Policies toward Foreign Direct Investment

The Government of Sierra Leone has a favorable attitude toward foreign direct investment (FDI), which it sees as critical to revitalizing the country’s economic growth. The Agenda for Prosperity, the country’s strategy paper on poverty reduction, is a five-year roadmap meant to place Sierra Leone on the path to achieving middle-income status by 2035. The strategy recognizes that private sector led growth will be pursued vigorously by attracting foreign direct investment, accessing funds from international capital markets and by forging partnership with the private sector on especially large scale projects. The 2014 -15 Ebola epidemic placed enormous strains on the government’s resources and capacities, essentially depriving the country of funds needed for infrastructural investment. The situation further worsened with the collapse of commodity prices in the global market and the unsuccessful oil exploration ventures undertaken by various foreign investments within the same period. As the economy is gradually picking up after the twin disaster, the country has embarked on attracting investments through public private partnerships (PPPs) to undertake major infrastructural projects, particularly in power, water, roads, ports, and telecommunications, etc. Emphatically, Sierra Leone perceives FDI as a catalyst to recovery from the economic downturn of the twin shocks of Ebola and depressed commodities prices, embarking along an ambitious path to become a middle-income economy.

The Ministry of Trade and Industry oversees trade policies and programs, and supervises the Sierra Leone Investment and Export Promotion Agency (SLIEPA), the government’s lead agency in implementing initiatives to stimulate exports and investments, improve the investment climate, and promote the development of small- and medium-sized enterprises (SMEs).

The government has a variety of initiatives to remove constraints on trade and improve the investment climate. In recent years, Sierra Leone has constructed major roads leading to district headquarter towns and rehabilitated a network of trunk and feeder roads, linking agricultural suppliers with urban markets in mainly district headquarter towns. The government has also prioritized improvements to the country’s trade facilitation infrastructure, including simplifying clearance procedures at the ports and land borders, and extending the major seaport to accommodate more vessels.

While the government’s message is that the country is open to foreign investment, investors see key obstacles. Corruption is widely seen as endemic, affecting procurements, land rights, customs, law enforcement, judicial proceedings, and many governance and economic sectors. The legal system generally treats foreign investors in a non-discriminatory fashion, although investors comment that judicial application of the laws is often subject to financial and political influences. The legal framework is largely in place, but consistent enforcement is a challenge.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activities. Foreigners are free to establish, acquire, and dispose of interests in business enterprises. However, foreign investors cannot invest in arms and ammunition, cement block manufacturing, granite and sand stone excavation, manufacturing of certain consumer durable goods, and military, police, and prison guards’ apparel and accoutrements. Furthermore, there are limits to land ownership by foreign entities and individuals, and the limitations vary depending on location of the land being used, and are discussed below in the “Real Property” section.

Business Facilitation

Sierra Leone has made significant progress in recent years in simplifying its business registration process. The Corporate Affairs Commission (CAC) now manages registration, which provides a “one stop shop” including an online business registration system. The entire process involves five steps and takes on average of ten days. Additional information is available from the CAC’s website at http://www.cac.gov.sl/ . SLIEPA also provides useful guidance on starting a business, sector-specific business licenses, mining licensing and certification fees, marine resources and fisheries, etc. at http://sliepa.org/starting-a-business/ . Impartial treatment is legally accorded to women, the under-privileged, and disadvantaged.

Outward Investment

Sierra Leone has no program to promote outward investment, but also places no restrictions on such activity.

Sierra Leone has bilateral investment treaties with Germany (in force since 1966) and the United Kingdom (revised in 2001). It signed a treaty with China in 2001, but the agreement has not yet entered into force. As a member of the Economic Community of West African States (ECOWAS), Sierra Leone also benefits from the Trade and Investment Framework Agreement signed in 2014 by ECOWAS and the United States.

Sierra Leone does not have a bilateral taxation treaty with the United States.

Investment Incentives

The Investment Promotion Act 2004 creates various incentives for foreign and domestic investors, and the Sierra Leone Investment and Export Promotion Agency (SLIEPA) compiles information about the benefits and incentives available in various sectors. In particular, these are investment and employment, research and development, value-added manufacturing and training expenses incentives; incentives provided for businesses engaged in agriculture, airlines, fish farming, infrastructure, liquefied petroleum gas and cookers, mineral and petroleum, petroleum refinery, pharmaceuticals, photovoltaic systems, poultry, tourism; and income tax deductions for disabled persons, women and youth employments and skills development, and social services like schools and hospitals etc. SLIEPA provides details of these investment incentives at http:sliepa.org/wp-content/uploads/Investment-Incentive-Handbook-02-02-2017.pdf .

Foreign Trade Zones/Free Ports/Trade Facilitation

In conjunction with First Step, a subsidiary of U.S.-based development organization World Hope International, the Government of Sierra Leone established a Special Economic Zone (SEZ) in 2011 on 50 acres near Freetown. According to the Sierra Leone SEZ policy of 2013, businesses operating in this zone shall enjoy tax holidays for ten years in the first instance, and renewable for another five years at the discretion of the Sierra Leone SEZ Authority. The GoSL further provides these businesses with import duty exemptions and expedited government services including customs, immigration, and registration.

Performance and Data Localization Requirements

The Sierra Leone Local Content Agency Act 2016 promotes foreign investors’ utilization of the domestic private sector. The act applies in the mining, petroleum, manufacturing, agriculture, transportation, maritime, aviation, tourism, public works, fisheries, health and energy sectors.

The local content policy targets several issues:

• Employment of nationals: Sierra Leoneans should be given “first consideration” for employment and training. The policy establishes a minimum of 50 percent staffing for Sierra Leonean nationals among an enterprise’s managerial and intermediate employees, and limits the employment of expatriates as junior employees.
• Use of local goods and services: Firms should give preference to Sierra Leonean goods when they are of equal or comparable value. Companies must use certain amounts of local materials in key sectors (including 10 percent of domestically produced units in manufacturing, 10 percent of domestically available granite in cement, and specific percentages of locally produced fabric and furniture in tourism). In the event there is inadequate local capacity to meet the law’s target, the Ministry of Trade and Industry may issue a waiver.
• National preferences in contracts: The policy gives first consideration to Sierra Leonean companies for mining and petroleum awards and licenses, as well as public works contracts. The policy also gives domestic firms a preferential margin in government and private procurements.

The local content policy will be enforced by the Local Content Agency. Companies will be required to submit local content plans to demonstrate compliance, and violations are subject to fines, the loss of investment incentives, and civil forfeiture.

The Embassy is unaware of any Government of Sierra Leone requirement for companies to turn over source code, provide access to surveillance information, or maintain data storage within the country.

Real Property

There are two systems of land tenure in Sierra Leone. The Western Area, the former British colony of Sierra Leone, which includes Freetown, operate under a freehold system. Outside the Western Area, in the provincial areas, land is governed under a leasehold system where local communities retain ultimate control. Foreigners cannot own land under either system, but they can lease land for terms of up to 99 years. In leasehold areas, local Paramount Chiefs control the land, and may enter into joint ventures with investors to develop or use the land in ways that serve the interests of the indigenous and local communities.

The Constitution protects property rights, but the rule of law is fragile and uneven across the country. In the absence of an effectively functioning legal framework, property rights and contracts are not adequately secure. Mortgages and liens are possible but rare, and generally involve high interest rates and short loan periods. There is no land titling system, and traditional tribal justice systems still serve as a supplement to the national government’s judiciary, especially in rural areas. In 2018, the World Bank Doing Business Report ranks Sierra Leone 165th in the world for the ease of registering property, as the process takes approximately 56 days and costs more than 11 percent of the property’s value.

