational facilities, and tourist sh ops.  Indirect jobs are those generated in domestic 
production and supply of inputs for the tourism sector.  
158 SLTDA (2008). 
159 The SLTDA replaced the Sri La nka (Ceylon) Tourist Board. 
160 These are the Tourism Advisory Committee, th e Sri Lanka Institute of Tourism and Hotel 
Management, and the Sri Lankan Convention Bureau. Sri Lanka WT/TPR/S/237 
 Page 127 
 
 
advises the Minister on tourism policy formulation a nd regulation, implements policy, issues licences 
to tourist enterprises, and monitors the tourist in dustry.  It also provides guidance to the SLTPB to 
develop and promote Sri Lanka as a tourist and travel destination. 
142. All tourist enterprises and tourist services, incl uding tourist guides, must obtain a licence from 
the SLTDA.  Travel agents are also required to ha ve a licence issued by the CAA.  Tourist guides 
must pass accredited courses;  foreign nationals may provide tourist guide services subject to the same 
testing and course requirements.  Foreign investment in excess of 40% in a travel agency requires approval by the BOI, on a case-by-case basis. 
143. Due to its growth potential and strong linkages to the rest of the economy, developing the 
tourism sector is one of the Government's prioritie s.  The objective is to transform Sri Lanka into 
South Asia's foremost tourist destination, by im proving the quality of services, promoting upscale 
tourism, and diversifying markets and services.  According to the Marketing Strategy and Activity 
Plan for 2008-10, the targeted markets include Indi a, the UK, Russia, and the Middle East.  Other key 
goals are to achieve 2 million tourist arrivals in 2016,  make tourism the country's third largest foreign 
exchange earner and the fastest job creator.
161  Accordingly, the SLTDA has taken several measures to 
develop tourism in the Northern and Eastern provinces,  which were affected by the armed conflict, as 
well as other selected areas as prime tourist destina tions.  In particular, the Government intends to 
promote the costal cities of the Eastern provin ce, known to have the best beaches, as premier 
recreational centres.  
144. The policy is to attract local and foreign invest ors to operate all tourism services, with the 
Government acting as a facilitator and regulator.  Fo r this purpose, several tax incentives are offered 
to investment projects approved by the BOI, includi ng tax holidays, concessionary income tax rates, 
and import duty exemptions (Table AIII.6).  In  addition, the SLTDA assists companies to set up 
tourism-related operations and provides management support once th ey are established.  In 2009, the 
Government granted a stimulus package to help the tourism industry overcome the effects of the 
global economic slowdown.  The package included  loan rescheduling, exemption of the fuel 
surcharge and the Economic Service Charge.  Severa l measures have also been taken to revitalize the 
tourism industry on the East coast, as demand is exp ected to grow following the end of the conflict.  
Current projects to upgrade airport, port, and road  infrastructure should also help boost the tourism 
industry in the medium-term. 
145. An embarkation levy of US$5 per passenger leaving Sri Lanka by air or sea, and a Tourist 
Development Levy of 1% on the turnover of all institutions licensed by the SLTDA are applied to 
fund the development and prom otion of Sri Lankan tourism.162  The partially government-owned 
Ceylon Hotels Corporation (CHC) was restructured  and converted into a public company (Ceylon 
Hotels Corporation Ltd.) in 2007.163 
                                                      
161 SLTDA online information.  Viewed at:  http://www.sltda.gov.lk/our_commitment 
[25 March 2010]. 
162 Finance Act No. 25 of 2003. 
163 Ceylon Hotels Corporation (repeal) Act No. 25 of 2007. Sri Lanka WT/TPR/S/237 
 Page 129 
 
 
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