HomeReportsBureau of Economic and Business Affairs2023 Investment Climate Statements…Sri Lanka

# 					2023 Investment Climate Statements: Sri Lanka			

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													EXECUTIVE SUMMARY											

                -  EXECUTIVE SUMMARY 
                -  1. Openness To, and Restrictions Upon, Foreign Investment                    -  Policies Towards Foreign Direct Investment 
                  -  Limits on Foreign Control and Right to Private Ownership and Establishment 
                  -  Other Investment Policy Reviews 
                  -  Business Facilitation 
                  -  Outward Investment 
                -  2. Bilateral Investment and Taxation Treaties 
                -  3. Legal Regime                    -  Transparency of the Regulatory System 
                  -  International Regulatory Considerations 
                  -  Legal System and Judicial Independence 
                  -  Laws and Regulations on Foreign Direct Investment 
                  -  Competition and Antitrust Laws 
                  -  Expropriation and Compensation 
                  -  Dispute Settlement                      -  ICSID Convention and New York Convention 
                    -  Investor-State Dispute Settlement 
                    -  International Commercial Arbitration and Foreign Courts 
                  -  Bankruptcy Regulations 
                -  4. Industrial Policies                    -  Investment Incentives 
                  -  Foreign Trade Zones/Free Ports/Trade Facilitation 
                  -  Performance and Data Localization Requirements 
                -  5. Protection of Property Rights                    -  Real Property 
                  -  Intellectual Property Rights 
                  -  Resources for Intellectual Property Rights Holders: 
                -  6. Financial Sector                    -  Capital Markets and Portfolio Investment 
                  -  Money and Banking System 
                  -  Foreign Exchange and Remittances                      -  Foreign Exchange 
                    -  Remittance Policies 
                  -  Sovereign Wealth Funds 
                -  7. State-Owned Enterprises                    -  Privatization Program 
                -  8. Responsible Business Conduct                    -  Additional Resources 
                  -  Climate Issues 
                -  9. Corruption                    -  Resources to Report Corruption 
                -  10. Political and Security Environment 
                -  11. Labor Policies and Practices                    -  Migrant Workers Abroad  
                  -  Foreign Workers in Sri Lanka  
                  -  Trade Unions  
                -  12. U.S. International Development Finance Corporation (DFC), and Other Investment Insurance or Development Finance Programs 
                -  13. Foreign Direct Investment Statistics 
                -  14. Contact for More Information 

## EXECUTIVE SUMMARY

Sri Lanka, a lower middle-income country with a population of approximately 22 million, continues to face the challenge of navigating its way out of an unprecedented economic crisis. Precipitated by unsustainable external debt load and budget deficits resulting from poor fiscal management, the Sri Lankan economy contracted by an estimated 8.7 percent in 2022. Near depletion of foreign currency reserves to meet even the basic import requirements of the country resulted in shortages of basic goods including food, fuel, and medical supplies throughout 2022, with the government halting the servicing of external public debts pending an orderly restructuring of debt obligations. Mass protests led to the resignation of former President Gotabaya Rajapaksa in July 2022. Meanwhile, Sri Lanka’s deteriorating ability to import agricultural inputs such as fertilizers – exacerbated partly by surging global prices from the Russian invasion of Ukraine – led to mass food insecurity and historic food inflation reaching as high as 94.9 percent in September 2022.

Since assuming office in July 2022, President Ranil Wickremesinghe introduced a variety of sweeping financial reforms including tax hikes and ongoing privatization of money-losing state-owned enterprises (SOEs). After prolonged negotiations, the IMF approved an Extended Fund Facility (EFF) in March 2023 – valued at roughly $3 billion over four years – to support Sri Lanka’s efforts to shore up financing. The disbursement began on March 22 with the first tranche of $330 million.

Economic outlook remains sluggish, albeit with a positive recovery momentum. The GDP is projected to contract by roughly 3 percent in 2023 before returning to positive growth in 2024, according to the IMF. Inflation which had risen since October 2021 to reach historic levels in October 2022 has since been declining but remains high. The Central Bank of Sri Lanka’s (CBSL) tight monetary policy including high interest rates adopted mid-last year has likely contributed to further economic contraction. CBSL had pegged the Sri Lankan Rupee’s (LKR) exchange rate with the U.S. dollar early last year; after this practice ended in March 2023, the rupee’s exchange rate has experienced increased volatility.

Key foreign exchange earners for the country include exports (namely apparel and tea), foreign remittances, and tourism. Due to strong export numbers largely led by the apparel sector as well as various import restrictions, the trade deficit remained relatively stable in 2022. Out of roughly $13 billion in exports, apparel accounted for $5.6 billion in 2022. Tourism, which recorded a severe blow due to the 2019 Easter attacks and COVID-19, gradually began recovering at the end of 2022; while still below peak arrival numbers in 2018, January-February 2023 saw two consecutive monthly arrivals of over 100,000 for the first time since 2018. Remittances recorded a considerable growth with the rapid increase of Sri Lankans seeking job opportunities overseas since the break of the crisis.

The current government appears committed to achieving budget sustainability, implementing several key economic reforms via politically unpopular tax hikes and cost-cutting measures. Many of these reforms reflect genuine efforts to qualify for the IMF’s EFF package which is conditioned on budget sustainability and transparency. Successful completion of these reforms and the IMF program is not guaranteed, with the political-economic landscape still very much uncertain in the country. While the government introduced an anti-corruption bill in April 2023 to tackle some of its endemic corruption issues, Sri Lanka’s track record on combatting corruption remains dubious at best, which may undermine the effectiveness of financial reforms to attract foreign investments.