The Government of Sierra Leone’s Agenda for Prosperity recognizes that reforming the manner in which land ownership rights and obligations are determined is necessary in order to attract foreign investment. The World Bank has provided assistance in this area, and proposed reforms include a comprehensive land use policy that modernizes the land registry, revises urban planning policies, and ensures that women have equal access. The cabinet in 2017 approved a comprehensive national land policy meant to improve upon and strengthen land laws and administration within the differentiated land tenure systems in the Western Area and the provinces. The policy, which awaits parliamentary action, is intended to enhance the abilities of institutions to be able to acquire land for responsible investment and promote sustainable socio-economic development.

Intellectual Property Rights

Sierra Leone has been a member of the World Intellectual Property Organization (WIPO) since 1986 and a member of the African Regional Intellectual Property Organization (ARIPO), the common intellectual property body for English-speaking African countries, since 1980. As a member of the WTO, Sierra Leone is also bound by the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Sierra Leone has not ratified the WIPO Copyright Treaty or the Berne Convention for the Protection of Literary and Artistic Rights.

Despite its recognition of international standards, Sierra Leone’s protection of intellectual property is limited. Laws dating back to the colonial era mean that patents and trademarks registered in the United Kingdom can be extended to Sierra Leone. Efforts to update the country’s legal framework have thus far included the Copyright Act 2011, the Patents and Industrial Design Act 2012, and the Trademark Act 2014. Nonetheless, legal protections remain outdated and incomplete, and government enforcement is minimal due to resource and capacity limitations. Customs screening for counterfeit goods is weak, and the government publishes no known statistics about seizures of counterfeit goods.

For companies who may wish to seek advice from local attorneys who are experts in Sierra Leonean law, go to http://photos.state.gov/libraries/adana/5/Consular/Lawyer_sList-2016.pdf  for a list of local lawyers.

Sierra Leone is not listed on the USTR’s 2017 Out-Of-Cycle Review of Notorious Markets, or in the 2018 Special 301 Report. For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

Limited capital market and portfolio investment opportunities exist in Sierra Leone. The country established a stock exchange in 2009, but the exchange initially listed only one stock, a state-controlled bank. In early 2017, the exchange added two new listings, while three other institutions expressed willingness to trade their shares at the exchange.

Sierra Leone acceded to the IMF Article VIII in January 1996, which removed all restrictions on payments and transfers for current international transactions. The regulatory system does not interfere with the free flow of financial resources. Nonetheless, foreign and domestic businesses alike have difficulty obtaining commercial credit. Foreign interests may access credit under the same market conditions as Sierra Leoneans, but banks loan small amounts at high interest rates. Foreign investors typically bring capital in from outside the country.

Money and Banking System

Sierra Leone’s banking sector consists of 14 commercial banks, 56 foreign exchange bureau, 17 community banks, 15 credit-only microfinance, three deposit-taking microfinance, two discount houses, a mortgage finance company, a leasing company, 59 financial service associations, an Apex bank, three mobile financial services providers, and a stock exchange. Nearly 100 bank branches exist throughout the country, with activity concentrated in Freetown. Though three correspondent banking relationships were lost in the past three years, the banking system currently has seven correspondent banks with no relationship in jeopardy. However, the commercial banking sector is characterized by poor performance and has significant financial vulnerability. While the country’s banks are profitable, two state-owned banks are plagued with non-performing loans making the bulk of their investments, and restructuring by the new GoSL administration is inevitable.

Foreign individuals and companies are permitted to establish bank accounts. The usage of mobile money is taking a central place in money transfers and popularity. Other electronic payments and ATM usage are limited in urban areas and non-existent in rural settings, but the Bank of Sierra Leone is much closer to rolling out a “national payment switch” to facilitate connectivity among different banks’ electronic systems. A major telecommunications network upgrade launching in 2018 specifically targets mobile money services and eCommerce.

Inadequate supervisory oversight of financial institutions, weak regulations, and corruption have made Sierra Leone vulnerable to money laundering. While the country’s anti-money laundering (AML) controls remain underdeveloped and underfunded, the Financial Intelligence Unit (FIU) completed a national risk assessment in 2017 and is currently working with the Economic Crime Team of the Office of Technical Assistance, U.S. Department of the Treasury to enhance its capacity with four technical visits already scheduled in 2018 with FIU.

There is no history of hostile takeovers in Sierra Leone.

Foreign Exchange and Remittances

Foreign Exchange

The Investment Promotion Act 2004 guarantees foreign investors and expatriate employees the right to repatriate earnings and the proceeds of the sale of assets. There are no restrictions placed on converting or transferring funds associated with investments, including remittances, earnings, loan repayments, or lease payments for as long as these transactions are done through the banking system. Investors can withdraw any amount from commercial banks and transfer the funds into any freely convertible currency at market rates. Availability of foreign currencies is often limited in practice, however, and foreign-controlled businesses outside of Freetown have reported challenges in dealing with local banks. The more rural the area, the greater the difficulty accessing banking services. The exchange rate is market determined, as the national currency fluctuates based on the forces of demand and supply in the market. Nonetheless, the Bank of Sierra Leone conducts weekly foreign exchange auctions of U.S. dollars. Only commercial banks registered in Sierra Leone may participate, and each bank is limited to purchasing USD100,000 at each auction. The local currency, the Leone, has been increasing against some regional currencies, and is not experiencing any major exchange rate fluctuations at this time. Sierra Leone is a party to the West African Monetary Zone (with the Gambia, Ghana, Guinea, Liberia, and Nigeria), and efforts to introduce a common currency, the ECO, have repeatedly been delayed.

Remittance Policies

The law provides that investors may freely repatriate proceeds and remittances. The Embassy is not aware of any recent complaints from investors regarding the remittance of investment returns, or of any planned policy changes on this issue.

Sovereign Wealth Funds

Sierra Leone does not maintain a sovereign wealth fund.

Sierra Leone has more than 20 state-owned enterprises (SOEs). These entities are active in the utilities, transport and financial sectors. There is no official or comprehensive government-maintained list of SOEs, but notable examples include the Guma Valley Water Company, the Sierra Leone Telecommunication Company (Sierratel), the Electricity Distribution and Supply Authority (EDSA), the Electricity Generation and Transmission Company (EGTC), the Sierra Leone Broadcasting Corporation, Rokel Commercial Bank, the Sierra Leone Commercial Bank, and the Sierra Leone Housing Corporation, and the Sierra Leone Produce marketing Company, among others.

Sierra Leone is not a party to the Government Procurement Agreement within the WTO Framework. SOEs may engage in commerce with the private sector, but they do not compete on the same terms as private enterprises, and they often have access to government subsidies and other benefits. SOEs in Sierra Leone do not play a significant role in funding or sponsoring research and development.

Privatization Program

The National Commission for Privatization was established in 2002 to facilitate the privatization of various state owned enterprises (SOEs). With support from the World Bank, the commission has focused on privatization of the country’s port operations, and currently seeks investments in public private partnerships (PPPs) for port security, telecommunications, and other infrastructure projects. Privatization processes are open to foreign investors, and could be integrated into plans for better capitalizing the stock exchange in Freetown via new equity listings.

