Bangladesh is the most densely populated non-city-state country in the world, with the eighth largest population (over 165 million) within a territory the size of Iowa. Bangladesh is situated in the northeastern corner of the Indian subcontinent, sharing a 4,100 km border with India and a 247-kilometer border with Burma. With sustained economic growth over the past decade, a large, young, and hard-working workforce, strategic location between the large South and Southeast Asian markets, and vibrant private sector, Bangladesh will likely continue to attract increasing investment, despite severe economic headwinds created by the global outbreak of COVID-19.
Buoyed by a young workforce and a growing consumer base, Bangladesh has enjoyed consistent annual GDP growth of more than six percent over the past decade, with the exception of the COVID-induced economic slowdown in 2020. Much of this growth continues to be driven by the ready-made garment (RMG) industry, which exported $35.81 billion of apparel products in fiscal year (FY) 2021, second only to China, and continued remittance inflows, reaching a record $24.77 billion in FY 2021. (Note: The Bangladeshi fiscal year is from July 1 to June 30; fiscal year 2021 ended on June 30, 2021.) The country’s RMG exports increased more than 30 percent year-over-year in FY 2021 as the global demand for apparel products accelerated after the COVID shock.
The Government of Bangladesh (GOB) actively seeks foreign investment. Sectors with active investments from overseas include agribusiness, garment/textiles, leather/leather goods, light manufacturing, power and energy, electronics, light engineering, information and communications technology (ICT), plastic, healthcare, medical equipment, pharmaceutical, ship building, and infrastructure. The GOB offers a range of investment incentives under its industrial policy and export-oriented growth strategy with few formal distinctions between foreign and domestic private investors.
Bangladesh’s Foreign Direct Investment (FDI) stock was $20.87 billion through the end of September 2021, with the United States being the top investing country with $4.1 billion in accumulated investments. Bangladesh received $2.56 billion FDI in 2020, according to data from the United Nations Conference on Trade and Development (UNCTAD). The rate of FDI inflows was only 0.77 percent of GDP, one of the lowest of rates in Asia.
Bangladesh has made gradual progress in reducing some constraints on investment, including taking steps to better ensure reliable electricity, but inadequate infrastructure, limited financing instruments, bureaucratic delays, lax enforcement of labor laws, and corruption continue to hinder foreign investment. Government efforts to improve the business environment in recent years show promise but implementation has yet to materialize. Slow adoption of alternative dispute resolution mechanisms and sluggish judicial processes impede the enforcement of contracts and the resolution of business disputes.
As a traditionally moderate, secular, peaceful, and stable country, Bangladesh experienced a decrease in terrorist activity in recent years, accompanied by an increase in terrorism-related investigations and arrests following the Holey Artisan Bakery terrorist attack in 2016. A December 2018 national election marred by irregularities, violence, and intimidation consolidated the power of Prime Minister Sheikh Hasina and her ruling party, the Awami League. This allowed the government to adopt legislation and policies diminishing space for the political opposition, undermining judicial independence, and threatening freedom of the media and NGOs. Bangladesh continues to host one of the world’s largest refugee populations. According to UN High Commission for Refugees, more than 923,000 Rohingya from Burma were in Bangladesh as of February 2022. This humanitarian crisis will likely require notable financial and political support until a return to Burma in a voluntary and sustainable manner is possible. International retail brands selling Bangladesh-made products and the international community continue to press the Government of Bangladesh to meaningfully address worker rights and factory safety problems in Bangladesh. With unprecedented support from the international community and the private sector, the Bangladesh garment sector has made significant progress on fire and structural safety. Critical work remains on safeguarding workers’ rights to freely associate and bargain collectively, including in Export Processing Zones (EPZs).
The Bangladeshi government has limited resources devoted to intellectual property rights (IPR) protection and counterfeit goods are readily available in Bangladesh. Government policies in the ICT sector are still under development. Current policies grant the government broad powers to intervene in that sector.
Capital markets in Bangladesh are still developing, and the financial sector is still highly dependent on banks.
1. Openness To, and Restrictions Upon, Foreign Investment
Bangladesh actively seeks foreign investment. Sectors with active investments from overseas include agribusiness, garment and textiles, leather and leather goods, light manufacturing, electronics, light engineering, energy and power, ICT, plastic, healthcare, medical equipment, pharmaceutical, ship building, and infrastructure. It offers a range of investment incentives under its industrial policy and export-oriented growth strategy with few formal distinctions between foreign and domestic private investors.
Foreign and domestic private entities can establish and own, operate, and dispose of interests in most types of business enterprises. Four sectors, however, are reserved for government investment:
Arms and ammunition and other defense equipment and machinery.
Forest plantation and mechanized extraction within the bounds of reserved forests.
Production of nuclear energy.
Security printing (items such as currency, visa foils, and tax stamps).
The Bangladesh Investment Development Authority (BIDA) is the principal authority tasked with supervising and promoting private investment. The BIDA Act of 2016 approved the merger of the now-disbanded Board of Investment and the Privatization Committee. BIDA is directly supervised by the Prime Minister’s Office and the Executive Chairman of BIDA holds a rank equivalent to Senior Secretary, the highest rank within the civil service. BIDA performs the following functions:
Provides pre-investment counseling services.
Registers and approves private industrial projects.
Issues approval of branch/liaison/representative offices.
Issues work permits for foreign nationals.