Foreign investments in Sri Lanka, historically below those of other comparable countries, is expected to have declined further in 2022 (the CBSL’s annual FDI report is scheduled for release in late April 2023). Foreign direct investments (FDI) stood at $780 million in 2021 compared to $687 million in 2020. Meanwhile, portfolio investments in the stock exchange and the government securities market also continued to witness net outflows in 2021. FDIs in Sri Lanka have largely been in tourism, real estate, development projects, ports, and telecommunications in recent years. The Sri Lankan government seeks to expand investment potential in franchising, information technology services, agriculture, electronics, and light manufacturing. The Board of Investment (BOI) is the primary government authority responsible for attracting both foreign and domestic investment, aiming to provide “one-stop” services for foreign investors. BOI facilitates FDIs by offering project incentives, arranging utility services, assisting in obtaining resident visas for expatriate personnel, and facilitating import and export clearances.

Sri Lanka’s strategic location off the southern coast of India along the main east-west Indian Ocean shipping lanes gives it a regional logistical advantage, especially as India does not have deep-water ports comparable to what Sri Lanka’s. This geographic advantage remains relatively untapped.

							1. Openness To, and Restrictions Upon, Foreign Investment					

### Policies Towards Foreign Direct Investment

Sri Lanka is a constitutional multiparty socialist republic. In 1978, Sri Lanka began moving away from socialist, protectionist policies and increasing foreign investment, although changes in government are often accompanied by swings in economic policy. The current government implemented sweeping interventions in 2022 (including import restrictions) to arrest the fallout from the recent historic economic crisis, but has since been pursuing a more market-oriented approach characterized in part by ongoing privatization efforts of large and deficit-ridden state-owned enterprises (SOEs). The government’s 2023 budget identifies attracting FDI as one of its priorities.

The BOI (www.investsrilanka.com), an autonomous statutory agency, is the primary government authority responsible for investment, particularly foreign investment, with BOI aiming to provide “one-stop” services for foreign investors. BOI’s Single Window Investment Facilitation Taskforce (SWIFT) helps facilitate the investment approvals process and works with other agencies in order to expedite the process. BOI can grant project incentives, arrange utility services, assist in obtaining resident visas for expatriate personnel, and facilitate import and export clearances.

Importers to Sri Lanka face high barriers. According to a World Bank study, Sri Lanka’s import regime is one of the most complex and protectionist in the world. U.S. stakeholders have raised concerns the previous government did not adequately consult with the private sector prior to implementing new taxes or regulations – citing the severe import restrictions imposed as a reaction to COVID-19 as an example. The current government under President Wickremesinghe also imposed a set of import restrictions in response to depleting foreign reserves, but with economic indicators beginning to stabilize since late 2022, officials have signaled willingness to gradually ease restrictions so long as foreign reserves remain stable.

As of January 2023, a total 243 item categories are temporarily suspended, with lifts subject to Finance Ministry assessments on domestic consumption needs on a good-by-good basis. An additional list of 276 items are currently suspended from imports subject to licensing requirements. Updates to import bans can be found directly through the Ministry of Finance’s gazettes (public notices): http://www.imexport.gov.lk/index.php/en/downloads/gazette.html

Sri Lanka is a challenging place to do business, with high transaction costs aggravated by an unpredictable economic policy environment, inefficient delivery of government services, and opaque government procurement practices. Investors noted concerns over the potential for contract repudiation, cronyism, and de facto or de jure expropriation. As of April 2023, the U.S. Embassy in Sri Lanka is currently not tracking any expropriation cases involving U.S. companies. Public sector corruption is a significant challenge for U.S. firms operating in Sri Lanka and a constraint on foreign investment. As noted in the Executive Summary, the new government has been moving in a positive direction regarding corruption via the introduction of a bill in April 2023 to strengthen anti-corruption enforcement. However, the country’s poor track record in combating corruption looms over the latest legislative attempt and its efficacy. While the country generally has adequate laws and regulations to combat corruption, enforcement is weak, inconsistent, and selective. U.S. stakeholders and potential investors expressed particular concern about corruption in large infrastructure projects and in government procurement. Investors also point out policy inconsistency as another leading investment deterrent. The viability of sustained improvement on this issue largely depends on the domestic political landscape.

While Sri Lanka is a challenging place for businesses to operate – for instance, foreigners report significant challenges to setting up bank accounts – investors report that starting a business in Sri Lanka is relatively simple and quick, especially when compared to other lower middle-income markets. However, scalability is a problem due to the lack of skilled labor, a relatively small talent pool and constraints on land ownership and use. Moreover, the height of the historic economic crisis saw substantial brain drain from the country, though no aggregate data exists to corroborate the extent of this talent flight. In general, investors note that employee retention is good in Sri Lanka, but numerous public holidays, a reluctance of employees to work at night, a lack of labor mobility, and difficulty recruiting women decrease efficiency and increase start-up times.

### Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign ownership is allowed in most sectors, although foreigners are prohibited from owning land with a few limited exceptions. Foreigners can invest in company shares, debt securities, government securities, and unit trusts. Many investors point to land acquisition as the biggest challenge for starting a new business. Generally, Sri Lanka prohibits the sale of public and private land to foreigners and to enterprises with foreign equity exceeding 50 percent. However, on July 30, 2018, Sri Lanka amended the Land (Restriction of Alienation) Act of 2014 to allow foreign companies listed on the Colombo Stock Exchange (CSE) to acquire land. Foreign companies not listed on the CSE—but engaged in banking, financial, insurance, maritime, aviation, advanced technology, or infrastructure development projects identified and approved as strategic development projects—may also be exempted from restrictions imposed by the Land Act of 2014 on a case-by-case basis.

The government owns approximately 80 percent of the land in Sri Lanka, including the land housing most tea, rubber, and coconut plantations, which are leased out, typically on 50-year terms. Private land ownership is limited to fifty acres per person. Although state land for industrial use is usually allotted on a 50-year lease, the government may approve 99-year leases on a case-by-case basis depending on the project. Many land title records were lost or destroyed during the civil war, and significant disputes remain over land ownership, particularly in the North and East. The government has started a program to return property taken by the government during the war to residents in the North and East, but this process has been slow and uneven.