The government encourages companies to engage in responsible business conduct, and the Sierra Leone Investment and Export Agency (SLIEPA) seeks investors who will undertake corporate social responsibility (CSR) projects. Sierra Leone does not have a set of standards or policies for CSR, but the law provides various incentives. For example, the Finance Act 2011 created a tax deduction for expenditures on social services that are outside the scope of the investment, such as the construction of schools and hospitals for community use. Businesses operating in areas outside of Freetown and the Western Area, where local Paramount Chiefs control the land, are often expected by community leaders to engage in projects to support the communities’ social and economic well-being, human capital development, and physical infrastructure. Throughout the country, there is limited awareness of the impacts that corporate activities might have on human rights and environmental protection. Sierra Leone is a member of the Extractive Industries Transparency Initiative, and has been certified as compliant since 2014.

Foreign investors and the public alike see corruption as a key challenge in Sierra Leone, despite some improvements in recent years. Sierra Leone ranked 130th out of 180 countries on Transparency International’s 2018 Corruption Perceptions Index, scoring an average of 30 percent within the last five years. Nonetheless, measures to combat corruption have been largely ineffective. For businesses, corruption exists in government procurement, the award of licenses and concessions, regulatory enforcement, customs clearance, and dispute resolution.

Sierra Leone signed the UN Convention against Corruption in 2003 and ratified it in 2004. The country is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The Anti-Corruption Act of 2008 does, however, make it a criminal offense to offer, solicit, or receive a bribe. The law applies to all appointed and elected officials, close family members, and all companies whether foreign or domestic, but it does not extend to political parties. Public officials must recuse themselves from matters in which they have financial interests, and must submit annual disclosures of their assets and liabilities. The Anti-Corruption Commission, established in 2000, has the authority to investigate and prosecute acts of corruption by individuals and companies. To date, the commission has had limited impact, though there are no suggestions that it has used its authority to discriminate against foreign businesses. The “Pay No Bribe” campaign, launched in 2016, encourages citizens to report corruption in the public sector. To date, ACC seems to most actively pursue primarily minor corruption cases, rather than higher-level government officials.

Sierra Leone joined the Extractive Industries Transparency Initiative (EITI) in 2008 and, after a brief suspension due to incomplete disclosures, the country has been EITI-compliant since 2014. Corruption has frustrated Sierra Leone’s hopes of partnering with the Millennium Challenge Corporation (MCC) on a compact program, since it began its USD44 million MCC threshold program participation in November 2015. The country has failed the “Control of Corruption” indicator on MCC’s annual scorecards from FY2014 to 2018, with the exception of 2017 when Sierra Leone passed the corruption indicator. Though the country made progress on numerous MCC indicators in 2017 and 2018–and had already commenced the implementation of a MCC four-year threshold program in 2016–eligibility for a larger compact program will depend on the country making additional progress in the battle against corruption.

Resources to Report Corruption

Ady Macauley, Commissioner
Anti-Corruption Commission
Cathedral House
3 Gloucester Street, Freetown
+232 76 394 111, +232 77 985 985
report@anticorruption.gov.sl
http://anticorruption.gov.sl/report_corruption.php 

Lavina Banduah
Executive Director
Transparency International Sierra Leone
20 Dundas Street, Freetown
+232 79 060 985, +232 76 618 348
lbanduah@tisierraleone.org & tisl@tisierraleone.org
http://www.tisierraleone.org/ 

Sierra Leone has experienced peace and stability since the end of the civil war in 2002. The country held multi-party elections in 2007, 2012, and 2018. The UN Integrated Peacebuilding Office in Sierra Leone (UNIPSIL) ended its operations in 2014. Sierra Leone’s relations with the neighboring countries of Guinea and Liberia are peaceful. There have been isolated incidents of politically motivated violence during and after the national and local elections in March 2018. Some recent incidents post-election, however, appear to have less connection to the elections and tend to be other local “score settling” or simple criminal activities. There are no reports, however, involving targeting of foreign-held property or installations.

Sierra Leone’s labor force is informal, unregulated, and lacking in specialized skills. Approximately 90 percent of laborers work in the informal sector, predominantly in subsistence or other small-scale agriculture. Sierra Leone’s labor force was devastated by the country’s civil war of 1991-2002, and the formal employment sector has yet to recover to pre-war levels. The war led to significant migration out of the country, and destroyed the nation’s education system. In a country where educational institutions once earned the moniker “the Athens of Africa,” adult literacy is estimated at 48.1 percent (2015 Est.), and businesses identify significant shortfalls in skilled professionals due to limited vocational training. While the government is developing Technical and Vocational Education and Training (TVET) programs, foreign investors find it difficult to recruit and train sufficient numbers of laborers. Youth unemployment is persistently high, and will continue to grow due to changing demographics.

The national minimum wage is 500,000 Leones (approximately USD65) per month, and applies to all workers, including in the informal sector. The law requires paid leave and overtime wages, but enforcement is ineffective and there is no prohibition on excessive compulsory overtime. Workers can be dismissed with limited notice and severance. Foreign employees must obtain work permits from the Ministry of Labor and Social Security, and most countries’ nationals must also have visas. Additional information is available from the Embassy of Sierra Leone in the United States and at http://travel.state.gov. Government policies regarding the hiring of Sierra Leonean nationals are described above in the “Performance and Data Localization Requirements” section.

The law allows workers to join independent unions of their choice without prior authorization, to conduct legal strikes, and to bargain collectively. The Ministry of Labor and Social Security estimates that approximately 35-40 percent of workers in the formal economy are unionized, including mainly agricultural workers, mineworkers and health workers. The law allows unions to conduct their activities without interference, and the government generally respects this right. However, in some private industries employers have reportedly intimidated workers to prevent them from joining a union, and there is no legal protection against employers’ discriminating against union members. Unions have the right to strike, although the government can require 21-day prior notice. Collective bargaining is widespread in the formal sector and most enterprises are covered by collective bargaining agreements on wages and working conditions. In 2015, workers at the Shandong Iron & Steel Group’s iron ore mine and at the Sierra Leone Bottling Company declared strikes over salary disparities and severance packages. In both cases, the workers and management were able to resolve the disputes.

Labor issues are governed by the Employers and Employees Act 1960, the Regulation of Wages and Industrial Relations Act 1971, and regulations adopted by the Ministry of Labor and the Ministry of Health and Sanitation. Legal requirements are outdated and poorly enforced. In particular, child labor remains a widespread problem. The law limits child labor, allowing light work at age 13, full-time nonhazardous work at age 15, and all work at age 18. The law against child labor is not effectively enforced. Nearly half of the children who reside in rural areas are engaged in child labor, compared with 36 percent in urban areas. The Ministry of Labor and Social Security attributes the ineffective enforcement to a lack of funding and the inherent difficulties of monitoring child labor in the informal sector. In addition, the International Labor Organization has identified discrepancies between provisions in the Child Rights Act 2007 and provisions of the Employers and Employer Act 1960, including with regard to the minimum wage.

Additional information is available in the Department of State’s Human Rights Report, http://www.state.gov/j/drl/rls/hrrpt, and the Department of Labor’s international child labor and forced labor reports, http://www.dol.gov/ilab/reports/child-labor .

The Overseas Private Investment Corporation (OPIC) operates in Sierra Leone pursuant to a bilateral agreement from 1961. OPIC provided a loan guarantee in 2011 to an investment fund with agricultural projects in Sierra Leone, and is now considering other potential projects in the country including a major expansion in the telecommunications sector.

Table 3: Sources and Destination of FDI

IMF Coordinated Portfolio Investment Survey data are not available for Sierra Leone.

Table 4: Sources of Portfolio Investment

IMF Coordinated Portfolio Investment Survey data are not available for Sierra Leone.