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

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

In areas where foreign investments are permitted, Sri Lanka treats foreign investors the same as domestic investors. However, corruption reportedly may make it difficult for U.S. firms to compete against foreign bidders not subject to the U.S. Foreign Corrupt Practices Act when competing for public tenders.

### Other Investment Policy Reviews

Sri Lanka has not undergone any investment policy reviews in the last five years by multilateral agencies or civil society organizations. Local and foreign media published short op-eds and articles in 2021-2022 highlighting some flagship foreign investment projects including the Colombo Port City project. The Port City project – officially called the Colombo International Financial City – is an ongoing special economic zone project funded and led by the China Harbor Engineering Company (CHEC):

- BBC “ Colombo Port City: A new Dubai or a Chinese enclave? ” (January 2022)
- Colombo Telegraph “ Port City – What Next? ” (May 2021)
- 2004 UNCTAD Report:  https://investmentpolicy.unctad.org/publications/82/investment-policy-review-of-sri-lanka

### Business Facilitation

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

### Outward Investment

The government supports outward investment, and the Export Development Board offers subsidies for companies seeking to establish overseas operations, including branch offices related to exports. New outward investment regulations came into effect November 20, 2017. Sri Lankan companies, partnerships, and individuals are permitted to invest in shares, units, debt securities, and sovereign bonds overseas subject to limits specified by the new Foreign Exchange Regulations. Sri Lankan companies are also permitted to establish overseas companies. Investments over the specified limit require the Central Bank Monetary Board’s approval. All investments must be made through outward investment accounts (OIA). All income from investments overseas must be routed through the same OIA within three months of payment. In the wake of the COVID-19 pandemic, the Sri Lankan government introduced a series of measures attempting to ease pressure on the Sri Lankan rupee. These measures included a temporary suspension on OIA transactions and additional foreign exchange controls for outward investments, the current temporary suspension measures are still in place well into 2023.

							2. Bilateral Investment and Taxation Treaties					

Sri Lanka has signed investment protection agreements with 26 countries, including the United States (which came into force in May 1993). Pursuant to the Constitution, investment protection agreements enjoy the force of law and legislative, executive, or administrative actions cannot contravene them.
                    - Sri Lanka has signed free trade agreements (FTAs) with India, Pakistan, and Singapore, and is negotiating an FTA with China and Thailand, with announced plans to engage Bangladesh next on a bilateral FTA. It also seeks to resume negotiations to establish an Economic and Technology Cooperation Agreement (ETCA) with India – which would expand the existing FTA to include IT services among others – which halted shortly before COVID-19.
                    - The FTAs with India and Pakistan only cover trade in goods. They provide for duty-free entry and duty preferences for manufactured and agricultural goods. A domestic value addition of 35 percent is required to qualify for concessions granted pursuant to the FTAs.
                    - The Singapore-Sri Lanka FTA came into force on May 1, 2018, but implementation was unilaterally slowed by domestic opposition in Sri Lanka. Sri Lanka has renewed its implementation efforts as of January 1, 2023. The agreement covers investment, goods, services, trade facilitation, government procurement, telecommunications, e-commerce, and dispute settlement. Sri Lanka eliminated customs duties on 50 percent of tariff lines, which will progressively increase to 80 percent over 14 years. Sri Lanka will not reduce or eliminate duties on the remaining 20 percent of tariff lines.
                    - Sri Lanka is a member of the South Asian Free Trade Area (SAFTA) and the Asia-Pacific Trade Agreement (APTA).

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

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

Sri Lanka has signed bilateral agreements with an additional 43 countries.

Sri Lanka passed an Inland Revenue Act in 2017. The law, which came into force on April 1, 2018, provides a tax framework to provide increased certainty to investors and taxpayers; modernize rules related to cross-border transactions to address tax avoidance; broaden the tax base; and expand income tax sources. A three-tier corporate tax structure was also introduced with a 40 percent rate for businesses in the liquor, tobacco, and betting and gaming industries. The law also introduced capital gains tax and fines and/or imprisonment for tax evasion and personal liability for company directors.

Sri Lanka is not a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting.

							3. Legal Regime					

### Transparency of the Regulatory System

Many foreign and domestic investors view the regulatory system as unpredictable with outdated regulations, rigid administrative procedures, and excessive leeway for bureaucratic discretion. BOI is responsible for informing potential investors about laws and regulations affecting operations in Sri Lanka, including new regulations and policies that are frequently developed to protect specific sectors or stakeholders. Effective enforcement mechanisms are sometimes lacking, and investors cite coordination problems between BOI and relevant line agencies. Lack of sufficient technical capacity within the government to review financial proposals for private infrastructure projects also creates problems during the tender process.

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

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

The Central Bank and the Finance Ministry published information on Central Government debt including contingent liabilities and government finance. Central Bank publishes information on debt of major SOE’s. Debt obligations are available online in the Central Bank Annual Report; Fiscal Management Report of the Finance Ministry; Annual Report of the Ministry of Finance. Information on contingent liabilities is available in the Annual Report of the Ministry of Finance. Since 2018, the Central Bank published guaranteed debt and central government debt annually. The government does not promote or require companies’ environmental, social, and governance (ESG) disclosures, however most large companies listed on the Colombo Stock Exchange disclose these.

### International Regulatory Considerations

Sri Lanka is a member of the World Trade Organization (WTO) and has made WTO notifications on customs valuation, agriculture, import licensing, sanitary and phytosanitary measures, the Agreement on Technical Barriers to Trade, the Agreement on Trade-Related Investment Measures, and the Agreement on Trade-Related Aspects of Intellectual Property Rights. Sri Lanka ratified the WTO Trade Facilitation Agreement (TFA) in 2016 and a National Trade Facilitation Committee was tasked with undertaking reforms needed to operationalize the TFA. The WTO conducted a review of the TFA in June 2019 in which Sri Lankan officials noted challenges related to accessing technical assistance and capacity building support for implementation of TFA recommendations. In September 2021 Sri Lanka requested for extension of its definitive implementation dates on certain provisions based on Article 17 of the Trade Facilitation Agreement.

### Legal System and Judicial Independence

Sri Lanka’s legal system reflects diverse cultural influences. Criminal law is fundamentally British-based while civil law is based largely Roman-Dutch legal principles – a legacy resulting from Sri Lanka’s colonial history under the Netherlands. Laws on marriage, divorce, inheritance, and other issues can also vary based on religious affiliation. Sri Lankan commercial law is almost entirely statutory, reflecting British colonial law, although amendments have largely kept pace with subsequent legal changes in the United Kingdom. Several important legislative enactments regulate commercial issues: the BOI Law; the Intellectual Property Act; the Companies Act; the Securities and Exchange Commission Act; the Banking Act; the Inland Revenue Act; the Industrial Promotion Act; and the Consumer Affairs Authority Act.

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

The Supreme Court remains largely independent of undue influence from other government branches. In a recent example, in April 2023, the Supreme Court halted the importation of medical products from certain Indian companies in response to a civil society complaint. The products were cleared for importing without proper registration due to what the civil society organization claimed were inappropriate connections between top Sri Lankan health officials and the Indian companies.

### Laws and Regulations on Foreign Direct Investment

The principal law governing foreign investment is Law No. 4 (known as the BOI Act), created in 1978 and amended in 1980, 1983, 1992, 2002, 2009 and 2012.  The BOI Act and implementing regulations provide for two types of investment approvals, one for concessions and one without concessions.  Under Section 17 of the Act, the BOI is empowered to approve companies satisfying minimum investment criteria with such companies eligible for duty-free import concessions.  The BOI acts as the “one-stop-shop” to facilitate all the requirements of the foreign investors to Sri Lanka. Investment approval under Section 16 of the BOI Act permits companies to operate under the “normal” laws and applies to investments that do not satisfy eligibility incentive criteria.  From April 1, 2017, Inland Revenue Act No. 24 of 2017 created an investment incentive regime granting a concessionary tax rate (for specific sectors) and capital allowances (depreciation) based on capital investments.  Commercial Hub Regulation No 1 of 2013 applies to transshipment trade, offshore businesses, and logistic services. The Strategic Development Project Act of 2008 (SDPA) provides tax incentives for large projects that the Cabinet identifies as “strategic development projects.” In May 2021, Parliament of Sri Lanka approved Port City Commission Bill to establish the Colombo Port City Special Economic Zone and Economic Commission: https://investsrilanka.com/.

### Competition and Antitrust Laws

Sri Lanka does not have a specific competition law. Instead, the BOI or respective regulatory authorities may review transactions for competition-related concerns. In March of 2017, Parliament approved the “Anti-Dumping and Countervailing” and “Safeguard Measures” Acts. These laws provide a framework against unfair trade practices and import surges and allow government trade agencies to initiate investigations relating to unfair business practices to impose additional and/or countervailing duties.

### Expropriation and Compensation

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

### Dispute Settlement

#### ICSID Convention and New York Convention

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

#### Investor-State Dispute Settlement

Sri Lanka signed a Bilateral Investment Treaty (BIT) with the United States in 1991. Over the past ten years, according to the United Nations, two investment disputes in Sri Lanka have involved foreign investors: 1) a dispute between a major European bank and the national Ceylon Petroleum Corporation regarding an oil hedging agreement, concluded with the proceeding being decided in favor of the foreign bank; and 2) an arbitration involving British and local investors (with the Attorney General as respondent) regarding a tourism development project that concluded in 2020 with the ICSID tribunal dismissing the $20 million claim for failure to prove the claim. Sri Lanka has largely demonstrated adherence to international arbitration standards in dispute settlements involving foreign investors.

#### International Commercial Arbitration and Foreign Courts

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

### Bankruptcy Regulations

The Companies Act and the Insolvency Ordinance provide for dissolution of insolvent companies, but there is no mechanism to facilitate the reorganization of financially troubled companies. Other laws make it difficult to keep a struggling company solvent. The Termination of Employment of Workmen Special Provisions Act (TEWA), for example, makes it difficult to fire or lay off workers who have been employed for more than six months for any reason other than serious, well-documented disciplinary problems. In the absence of comprehensive bankruptcy laws, extra-judicial powers granted by law to financial institutions protect the rights of creditors. A creditor may petition the court to dissolve the company if the company cannot make payments on debts in excess of LKR 50,000 ($320.00). Lenders are also empowered to foreclose on collateral without court intervention. However, loans below LKR 5 million ($32,000) are exempt, and lenders cannot foreclose on collateral provided by guarantors to a loan.

							4. Industrial Policies					

### Investment Incentives

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

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

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

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

### Foreign Trade Zones/Free Ports/Trade Facilitation

Sri Lanka has 15 free trade zones, also called “export processing zones,” which are administered by the BOI. Foreign investors have the same investment opportunities as local entities in these zones. Export-oriented companies located within and outside the zones are eligible to import project-related material and inputs free of customs import duties although such imports may be subject to other taxes.

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

In 2019, the China Harbor Engineering Company (CHEC) completed the reclamation of 269 hectares of land adjacent to Colombo’s port and historic downtown to form the Colombo Port City Special Economic Zone (SEZ), which government officials describe as a future “international commercial and financial hub.” CHEC invested $1.4 billion in the land reclamation and basic infrastructure of the Port City, in return for which it will have control, via lease, of 116 of the 178 total hectares of marketable land on the site, the balance of which the government will control. Parliament approved on May 20, 2021, legislation to govern the SEZ and establish a commission to act as promoter, manager, regulator, and “single window investment facilitator” to attract foreign direct investment to the project. The legislation also includes tax exemptions and other incentives for potential investors. The legislation was amended prior to approval by a simple majority in Parliament following a Supreme Court ruling on multiple legal challenges to the bill’s constitutionality, though concerns remain about the potential risk of illicit financial flows.