Economic and Commercial Section
U.S. Mission Sierra Leone
Southridge, Hill Station
Freetown, Sierra Leone
+232 99 105 000
freetown-econ@state.gov

Policies towards Foreign Direct Investment

Sri Lanka is a constitutional multiparty republic. In 1978, Sri Lanka shifted away from a strong socialist orientation and opened up to foreign investment; however, changes in government have often been accompanied by reversals in economic policy. The current coalition government led by President Sirisena and Prime Minister Wickremesinghe follows a pro-business stance. President Sirisena’s Sri Lanka Freedom Party has a socialist orientation. Prime Minister Ranil Wickremesinghe represents the United National Party.

The government’s economic policies contained in Vision 2025, published in September 2017, aim to position Sri Lanka as an export-oriented economic hub at the center of the Indian Ocean. The government has formulated a new Trade Policy and a National Export Strategy to create a more liberal and predictable trade regime. The government expects these policies to attract export-oriented FDI, improve trade logistics, and boost firms’ abilities to compete in global markets.

Former President Mahinda Rajapaksa (2005-2015) followed a statist economic policy, advocating for government control of strategic enterprises and expanding the role of the state. The Rajapaksa administration also introduced a substantial government infrastructure development program, largely financed with Chinese loans.

Sri Lanka will require high levels of FDI to meet its growth targets. Recent FDI concentrated on real estate, mixed development projects, and ports. Ports will be an important driver of growth. In 2017, the government sold a majority stake (on a 99-year lease) of the Chinese-funded and Chinese-built Hambantota Port to a Chinese company, also approving a Chinese logistics and industrial zone in Hambantota at the same time. Colombo Financial City (formerly called Colombo Port City) is a large–scale land reclamation and city development project being developed by a Chinese company. The tourism sector, with over two million tourists per year visiting Sri Lanka, will also require FDI. Investors are capitalizing on Sri Lanka’s environment, culture, religious history, and wildlife to attract high-end tourists and to tap into the growing markets of India and China. The business process outsourcing sector is growing and has strong involvement from U.S. firms. With a growing middle class, investors also see opportunities in franchising, retail and services, as well as light manufacturing.

Importers to Sri Lanka face high taxes. According to a World Bank study, Sri Lanka’s present import regime is one of the most complex and protectionist in the world. The 2018 government budget stressed the need to liberalize trade and shift away from being protectionist and inward oriented. As an initial step, the budget lifted para-tariffs on several items. Sri Lanka’s free trade agreements (FTA) with India and Pakistan offer preferential access to those markets, and Sri Lanka is currently negotiating an Economic and Technology Agreement (ETCA) with India and an FTA with China. The government expects the Sri Lanka-Singapore FTA, signed in January 2018, to increase private sector growth and integrate Sri Lanka into regional and global value chains. Colombo, the capital, has cleaner air and less congested roads than many South Asian cities, creating a potentially attractive environment for expatriates.

Sri Lanka is a challenging place to do business, with high transaction costs caused by an unpredictable economic policy environment. The government’s overall provision of services is impeded by inefficiency. While the administration has started to implement more transparent procurement practices, economic growth is stymied by lingering opaque government procurement practices. Investors cite the risks of contract repudiation, cronyism, damage to reputation, and de facto or de jure expropriation as concerns, although the government has said it will address these issues. From an investor viewpoint, the power and petroleum sectors are particularly challenging, as decision-making authority is highly fragmented and the capital investments required are substantial. Trade union opposition at both the Ceylon Petroleum Corporation and the Ceylon Electricity Board (CEB) make reform of these loss-generating state-owned enterprises very difficult. Investors report that starting a business in Sri Lanka is relatively simple and quick, especially when compared to other frontier markets. Scalability is a problem, however, as the lack of skilled labor and a relatively small talent pool limits growth. Investors claim employee retention is good in Sri Lanka, but numerous public holidays, reluctance of workers to work at night, the lack of labor mobility, and a difficulty in recruiting women can reduce efficiency and increase start-up times.

The Board of Investment (BOI) (www.investsrilanka.com ), an autonomous statutory agency, is the primary government authority responsible for investment, with a focus on foreign investment. The Board of Investment is intended to provide “one-stop” service for all foreign investors. The Board of Investment’s duties include the approval of projects, granting incentives and arranging utility services. It also assists in obtaining resident visas for expatriate personnel and facilitates import and export clearances. The Board of Investment’s Single Window Investment Facilitation Taskforce (SWIFT) acts as a facilitation arm of the investment approvals process and provides linkages to the relevant line agencies in order to expedite the project approval process.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign ownership is allowed in most sectors, although the land ownership law prohibits foreigners from owning land with some exceptions. Foreign investors are permitted to invest in company shares, debt securities, government securities, and unit trusts. Most investors cite acquiring land as the biggest challenge for any new business in Sri Lanka. Private land ownership is limited to fifty acres per person. The government owns approximately 80 percent of the land in Sri Lanka including land housing most tea, rubber, and coconut plantations, which are leased to the private sector on 50-year terms. 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 nature of the project. Many land title records were lost during the Sri Lankan civil war and significant disputes remain over property ownership in the North and East. The government has started a program to hand back property taken by the government during the war to residents in the North and East.

Foreigners are prohibited from purchasing land and real estate except for apartments above the third floor. Currently, Cabinet can approve a land purchase for an investment in the national interest, provided there is a substantial foreign remittance for the purchase of the land. The 2017 and 2018 budgets promised to relax restrictions on apartment ownership. Other policies of concern include the November 2011 Underutilized Assets Act, which resulted in the seizure of 37 companies. The current government also imposed a one-time 25 percent tax on companies making profits over LKR 2 billion (USD 13 million) in the 2013/14 financial year. Foreign investors enjoying tax holidays were exempted from the tax.

The government allows 100 percent foreign investment in any commercial, trading, or industrial activity other than a few specified sectors: air transportation; coastal shipping; large scale mechanized mining of gems; lotteries; manufacture of military hardware, military vehicles, and aircraft; dangerous drugs; alcohol; toxic, hazardous, or carcinogenic materials; currency; and security documents. These sectors are regulated and subject to approval by various government agencies including the Board of Investment.

Foreign investments in the following areas are restricted to 40 percent ownership: the production for export of goods subject to international quotas; growing and primary processing of tea, rubber, coconut; cocoa, rice, sugar and spices; mining and primary processing of non-renewable national resources; timber based industries using local timber, deep-sea fishing; mass communications; education; freight forwarding; travel services; and businesses providing shipping services. Foreign ownership in excess of 40 percent must be preapproved on a case-by-case basis by the Board of Investment. Foreign investment is not permitted in the following businesses: pawn brokering; retail trade with a capital investment of less than USD 5 million; and coastal fishing. In areas where foreign investment is permitted, policy treats foreign investors equally with domestic investors.

The Board of Investment screens foreign investors applying for incentives offered under the Board of Investment law to ensure they meet environment compliances and economic factors. Some investments, especially in utilities, are screened by respective statutory agencies or line ministries.

Other Investment Policy Reviews

Sri Lanka has been a member of the World Trade Organization (WTO) since 1995. The most recent WTO Trade Policy Review for Sri Lanka was conducted in 2016. This is Sri Lanka’s fourth Trade Policy Review. Additional information may be found at: https://www.wto.org/english/tratop_e/tpr_e/tp447_e.htm .

The government has not conducted investment policy reviews through the Organization for Economic Cooperation and Development (OECD) or the U.N. Conference on Trade and Development (UNCTAD) within the last few years.

Business Facilitation

The Board of Investment is the central facilitation point for foreign investors.