Sri Lanka’s State Pharmaceutical Corporation (SPC), a state-owned enterprise established a dedicated pharmaceutical manufacturing zone in Hambantota (southern tip of Sri Lanka). The Sri Lankan government has earmarked some 400 acres of land in the Hambantota-Arabokka area and announced tax exemptions for foreign companies ready to set up manufacturing units. The SPC has also approached Indian manufacturers about the possibility of establishing manufacturing centers in the dedicated pharmaceutical manufacturing zone in Hambantota. The goal being to produce at least 40 percent of pharmaceuticals for domestic needs and up to $1 billion in annual pharmaceutical exports. In addition to favorable taxation benefits, all infrastructure facilities will be supplied by the Sri Lanka Board of Investment.

### Performance and Data Localization Requirements

Employment of foreign personnel is permitted when there is a demonstrated shortage of qualified local labor. Technical and managerial personnel are in short supply, and this shortage is likely to continue in the near future. Foreign laborers do not experience significant problems in obtaining work or residence permits. Sri Lanka has seen a rise in foreign laborers, mainly in construction sites, with some reportedly working without proper work visas. Foreign investors who remit at least $250,000 can qualify for a five-year resident visa under the Resident Guest Scheme Visa Program: https://www.immigration.gov.lk/pages_e.php?id=14. Sri Lanka offers dual citizenship status to Sri Lankans who have obtained foreign citizenship in seven designated countries, including the United States. Tourist and business visas are granted for one month with possible extensions.

Sri Lanka has no specific requirements for foreign information technology providers to turn over source code or provide access to surveillance. Provisions relating to interception of communications for cybercrime issues are subject to court supervision under the Computer Crimes Act (CCA) of 2007. Sri Lanka became a party to the Budapest Cybercrime Convention in 2015, and safeguards based on the convention are in force. Although there is no comprehensive legislative protection of electronic data, the CCA has a provision to protect data and information. Personal Data Protection Act, No. 9 of 2022 Provide for the regulation of processing of personal Data; to identify and strengthen the rights of data subjects in relation to the protection of personal data; to provide for the establishment of the data protection authority; and to provide for matters connected there with or incidental. The government will be submitting the Cyber Security Bill to the Parliament in 2023. There is no ban on the sale of electronic data for marketing purposes.

							5. Protection of Property Rights					

### Real Property

Secured interests in real property in Sri Lanka are generally recognized and enforced (https://www.hg.org/legal-articles/intellectual-property-law-in-sri-lanka-21205), but many investors claim protection can be flimsy. A reliable registration system exists for recording private property including land, buildings, and mortgages, although problems reportedly exist due to fraud and forged documents. In 1998 the government introduced Bim Saviya Program (Title Registration) to provide stronger and clear Land ownership with the view of improving Land Utilization with the aid of new technology. This program aims to avoid unnecessary disputes due to land ownership or boundaries. Property registration required, on average, completion of eight procedures lasting 39 days. Sri Lanka prohibits the sale of land to foreign nationals and to enterprises with foreign equity exceeding 50 percent. Foreign investors are eligible to lease lands in Sri Lanka to establish their projects and plants under the BOI. Foreigners can freely buy properties as long as they are willing to pay the Land Tax for foreigners at 100 percent of the property value. An alternative is to lease the land for 99 years, bringing the tax down to 7 percent.

Under current law, the Prescription Ordinance stipulates that a person holding continuous “adverse possession” of real property for ten years without challenge is entitled to ownership of that property. (Prescription, Cap. 81, No. 22 of 1871, § 3, COMMONLII.)

### Intellectual Property Rights

Sri Lanka is currently not in the USTR Special 301 Report or the Notorious Markets List.

Sri Lanka is a party to major intellectual property agreements. The country adopted an intellectual property law in 2003 intended to meet U.S.-Sri Lanka bilateral IPR agreements and trade-related aspects of intellectual property rights (TRIPS) agreement obligations. The law governs copyrights and related rights; industrial designs; patents, trademarks, and service marks; trade names; layout designs of integrated circuits; geographical indications; unfair competition; databases; computer programs; and undisclosed information (e.g., trade secrets). While it is not compulsory to register a trademark, it is recommended to register a trademark for easy and effective enforcement. For registration and grant of industrial designs and patents, an applicant must file formal applications with the Director-General of Intellectual Property. Copyright protection is accorded without any formality of registration in Sri Lanka. While trade secrets infringement is considered under the umbrella of unfair competition in the Sri Lankan IP framework, Sri Lanka lacks a separate substantive piece of legislation governing trade secrets, which is deficient compared to international norms.

The Government of Sri Lanka has taken concrete steps to strengthen its IP regime. The National Intellectual Property Office (NIPO) has shown its intention to accede to the Madrid Protocol, and the Sri Lankan Parliament approved the proposal to accede to the Madrid Protocol in 2020. The necessary amendments in the existing IP Act have been initiated to facilitate Sri Lanka’s entry into the Madrid protocol. In 2019, the Sri Lankan Government amended its Information Technology (IT) policy. The amended policy requires government agencies only to use licensed or open-source software. However, the Government has yet to put systems to monitor compliance with the policy. In February 2022, the Sri Lankan cabinet approved for discussion possible amendments to the IP Act. The objective of the proposed amendment is to include a fair use exemption for copyrighted audio works to be copied and edited into an accessible format (for disabled persons), and to establish Geographical Indications (GI) protection for certain products.

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

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

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

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

### Resources for Intellectual Property Rights Holders:

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

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

Local lawyers list: https://lk.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys-2/

Description of the process of protecting and enforcing IP within the country/economy:https://www.wipo.int/edocs/mdocs/aspac/en/wipo_inn_tyo_12/wipo_inn_tyo_12_ref_t3srilanka.pdf

Sri Lankan Customs will seize and destroy counterfeit or illicit goods:https://www.customs.gov.lk/destruction-of-counterfeit-and-pirated-goods-on-world-ip-day/

							6. Financial Sector					

### Capital Markets and Portfolio Investment

The Securities and Exchange Commission (SEC) governs the Colombo Stock Exchange (CSE), unit trusts, stockbrokers, listed public companies, margin traders, underwriters, investment managers, credit rating agencies, and securities depositories (https://cse.lk/). Foreign portfolio investment is encouraged. Foreign investors can purchase up to 100 percent of equity in Sri Lankan companies in permitted sectors. Investors may open an Inward Investment Account (IIA) with any commercial bank in Sri Lanka to bring in investments. As of January 31, 2022, 297 companies representing 20 business sectors are listed on the CSE. As stock market liquidity is limited, investors need to manage exit strategies carefully.

In accordance with its IMF Article VIII obligations, the government and the CBSL generally refrain from restrictions on current international transfers. When the government experiences balance of payments difficulties, it tends to impose controls on foreign exchange transactions. Due to pressures on the balance of payments caused by the COVID-19 and the subsequent economic crisis, Sri Lanka took several measures to restrict imports and limit outward capital transactions in 2020, these limits are still in place as of March 2023. In addition to the import restrictions.

The state consumes over 50 percent of the country’s domestic financial resources and has a virtual monopoly on the management and use of long-term savings. This inhibits the free flow of financial resources to product and factor markets. High budget deficits have caused interest rates to rise and resulted in higher inflation. Sri Lanka which recorded unprecedented inflation levels in late 2022 has since been stabilizing basket good prices beginning 2023. Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) stood at 15.50 percent and 16.50 per cent, respectively by March 2023.

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

### Money and Banking System

Sri Lanka has a diversified banking system. In terms of physical access to outlets, Sri Lanka also enjoys high levels of banking penetration, with bank branch density at 17 per 100,000 adults, compared to the South Asia regional average of 10.2. There are 25 commercial banks: 13 local and 12 foreign. In addition, there are seven specialized local banks. Citibank N.A. is the only U.S. bank operating in Sri Lanka. Several domestic private commercial banks have substantial government equity acquired through investment agencies controlled by the government. Banking has expanded to rural areas, and by end of Q3 of 2022 there were over 6,711 commercial bank branches and over 6,176 Automated Teller Machines throughout the country. Both resident and non-resident foreign nationals can open foreign currency banking accounts. However, non-resident foreign nationals are not eligible to open Sri Lankan Rupee accounts. A foreign individual can open a Personal Foreign Currency Account or (PFC account). This is a special type of account that can be opened in foreign currencies carried by the overseas client. Just like an ordinary bank account, this type of account gives interests against the deposits.

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

Amidst strong macroeconomic headwind, performance of the banking sector was stable. Total assets of the banking industry grew to LKR 19,313 billion ($52.14 billion) by the end of the 3rd quarter of 2022 while profitability of the sector improved to LKR 131.1 billion ($0.35 billion) by the end of the 3rd quarter of 2022. However, banks faced liquidity shortages in both the foreign and domestic currency markets during the year 2022 which gradually eased out by early 2023. The acute liquidity shortages in the foreign currency market, which intensified the crisis due to the inability to fund essential imports is at present recording a notable surplus. Banking Sector stability in the near term will depend on its ability to manage the increase in Non-Performing Loans (NPLs) exacerbated due to economic contraction and personal income tax hikes and the impending restructuring of domestic debt, which the banking sector collectively holds nearly 50 percent.

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

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

### Foreign Exchange and Remittances

#### Foreign Exchange

Sri Lanka is currently experiencing an unprecedented foreign exchange shortage. Companies say they find it extremely difficult to repatriate funds due to a severe scarcity of U.S. dollars in the banking system. In accordance with its Article VIII obligations as a member of the IMF, Sri Lanka liberalized exchange controls on current account transactions in 1994 and, in 2010-2012, the government relaxed exchange controls on several categories of capital account transactions. A new Foreign Exchange Act, No. 12 of 2017, came into operation on November 20, 2017 and further liberalized capital account transactions to simplify current account transactions. Foreign investors are required to open Inward Investment Accounts (IIA) to transfer funds required for capital investments but there are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment through an IIA in any foreign currency designated by CBSL.

Rules require exporters to convert, the residual (remaining balance of such export proceeds received), into Sri Lanka Rupees, on or before the seventh (7th) day of the succeeding month, upon meeting following authorized payments.

- Outward remittances in respect of current transactions;
- Withdrawal in foreign currency notes, as permitted;
- Debt servicing expenses and repayment of foreign currency loans;
- Purchases of goods and obtaining services including one-month commitments; and
- Payments in respect of making investments in Sri Lanka Development Bonds in foreign currency up to ten per-centum (10 percent) of the export proceeds, so received.

Accordingly, with the issuance of these rules, exporters are able to meet all the expenditure relating to export of goods and services, out of their export proceeds.

#### Remittance Policies

No barriers exist, legal or otherwise, to remittance of corporate profits and dividends for foreign enterprises since 2017 when Sri Lanka relaxed investment remittance policies with the new Foreign Exchange Act. Remittances are done through IIAs. There are no waiting periods for remitting investment returns, interest, and principal on private foreign debt, lease payments, royalties, and management fees provided there is sufficient evidence to prove the originally invested funds were remitted into the country through legal channels. Exporters must repatriate export proceeds within 120 days. However, due to the current economic crisis, U.S. partners have reported difficulties in remitting franchise fees and royalty payments due to shortages in dollars in the banking system.