The Department of Registrar of Companies (www.drc.gov.lk ) has the responsibility for business registration. The registration system is all done in-person except for the on-line submission of the name approval application for a business registration. Online registration was recently introduced, but, in practice, the system is not widely used. Registration at the Companies Registry takes on average seven to ten days. In addition to the Registrar of Companies, businesses must register with the Inland Revenue Department to obtain a taxpayer identification number for payment of taxes and the Department of Labor for payment of social security payments. According to the World Bank (http://iab.worldbank.org/ ), it takes six procedures and 65 days to establish a foreign-owned limited liability company (LLC) in Sri Lanka.

Outward Investment

The government supports outward investment. 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. 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.

Bilateral Investment Agreements and FTAs

The government has signed investment protection agreements with the United States (which came into force in May 1993), as well as with the following countries: Australia, Belgium-Luxembourg, China, Czech Republic, Denmark, Egypt, Finland, France, Germany, Indonesia, India, Iran (not in force), Italy, Japan, Korea, Kuwait (not in force), Malaysia, the Netherlands, Norway, Pakistan, Romania, Singapore, Sweden, Switzerland, Thailand, the United Kingdom and Vietnam (not in force.) Under Article 157 of the Sri Lankan Constitution, investment protection agreements enjoy the force of law and no legislative, executive, or administrative action can contravene them.

Sri Lanka has signed FTA’s with India, Pakistan and Singapore. The Sri Lanka-Singapore FTA was signed in 2018 and has not come into force yet.

Bilateral Taxation Treaties

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: http://www.irs.gov/Businesses/International-Businesses/Sri-Lanka—Tax-Treaty-Documents .

Sri Lanka has also signed bilateral agreements with Australia, Bangladesh, Bahrain, Belgium, Canada, China, Czech Republic, Denmark, France, Finland, Germany, Hong Kong, India, Indonesia, Iran, Italy, Japan, Korea, Kuwait, Malaysia, Mauritius, Nepal, Netherlands, Norway, Oman, Pakistan, Philippines, Poland, Qatar, Romania, Russia, Saudi Arabia, Singapore, Sweden, Switzerland, Thailand, UAE, U.K., Vietnam, Seychelles, Belarus, Palestine, and Luxembourg.

Sri Lanka passed a new Inland Revenue Act in 2017. The new law, which came into force on April 1, 2018 aims to provide a tax framework that gives more 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 has also been introduced. The standard rate of tax is 28 percent while a 14 percent rate applies to certain identified industries. A 40 percent rate applies to businesses in the liquor, tobacco and betting and gaming industries. The law also contains a new investment incentive regime. It has introduced capital gains tax on capital gains and fines and/or imprisonment for tax evasion. The tax law imposes personal liability on company directors. Existing tax holidays are to be honored through transitional provisions. The U.S. Embassy encourages prospective U.S. investors to consult with auditing firm to assess relevant tax liability.

Investment Incentives

The Inland Revenue Act of 2017, implemented April 1, 2018, includes concessionary corporate tax rates for investments in specific sectors and increased capital allowances (depreciation) on capital investments. The government will honor existing tax holidays through transitional provisions.

Corporate Taxation

The standard rate of corporate tax is 28 percent. A concessionary rate of 14 percent applies for small and medium companies (with an annual income of less than LKR 500 million, USD 3.2 million); and companies exporting goods and services; and companies engaged in agricultural business; education services; promotion of tourism and information technology services. A 40 percent corporate tax rate applies to companies engaged in gaming, liquor and tobacco related businesses.

Capital Allowances

The following capital allowances (capital expenditure to be deducted from revenues of the company before tax is imposed) applies. The law contains carry forward provisions for set off ranging from 10 to 25 years.

• Investments up to USD 3 million (will expire three years from April 1, 2018):
  • Investments in the Northern Province – depreciation at the rate of 200 percent;
  • Investments in the rest of the country – depreciation at the rate of 100 percent.
• Investments exceeding USD 3 million:
  • Northern Province – depreciation at the rate of 200 percent.
• Investments in other provinces:
  • Investments from USD 3 million to USD 100 million – depreciation at the rate of 100 percent;
  • Investments exceeding USD 100 million – depreciation at the rate of 150 percent.

Research and Development Expenditure

An amount equal to 200 percent of research and development expenditure can be deducted from income for three years.

Depreciation allowances for the following assets acquired after April 1, 2018 are as follows:

• Computers, vehicles, machinery and furniture – depreciation at the rate of 20 percent for five years;
• Buildings – deprecation at the rate of 5 percent for 20 years or the actual useful life.

In addition to the above incentives, BOI companies also qualify for customs duty exemptions on project related capital goods during the project implementation period. Export oriented companies are allowed to import raw materials free of customs import duty, value added tax, ports and airport levy and nations building tax. Large scale export-oriented manufacturing companies with an investment of over USD 200 million will be exempted from paying Ports and Airports Development levy (PAL) for importation of project related capital goods during the project implementation period. The Strategic Development Project Act also provides tax incentives.

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

Foreign Trade Zones/Free Ports/Trade Facilitation

Sri Lanka has 12 free trade zones, also called export processing zones, administered by the Board of Investment. 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. The imports may be subject to other taxes.

In the past, firms preferred to locate their factories near the Colombo harbor or airport to reduce transport 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 Board of Investment and the government now encourage export-oriented factories to locate in industrial zones farther from Colombo although Sri Lanka’s limited road network make these outlying zones more challenging.

Sri Lanka plans to create a China Logistics and Industrial Zone (SLCLIZ) in Hambantota in the Southern Province which would be open for Chinese investors to establish factories. The government plans to allocate 1,000 acres of land for the zone. SLCIZ is expected to include the Hambantota Port.

Performance and Data Localization Requirements

There are no performance requirements. In most cases, firms enjoying preferential Board of Investment incentives in the manufacturing sector must export 80 percent of production while those in the service sector must earn at least 70 percent of their income in foreign exchange. Foreign investors are generally not expected to reduce their equity over time nor are they expected to transfer technology within a specified period of time except for build-own-transfer or other such projects in which the terms are specified within pertinent contracts.

Foreign investors who remit at least USD 250,000 can qualify for a five-year resident visa under the Resident Guest Scheme Visa Program (http://www.immigration.gov.lk/web/index.php?option=com_content&view=article&id=154&Itemid=200&lang=en ). 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 employees in the commercial sector do not experience significant problems in obtaining work or residence permits. Sri Lanka offers dual citizenship status to Sri Lankans who have obtained foreign citizenship in seven designated countries. 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 of 2007. Sri Lanka became a party to the Budapest Cybercrime Convention in 2015. As a result, safeguards based on this convention are in force. Although there is no comprehensive legislative protection of electronic data, the Computer Crimes Act has a provision to protect data and information. Steps are being taken by the government to formulate data protection legislation. There is no ban on the sale of electronic data for marketing purposes.

Sri Lanka ratified the UN Electronic Commerce Convention in July 2015 and began implementing it on February 1, 2016 by taking steps to amend the Sri Lanka Electronic Transactions law to comply with the convention.

Real Property

Secured interests in property in Sri Lanka are generally recognized and enforced, but many investors claim protection can be flimsy. A reliable registration system exists for recording private property including land, buildings and mortgages, although problems exist due to fraud and forged documents. Redress by courts is slow. A legal framework that enables the state to takeover private land relatively easily has also led to disputes and an erosion of investor confidence. In the World Bank’s 2017 “Doing Business Index” Sri Lanka ranked 155 out of 190 countries in the category of registering a property. Property registration required, on average, completion of nine procedures lasting 51 days. Foreigners are prohibited from the purchase of lands. A regulation imposing a 15 percent tax on leases to foreigners was removed in January 2016.