### Sovereign Wealth Funds

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

							7. State-Owned Enterprises					

SOEs are active in transport (buses and railways, ports and airport management, airline operations); utilities such as electricity; petroleum imports and refining; water supply; retail; banking; telecommunications; television and radio broadcasting; newspaper publishing; and insurance. SOEs hold monopoly positions in some sectors such as utilities and petroleum/refining. Following the end of the civil war in 2009, Sri Lankan armed forces began operating domestic air services, tourist resorts, and farms crowding out some private investment. In total, there are over 400 SOEs of which 55 have been identified by the Sri Lanka Treasury as strategically important, and 345 have been identified as non-commercial.

### Privatization Program

The current government has ongoing privatization efforts of some flagship SOEs that have been running deficits the past several years. Past attempts under previous governments were unsuccessful and mostly ended at conceptual discussions, but the current push – in part as a reaction to the IMF EFF package which is conditioned on SOE reforms – has led to March 2023 call for expressions of interest by the Sri Lankan Ministry of Finance for four SOEs in the insurance, petroleum, and hotel sectors. The government is in active discussions with other flagship SOEs – including Sri Lankan Airlines – on divesting away piecemeal functions. SOE labor unions and opposition political parties often oppose privatization and are particularly averse to foreign ownership. Privatization through the sale of shares in the stock market is likely to be less problematic. Sri Lanka has been receiving multilateral technical assistance on SOE divestitures for smoothing its transition process.

							8. Responsible Business Conduct					

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

### Additional Resources

Department of State

- Country Reports on Human Rights Practices ;
- Trafficking in Persons Report ;
- Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities ;
- U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises ; and;
- Xinjiang Supply Chain Business Advisory 

Department of the Treasury

- OFAC Recent Actions

Department of Labor

- Findings on the Worst Forms of Child Labor Report ;
- List of Goods Produced by Child Labor or Forced Labor ;
- Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World  and;
- Comply Chain .

### Climate Issues

The Sri Lanka Sustainable Energy Authority (SEA) prioritizes increased clean energy investment to meet the government’s ambitious 70 percent renewables target by 2030. The SEA is tasked with increasing this investment, but with ongoing economic crisis in Sri Lanka SEA has been having difficulty bring this to fruition.

The government has a National Climate Change Policy with a goal to adapt to climate change and have mitigation measures on the impact of it within the framework of sustainable development. At the November 2022 COP 27, President Ranil Wickremesinghe reiterated Sri Lanka’s commitment to ceasing of building new coal-fired power plants and achieve net-zero carbon emissions by 2050. Sri Lanka has set a target of achieving 70 percent of all its energy requirements from renewable sources by 2030.

Electricity tariffs are time-based tariffs regulated for residential customers. Two types of tariff categories are provided – block tariffs and time of use (ToU) tariffs. The block tariff charges residences on an incremental basis based on monthly power consumption. The Public Utilities Commission of Sri Lanka (PUCSL) increased tariffs by an average of 75 percent in August 2022 and again by 66 percent in February 2023. According to World Bank, foreign direct investment in the power sector has declined in recent years due to policy uncertainties and the risk of currency depreciation. The electricity act of Sri Lanka requires the government to hold at least a 50 percent share or certain shares determined by the Treasury and Ministry of Finance, which could potentially set barriers for both domestic and international investors. As of August 2022, the Ceylon Electricity Board (CEB)’owed 137.9 billion rupees to independent power producers and the Ceylon Petroleum Corporation. CEB owes renewable power producers 28.5 billion rupees, thermal power producers 76.8 billion rupees, and rooftop power owners around 1 billion rupees. Imports of equipment for renewable energy including solar panels and storage batteries, for example, are exempt from the national building tax (NBT), as well as the ports and airport levy (PAL).

Sri Lanka announced plans to ban internal combustion engine (ICE) car sales by 2040. Importation of three-wheelers powered by two-stroke petrol engines, as well as spare parts for such engines, has been banned since 2008. According to the United Nations Environment Program (UNEP), Sri Lanka has a high share of hybrid and electric vehicles as a result of strict and aggressive vehicles taxation scheme that provides substantial tax reductions for hybrids imported into the country since 2010 and for electric vehicles since 2015. This has resulted in about 80,000 hybrid vehicles and 2,400 fully electric vehicles in the country.

While the current government has high renewable energy ambitions, internal political conflict over energy policy, droughts and floods reducing hydroelectricity generation, and, in some cases, inability to front enough money for renewable technologies delay progress. The main renewable resources available in Sri Lanka include biomass, hydropower, solar, and wind. The 2015-25 power plan laid out in the Sri Lanka Energy Sector Development Plan for a Knowledge-based Economy (SLEDP) and the Global Energy Parliament (GEP) will require increased involvement from private companies to meet renewable energy goals.

							9. Corruption					

While Sri Lanka has generally adequate laws and regulations to combat corruption, enforcement is often weak and inconsistent. U.S. firms identify corruption as a major constraint on foreign investment, but generally not a major threat to operating in Sri Lanka once contracts have been established. The business community claims that corruption has the greatest effect on investors in large projects and on those pursuing government procurement contracts. Projects geared toward exports face fewer problems. A Right to Information Act came into effect in February of 2017 which increased government transparency. The government also introduced a major anti-corruption bill on April 2023 in an apparent attempt to strengthen the enforcement arm of anti-corruption regulations, as well as to satisfy IMF EFF conditions on transparency. The bill has won some praise from civil society but has also raised concerns from other civil society members who point to provisions regarding enforced confidentiality of internal discussions and stricter punishments on false allegations as possible steps in the wrong direction. Overall impact of the bill remains to be seen.