Intellectual Property Rights

Intellectual property right (IPR) enforcement is improving in Sri Lanka although counterfeit goods continue to be widely available making it difficult for legitimate industries to protect their markets. Local agents of well-known U.S. and other international companies representing recording, software, movie, clothing, and consumer product industries continue to complain that lack of IPR protection damages their businesses. Sri Lanka has a comprehensive IPR law and several offenders have been charged or convicted. Overall, IPR protection is improving in the country. For instance, the government’s information technology (IT) policy requires government agencies to use licensed or open source software. Software companies have reported an increased interest by large companies in improving IPR regimes. Sri Lanka does not track and report on seizures of counterfeit goods.

Sri Lanka is a party to major intellectual property agreements. Sri Lanka adopted an intellectual property law in 2003 that was intended to meet both U.S.-Sri Lanka bilateral IPR agreements and, to a great extent, trade-related aspects of intellectual property rights (TRIPS) 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). All trademarks, designs, industrial designs, and patents must be registered with the Director General of Intellectual Property. No legal provisions exist for registration of copyrights and trade secrets.

The National Intellectual Property Office has stepped up efforts to improve the trademarks and patents administration regime. Infringement of intellectual property rights is a punishable offense under the IP law with criminal and civil penalties. Recourse available to owners includes injunctive relief; seizure and destruction of infringing goods and plates or implements used for the making of infringing copies; and prohibition of imports and exports. Penalties for the first offense include up to six months imprisonment or a fine of up to LKR 500,000 (USD 3,200), but smaller penalties are the norm. Aggrieved parties can seek redress for any IPR violations through the courts though this can be a frustrating and time-consuming process. In recent times warning letters have proved to be an effective alternative to litigation in cases of minor copyright and trademark infringements. Sri Lanka Customs’ regulatory code provides ex officio authority to seize suspected counterfeit shipments at the borders. However, police and customs authorities generally do not proactively initiate action against IPR violators unless the victims bring it to the authorities’ attention and work with them on enforcement actions. Judicial cooperation continues to improve. The government has established a special antipiracy and counterfeit unit in the Criminal Investigation Division (CID) of the police to specifically address IPR concerns. There is also an IPR unit in the Social Protection Unit of Sri Lankan Customs, and a trademark database to advance IPR protection. The government has yet to make full use of this database.

Sri Lanka is not listed in U.S. Trade Representative’s Special 301 report.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Resources for Rights Holders

Contact at U.S. Embassy Colombo:

Partha Mazumdar, Economic Section Chief
94-11-2498500
Email: commercialcolombo@state.gov

Local lawyers list: https://lk.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys-2/?_ga=2.122197826.833404297.1556637989-875676780.1556293227.

U.S. Patent and Trademark Office Intellectual Property Attache:

Shilpi Jha, IP Specialist for South Asia
Email: Shilpi.jha@trade.gov

Country/Economy Resources:

American Chamber of Commerce in Sri Lanka: www.amcham.lk 
National Intellectual Property Office of Sri Lanka: www.nipo.gov.lk 

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. Foreign portfolio investment is encouraged. Foreign investors can purchase up to 100 percent of equity in Sri Lankan companies in numerous permitted sectors. In order to facilitate portfolio investments, country and regional funds may obtain SEC approval to invest in the Sri Lankan stock market. These funds make transactions through share investments in Inward Investment Accounts maintained in commercial banks. Currently, 299 companies representing 20 business sectors are listed on the CSE. As stock market liquidity is limited, investors need to manage their exit strategy carefully. Investors will be affected by the exchange rate as well.

The SEC has intensified oversight of regulated entities and conducted investigations on insider trading and market manipulation prior to 2015. Previous attempts to investigate insider trading and fraud at the CSE during 2011-2014 had to be abandoned as the SEC came under pressure from powerful market players. Four senior SEC officials resigned over regulatory issues during this period citing pressures from high net-worth local investors. The SEC law is to be amended to align the regulatory framework with international standards. International Organization of Securities Commissions’ Country Review 2017 noted gaps in the regulatory framework, including limited cooperation between regulatory authorities and non-regulation of market players such as investment banks and financial planners.

In accordance with its IMF Article VIII obligations, the government and the Central Bank generally refrain from restrictions on current international transfers. When the government experiences balance of payments difficulties, it does tend to impose controls on foreign exchange transactions, but in recent years has exercised restraint in resorting to such measures.

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 in the country. 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. On a year-to-year basis inflation was approximately 4.2 percent in March 2018 and the average prime lending rate was 11 percent. Retained profits finance a significant portion of private investment in Sri Lanka. Commercial banks are the principal source of bank finance. Bank loans are the most widely used credit instrument for the private sector. Large companies raise funds through corporate debentures as well. Credit ratings are mandatory for all deposit-taking institutions and for all varieties of debt instruments. Local companies are allowed to borrow from foreign sources. Foreign direct investment finances about 2 percent of overall investment. Foreign investors are allowed to 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. There are 26 commercial banks – 13 local and 13 foreign. In addition, there are seven local specialized banks. Citibank NA 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 sector penetration has increased. Banking has expanded to rural areas, and by 2016 there were over 5,800 commercial banking outlets and over 3,500 Automated Teller Machines spread 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 Lanka rupee accounts.

The Central Bank is responsible for supervision of all banking institutions and has driven improvements in banking regulations, provisioning and public disclosure of banking sector performance. Credit ratings are mandatory for all banks operating in Sri Lanka. The Central Bank has introduced accounting standards corresponding to International Financial Reporting Standards for banks on January 1, 2018, and the application of the standard is estimated to substantially increase the impairment provisions on loans. In addition, the migration to the Basel III capital standards began in July 2017. Banks will need to increase capital to meet minimum capital ratios, which are set to rise to international standards by January 2019. The Central Bank is likely to allow staggered application of capital provisions to smaller banks unable to meet capital requirements immediately. New capital provisions and accounting standards may prompt banking sector consolidation.

Total assets of commercial banks stood at LKR 7,843 billion (USD 46.5 billion) as of December 31, 2016. The two fully state-owned commercial banks – Bank of Ceylon and People’s Bank – are significant players, accounting for about 38 percent of all banking assets. The two state banks have a large portfolio of non-performing loans. Both these banks have significant exposure to state-owned companies, which are treated as performing loans. However, as these banks are implicitly guaranteed by the state, their problems have not harmed the credibility of the rest of the banking system.

Private commercial banks and foreign banks operating in Sri Lanka generally follow more prudent credit policies and as a group are in better financial shape. Foreign banks tend to follow international best practices as most foreign bank branches are subject to supervision in their own country in addition to that of the Sri Lankan Central Bank. Asset quality of the banking sector improved during the first half of 2017. The non-performing loans (NPLs) ratio was 2.7 percent in June 2017. In 2017, the IMF warned of high credit growth and excessive leverage associated with the real estate sector. In a March 2018 review, the IMF said the Central Bank has been effective in curbing credit growth and should remain vigilant and take action if needed to curb excessive credit growth in certain sectors.

According to an IMF study, Sri Lanka lost 2 percent of its correspondent banking relationships in 2012-2015, but the withdrawal of these relationships had no significant impact on the banking sector. Due to deficiencies in the AML/CFT regime, Sri Lanka was placed under the Financial Action Task Force (FATF) monitoring process in October 2017.

The Central Bank is exploring the adoption of blockchain technologies in its financial transactions and has appointed two committees to look into the possible adoption of Blockchain and cryptocurrencies.

Sri Lanka’s alternative financial services industry includes finance companies, leasing companies, and micro finance institutes. This sector has grown rapidly. The Central Bank has established an enforcement unit to strengthen the regulatory and supervisory framework of non-banking financial institutions. In order to regulate microfinance institutions, the Microfinance Act was enacted in 2016. Few finance companies are facing liquidity issues. Credit ratings will be mandatory for finance companies from October 1, 2018.

The government has 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 Policies

Sri Lanka generally has investor-friendly conversion and transfer policies. Companies note they can repatriate funds relatively easily. In accordance with its Article VIII obligations as a member of the IMF (http://www.imf.org/external/pubs/ft/aa/aa08.htm ), 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 in to operation on November 20, 2017. The law has further liberalized capital account transactions and aims at simplifying the processes associated with current account transactions. Foreign investors are required to open Inward Investment Accounts (IIA) to transfer funds required for capital investments. 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 the Central Bank or Sri Lanka. The Central Bank recently established the Department of Foreign Exchange to implement the provisions of the new Foreign Exchange Law, in place of the Exchange Control Department.

Sri Lanka follows a flexible exchange rate regime with the Central Bank intervening to smoothen volatility and to build up reserves.

Foreigners are permitted to invest in Sri Lankan debt instruments, both government and corporate debt. The Central Bank’s rupee-denominated T-bill and T-bond issues in the local market are also open to foreign investors. Both foreign and local companies are permitted to borrow from foreign sources.

Remittance Policies

No barriers exist, legal or otherwise, to the expeditious remittance of corporate profits and dividends for foreign enterprises. Sri Lanka has recently relaxed investment remittance policies. Remittances are done through Inward Investment Accounts. 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.

Sovereign Wealth Funds

Sri Lanka does not have a sovereign wealth fund. Instead 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. Currently, the funds are invested only domestically. In the past, the government and the Central Bank have been accused of misusing the Employees’ Provident Fund (EPF), a large retirement fund of private sector workers managed by the Central Bank, for stock market investments and to help supporters of the governing party. When funds are invested in stock market listed companies, government representatives have played an active role in the management of such companies. Experts argue the fund must be segregated from politics and professionalized. The current government has vowed to improve the management of the pension funds. Government-managed pension funds must meet Sri Lankan accounting standards.

State Owned Enterprises (SOEs) are active in transport (bus 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. Since the end of the war, Sri Lankan armed forces have begun operating air services, tourist resorts, and farms for civilian purposes crowding out some private investment. In total, there are 400 SOEs of which 55 have been identified by the Sri Lanka Treasury as strategically important SOEs and 345 have been identified as non-commercial SOEs http://www.treasury.gov.lk/web/guest/publications/annual-report . SOEs employ over 240,000 people. There is widespread recognition that SOEs are poorly managed and in urgent need of reforms. Statements of Corporate Intent (SCIs) for five large SOEs were signed in April 2017 aimed at enhancing transparency and accountability. SOEs make purchases from private companies and foreign firms and have easy access to credit from state-owned-banks and to government-owned land. SOEs do not engage in research and development.

Privatization Program

The government is seeking to improve the efficiency of SOEs through private sector style management practices. It also proposes to list SOEs on the Colombo Stock Exchange and partially privatize non-strategic SOEs. Initially, the government has selected two government owned hotels for privatization. The government is also seeking an investment partner to manage the heavily indebted national carrier Sri Lankan Airlines. Foreign investors are expected to be able to participate in these privatization programs. However, the government does not always follow an open bidding process when selling outside the stock exchange. For instance, in the case of the sale of the Hambantota Port in 2017, the government has allowed a Chinese company to secure the deal without an open bidding process. The government explained that the deal was driven by debt-for-equity swaps owing to debt owed to China, although media reporting in May 2018 indicated that the payment for the port was in cash rather than debt forgiveness.

The government is reviewing a plan to award large development projects utilizing a “Swiss Challenge” process where an unsolicited project proposal by a company to the government is put forward for public review and other interested parties are invited to submit counter proposals.

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.

The previous government (2005-2015) halted privatizations preferring to maintain SOEs and even reversed several privatizations it had granted in the past.

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 are actively promoting CSR and some small and medium enterprises have also started to promote CSR. Several organizations promote good business practices through programs and awards to recognize sustainability policies, good corporate governance and sound management practices. CSR Sri Lanka is an apex body initiated by 40 leading companies to foster CSR among businesses. The United Stated Agency for International Development (USAID) is working with CSR Sri Lanka to increase the impact of corporate social responsibility activities under the concept of transformative CSR by encouraging business corporations to work together to improve sustainability of businesses and create value to their shareholders, customers, employees, society and the environment. CSR Sri Lanka also seeks to build private sector / public sector partnerships. The Ceylon Chamber of Commerce, the largest business chamber in Sri Lanka, promotes CSR among its membership. The apparel industry, Sri Lanka’s largest export industry, has a specially designated CSR program for the industry under the title “Garments without Guilt” (www.garmentswithoutguilt.com ). The ethical sourcing and sustainable development practices under the program aim to empower women and their communities. Internationally, some of Sri Lanka’s leading companies have joined the UN Global Compact initiative. The majority of private sector CSR programs in Sri Lanka are professional and competent but the government does not regulate the programs.

The Securities and Exchange Commission 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 the Sri Lankan capital markets. The Sri Lanka Institute of Directors, under the auspices of the Ceylon Chamber of Commerce, the largest business chamber of Sri Lanka, is another organization working to improve corporate governance and ethical business conduct among company directors.

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. 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 are questionable.

Sri Lanka has a number of mineral resources including graphite, mineral sands and gemstones. The government does not participate in the Extractive Industries Transparency Initiative (EITI).

While Sri Lanka has generally adequate laws and regulations to combat corruption, enforcement is considered weak and inconsistent. U.S. firms identify corruption as a 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. Some claim that the level of corruption makes it difficult to compete with bidders not subject to the U.S. Foreign Corrupt Practices Act. Projects geared toward exports face fewer problems. Local investors cite weak internal enforcement of anti-corruption policies as a problem within the government. A new Right to Information Act came into effect from February 2017 and is expected to increase transparency.

The Commission to Investigate Allegations of Bribery or Corruption (CIABOC or Bribery Commission) is the main body responsible for investigating bribery allegations. The Bribery Commission institutes proceedings against responsible individuals in the appropriate court. The law states a public official’s offer or acceptance of a bribe constitutes a criminal offense and carries a maximum sentence of seven years imprisonment and a fine at the discretion of the courts. 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.

Government procurement regulations contain provisions to counter conflict-of-interest in awarding contracts or government procurement. The government does not require private companies to establish internal codes of conduct that prohibit bribery of public officials.

The law does not cover the protection of NGOs involved in investigation of corruption.

In response to allegations of corruption during the Rajapaksa administration, the government has appointed a multitude of agencies and commissions to probe allegations.

Some of the newly created agencies are:

• A Presidential Commission of Inquiry to probe allegations of corruption and abuse of power;
• Police Financial Crimes Investigation Division (FCID);
• State Asset Recovery Task Force (START).

In addition, a special Presidential Commission investigated corruption related to Treasury bond issuance at the Central Bank in 2015-2016.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Sri Lanka signed and ratified the UN Convention against Corruption in March 2004. Sri Lanka has signed but not ratified the UN Convention against Transnational Organized Crime. 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 government agency responsible for combating corruption:

Commission to Investigate Allegations of Bribery or Corruption
No 36, Malalasekara Mawatha, Colombo 7
Phone: 94-11- 2595039
Email: dgbribery@gmail.com

Contact at “watchdog” organization:

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

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 war, the LTTE had a history of attacks against civilians, although none of the attacks were directed against U.S. citizens. There have been no terrorist attacks since the end of the conflict. The government maintains authority throughout the country. Demonstrations take place in Sri Lanka from time to time in response to world events or local developments. Demonstrations near Western embassies are not uncommon but have been well-contained with support from the Sri Lankan police and military.