The Commission to Investigate Allegations of Bribery or Corruption (CIABOC or Bribery Commission) is the main body responsible for investigating bribery allegations, but it is widely considered ineffective and has reportedly made little progress pursuing cases of national significance. The law states that a public official’s offer or acceptance of a bribe constitutes a criminal offense and carries a maximum sentence of seven years imprisonment and fine. Bribery laws extend to family members of public officials, but political parties are not covered. A bribe by a local company to a foreign official is also not covered by the Bribery Act and the government does not require private companies to establish internal codes of conduct that prohibit bribery of public officials. Thus far, the Bribery Commission has focused on minor cases such as bribes taken by traffic police, wildlife officers, and school principals. These cases reportedly follow a pattern of targeting low-level offenses with prosecutions years after the offense followed by the imposition of sentences not always proportionate to the conduct (i.e., sometimes overly strict, other times overly lenient).

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

### Resources to Report Corruption

Contact at the government agency or agencies that are responsible for combating corruption:

Commission to Investigate Allegations of Bribery or CorruptionNo 36, Malalasekara Mawatha, Colombo 7T+94 112 596360 / 2595039M+94 767011954Email: ciaboc@eureka.lk or dgbribery@gmail.com

Contact at a “watchdog” organization:

Transparency International, Sri Lanka5/1 Elibank Road Colombo 5Phone: 94-11- 4369783Email: tisl@tisrilanka.org****

							10. Political and Security Environment					

The government’s military campaign against the Liberation Tigers of Tamil Eelam (LTTE) ended in May 2009 with the defeat of the LTTE. During the civil war, the LTTE had a history of attacks against civilians, although none of the attacks were intentionally directed against U.S. citizens. On April 21, 2019, terrorist attacks targeted several churches and hotels throughout Colombo and in the eastern city of Batticaloa, killing more than 250 people, including over 40 foreigners, five of whom were Americans. In the aftermath of the attacks, the government imposed nationwide curfews and a temporary ban on some social media outlets. There have not been nationwide social media or online public forum shutdowns since, though there have been anecdotal reports alleging social media platform shutdowns during the 2022 protests during the height of the economic crisis under the previous government. There have been no significant reports on shutdowns under the current government.

The economic situation remains unstable. Conditions have improved notably from 2022, although fuel supply and electricity generation are still subject to rationing. Tax hikes under the current government as part of its efforts to meet IMF conditions led to vocal opposition and protests from various segments, though the opposition has not led to any mass movements similar to 2022 protests in scale. Several government trade unions have launched strike action demanding the tax be withdrawn and are threatening to shut down essential services if their demands are ignored; several protests in the health and energy sectors in 2023 led to temporary slowdowns of services.

							11. Labor Policies and Practices					

Both local and international businesses have cited labor shortages as a major problem in Sri Lanka.****In 2021, 8.5 million Sri Lankans were employed: 46.7 percent in services, 26 percent in industry and 27.3 percent in agriculture. Approximately 70 percent of the employed are in the informal sector. The government sector also employs over 1.4 million people.

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

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

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

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

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

Women face workforce restrictions such as caps on overtime work, limits on nighttime shifts and restrictions from certain jobs. In 2021 the labor market was characterized by high female unemployment and low female labor force participation: an estimated 55 percent of public sector employees were men and 45 percent women while 70 percent of employees outside the public sector were men and only 30 percent women.

### Migrant Workers Abroad 

In 2022, over 300,000 Sri Lankans are estimated to have registered for foreign employment, a significant increase from previous years.  Remittances from migrant workers, averaged about $5.49 billion in 2021, making up Sri Lanka’s second largest source of foreign exchange.  In 2022, this dropped to $3.78 billion, in part due to the economic crisis, as well as more people relying on informal channels to send remittances back to Sri Lanka.  Most of this labor force is unskilled (i.e., housemaids and factory laborers) and located primarily in the Middle East.  Sri Lanka is also losing many of its skilled workers to more lucrative jobs abroad.  Approximately 6,000 Sri Lankans work in Bangladeshi garment factories. 

### Foreign Workers in Sri Lanka 

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

### Trade Unions 

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

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

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

All forms of forced and compulsory labor are prohibited.  In March of 2016, the government introduced a national minimum wage set at LKR 10,000 ($36) per month or LKR 400 ($1.45) per day.  The National Minimum Wage of Workers Act was amended in 2021, increasing the minimum wage to LKR 12,500 ($45) monthly and LKR 500 ($1.81) per day.  Forty-four “wage boards” established by the Ministry of Labor set minimum wages and working conditions by sector and industry in consultation with unions and employers.  The minimum wages established by these sector-specific wage boards tend to be higher than the minimum wage.   

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

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

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

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

							12. U.S. International Development Finance Corporation (DFC), and Other Investment Insurance or Development Finance Programs					

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

Several countries provide bilateral project loans to the government, which assist firms from their countries to win projects. China has provided extensive loans, enabling Chinese companies to engage in numerous projects in Sri Lanka ranging from road and port construction to railway equipment supply.

Since 2019, the U.S. Government has committed a $265 million in funding to Sri Lanka’s Sanasa Development Bank to support small and medium enterprises (SMEs) and women entrepreneurs. The loan from DFC aims to support private sector investment and economic growth in Sri Lanka. The funding agreement directs a portion of the loan to businesses that are owned by women, led by women, or provide a product or service that empowers women.   In June 2022, DFC approved an additional $100 million in direct loan to the Ceylon Commercial Bank – one of the largest private banks in Sri Lanka – for SME loans to Sri Lanka. Loans from USG agencies such as DFC involve host government consultations and approval, including consultations with the Central Bank of Sri Lanka and approvals from the Department of National Planning (under the Ministry of Finance). In some instances, local recipients of USG loans have faced challenges to receiving disbursements in accordance with Sri Lankan central bank regulations, due in part to internal company issues and resulting personnel turnover.

							13. Foreign Direct Investment Statistics