Business-related Violence

Business related violence is not common and has little impact on the investment environment. In March 2018, business, mainly in the Central Province, was affected due to curfews following rioting. No tourists or hotel properties were harmed due to the violence in which three local people died and nearly 500 shops and homes were destroyed. The government also declared a temporary state of emergency. In addition, the government imposed its first-ever social media ban from March 7 – 15, 2018, in the face of riots provoked in part by social media hate speech. The prohibition affected businesses dependent on social media. In December 2016, striking workers at the then government-operated Hambantota port prevented two foreign cargo ships from leaving the port. The Navy intervened to release the ships. In January 2017, hundreds of protesters refused to vacate their land and clashed with police at the opening of a Chinese industrial zone in Hambantota. There are on-going street protests over a private medical college in Sri Lanka. In August 2013, a large rubber glove manufacturing factory was forced to move to a new location due to protests. Residents near the factory protested, alleging it had polluted water in the area. An army crackdown on protesters resulted in three deaths. In March 2014, residents near another rubber factory protested against water pollution. In mid-2013, a leading international food company temporarily suspended operations in Sri Lanka citing precautionary measures to ensure the safety of its employees after it faced product bans, court cases and angry demonstrators over the sale of contaminated milk powder. In 2013, a group of local politicians were charged with killing a Sri Lankan tea estate manager.

Sri Lanka is going through a demographic transition with a rapidly aging population. Businesses cite labor shortage as a major problem. In 2017, eight million Sri Lankans were employed with 47 percent in services, 29 percent in industry and 24 percent in agriculture. Approximately 60 percent of the employed are in the informal sector. Of the eight million employed, more than one million are self-employed as drivers of three-wheel taxis. An unknown percentage of three-wheel taxi drivers pursues other forms of employment as well. Another preferred choice for employment is the government sector with 1.4 million people engaged in government service.

Labor is available at relatively low cost, though it is higher than in other South Asian countries. Many of Sri Lanka’s top graduates seek employment outside the country. For those who remain, Sri Lankan 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 over an average of 54 salary weeks, one of the highest in the world. There is no unemployment insurance or other social safety net for laid off workers.

The Sri Lankan labor force is literate (particularly in local languages) and trainable, although weak in certain technical skills and the English language. The average worker has eight years of schooling and two-thirds of the labor force is male.

The unemployment rate has declined in recent years to an estimated four percent, although low unemployment rates are due in part to a large outflow of Sri Lankan migrant labor. Female labor force participation is low – around 36 percent – implying that there is a large pool of untapped work force. Unemployment among high school/college graduates has been proportionally higher than the rate for less-educated workers due to an oversupply of liberal arts educated graduates.

The Sri Lankan labor market has a limited pool of skilled workers. Youth are increasingly uninterested in highly labor-intensive manual jobs, causing labor shortages in the industrial and construction sectors. A significant proportion of the unemployed seek “white collar” employment, often preferring stable government jobs. Most labor-seeking sectors offer manual or semi-skilled jobs, or they require technical or professional skills such as management, marketing, information technology, accountancy and finance, and English language proficiency. Many service sector companies can rely on Sri Lankan engineers, researchers, technicians, and analysts to deliver high-quality, high-precision products. Foreign and local companies report a strong worker commitment to excellence in Sri Lanka, with rapid adaptation to quality standards. Retention is fairly good in the information technology sector, but 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, as workers are reluctant to leave their families and villages for employment elsewhere. The construction, plantation, apparel and other manufacturing industries report a severe shortage of workers. Some investors have faced problems in finding sufficient employees with the requisite skills, a situation faced by the tourism industry with the opening of new hotels. The supply of engineers, computer programmers and other graduates with science and technology degrees does not meet demand.

The government has initiated educational reforms to better prepare students for the labor market. More computer, accounting, business skills and English language training programs are becoming available. The demand for these skills still outpaces supply.

Migrant Workers Abroad

There are an estimated 1.8 million Sri Lankan workers abroad. Remittances from migrant workers at about USD 7 billion per year make up Sri Lanka’s largest source of foreign exchange. The majority of this labor force is unskilled (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 60,000 Sri Lankans work as managers in Bangladeshi garment factories, for instance.

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. Several unions are affiliated with different political parties and work at state-owned enterprises. This is not the case for private companies which only have one union or perhaps a workers’ council to represent the employees. Some employers have alleged that the People’s Liberation Front of Sri Lanka (JVP), a Marxist political party opposed to private enterprise, can provoke strikes under the pretense of trade union activity. Due to the JVP’s violent past, employers generally are reluctant to deal with its trade union arm, the Inter-Company Trade Union. 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. By law, workers may lodge complaints to protect their rights with the Commissioner of Labor, a labor tribunal, or the Supreme Court. The President retains the power to designate any industry as an essential service.

Unions represent workers in many large private firms, but workers in small-scale agriculture and small businesses usually do not belong to unions. The tea industry, however, is highly unionized, and public sector employees are unionized at very high rates as well. Labor in the export processing zone (EPZ) enterprises tend to be represented by non-union worker councils, although unions also exist in the EPZs. The Board of Investment has requested companies recognize trade unions, allow union access to export processing zones and accept the right to collective bargaining. The Board of Investment has issued guidelines for employee councils giving them the power to negotiate binding collective agreements. According to the Board of Investment, where both a recognized trade union with bargaining power and a non-union worker council exist in an enterprise, the trade union will have the power to represent the employees in collective bargaining. The International Labor Organization’s (ILO) Freedom of Association Committee has 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.

Unions have complained that some employers, especially in the export processing zones, prohibit union access and do not register unions on a timely basis.

Collective bargaining exists but is not universal. The Employers’ Federation of Ceylon, the main employers’ association in Sri Lanka, assists its member companies to negotiate with unions and sign 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 were only a few collective bargaining agreements signed with companies located in EPZs.

Law prohibits all forms of forced and compulsory labor. In March 2016, the government introduced a national minimum wage for the first time. The national minimum wage is set at LKR 10,000 (USD 64) per month or LKR 400 (USD 2.56) per day. In addition, 44 “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 new national 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.

Despite private sector condemnation, the government occasionally interferes in private sector wage setting. In 2016, the government announced a LKR 2,500 (USD 16) monthly wage increase to private sector workers earning a salary below LKR 40,000 (USD 256) per month. 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 14. The minimum age for employment in hazardous work is 18 years. The Hazardous Occupations Regulation contains a list of 51 occupations considered to be hazardous forms of child labor in Sri Lanka.

Previously confrontational labor-management relations have improved in the last few years as private sector employers have worked harder to motivate and care for employees. While labor-management relations vary from organization to organization, managers who emphasize communication with workers and offer training opportunities generally experience fewer difficulties. U.S. investors in Sri Lanka (including U.S. garment buyers) generally promote good labor management relations and labor conditions that exceed local standards. Strikes are common in the public sector.

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 labor laws of Sri Lanka are laid out in almost 50 different statutes and the Ministry of Labor and Trade Union Relations has consolidated these in a Labor Code. 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.

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 and the Overseas Private Investment Corporation (OPIC) concluded an agreement in 1966 which was subsequently renewed in 1993. This agreement provides investment insurance guarantees for U.S. investors.

Sri Lanka is a founding member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank which also offers the opportunity for insurance against non-commercial risks.

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

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Data not available.

Partha Mazumdar, Economic Section Chief
94-11-2498500
Email: commercialcolombo@state.gov