Issues approval of royalty remittances, technical know-how, and technical assistance fees.
Facilitates import of capital machinery and raw materials.
Issues approvals of foreign loans and supplier credits.
Provides aftercare facilities.
BIDA’s website has aggregated information regarding Bangladesh investment policies, incentives, and ease of doing business indicators: http://bida.gov.bd/
In addition to BIDA, there are three other Investment Promotion Agencies (IPAs) responsible for promoting investments in their respective jurisdictions.
Bangladesh Export Processing Zone Authority (BEPZA) promotes investments in Export Processing Zones (EPZs). The first EPZ was established in the 1980s and there are currently eight EPZs in the country. Website:
Bangladesh Economic Zones Authority (BEZA) plans to establish approximately 100 Economic Zones (EZs) throughout the country over the next several years. Site selections for 97 EZs have been completed as of February 2022, of which 10 private EZs are already licensed and operational while development of several other public and private sector EZs are underway. While EPZs accommodate exporting companies only, EZs are open for both export- and domestic-oriented companies. Website:
Bangladesh Hi-Tech Park Authority (BHTPA) is responsible for attracting and facilitating investments in the high-tech parks Bangladesh is establishing across the country. Website:
Foreign and domestic private entities can establish and own, operate, and dispose of interests in most types of business enterprises. Bangladesh allows private investment in power generation and natural gas exploration, but efforts to allow full foreign participation in petroleum marketing and gas distribution have stalled. Regulations in the area of telecommunication infrastructure currently include provisions for 60 percent foreign ownership (70 percent for tower sharing). In addition to the four sectors reserved for government investment, there are 17 controlled sectors that require prior clearance/ permission from the respective line ministries/authorities. These are:
Fishing in the deep sea.
Bank/financial institutions in the private sector.
Insurance companies in the private sector.
Generation, supply, and distribution of power in the private sector.
Exploration, extraction, and supply of natural gas/oil.
Exploration, extraction, and supply of coal.
Exploration, extraction, and supply of other mineral resources.
Crude oil refinery (recycling/refining of lube oil used as fuel).
Medium and large industries using natural gas/condensate and other minerals as raw material.
Telecommunications service (mobile/cellular and land phone).
Sea-bound ship transport.
Industries using heavy minerals accumulated from sea beaches.
While discrimination against foreign investors is not widespread, the government frequently promotes local industries, and some discriminatory policies and regulations exist. For example, the government closely controls approvals for imported medicines that compete with domestically manufactured pharmaceutical products and it has required majority local ownership of new shipping and insurance companies, albeit with exemptions for existing foreign-owned firms. In practical terms, foreign investors frequently find it necessary to have a local partner even though this requirement may not be statutorily defined. In certain strategic sectors, the GOB has placed unofficial barriers on foreign companies’ ability to divest from the country.
BIDA is responsible for screening, reviewing, and approving investments in Bangladesh, except for investments in EPZs, EZs, and High-Tech Parks, which are supervised by BEPZA, BEZA, and BHTPA respectively. Both foreign and domestic companies are required to obtain approval from relevant ministries and agencies with regulatory oversight. In certain sectors (e.g., healthcare), foreign companies may be required to obtain a No Objection Certificate (NOC) from the relevant ministry or agency stating the specific investment will not hinder local manufacturers and is in line with the guidelines of the ministry concerned. Since Bangladesh actively seeks foreign investments, instances where one of the Investment Promotion Agencies (IPAs) declines investment proposals are rare.
In February 2018, the Bangladesh Parliament passed the “One Stop Service Bill 2018,” which aims to streamline business and investment registration processes. The four IPAs – BIDA, BEPZA, BEZA, and BHTPA – are mandated to provide one-stop services (OSS) to local and foreign investors under their respective jurisdictions. Expected streamlined services include company registration, taxpayer’s identification number (TIN) and value added tax (VAT) registration, work permit issuance, power and utilities connections, capital and profit repatriation, and environment clearance. In 2019 Bangladesh made reforms in three key areas: starting a business, getting electricity, and getting credit. BIDA offers 56 services under its OSS as of February 2022and has a plan to expand to 154 services covering 35 agencies. The GOB is also planning to integrate the services of all four investment promotion agencies under a single online platform. Progress on realizing a comprehensive OSS for businesses has been slowed by bureaucratic delays and a lack of interagency coordination.
Companies can register their businesses at the Office of the Registrar of Joint Stock Companies and Firms (RJSC): www.roc.gov.bd. However, the online business registration process, while improving, can at times be unclear and inconsistent. Additionally, BIDA facilitates company registration services as part of its OSS, which is available at: https://bidaquickserv.org. BIDA also facilitates other services including office set-up approval, work permits for foreign employees, environmental clearance, outward remittance approval, and tax registration with National Board of Revenue. Other agencies with which a company must typically register are:
City Corporation – Trade License.
National Board of Revenue – Tax & VAT Registration.
Chief Inspector of Shops and Establishments – Employment of Workers Notification.
It takes approximately 20 days to start a business in the country according to the World Bank. The company registration process at the RJSC generally takes one or two days to complete. The process for trade licensing, tax registration, and VAT registration required as of 2021 seven days, one day, and one week respectively.
Outward foreign direct investment is generally restricted through the Foreign Exchange Regulation Act of 1947. As a result, the Bangladesh Bank plays a key role in limiting outbound investment. In September 2015, the government amended the Foreign Exchange Regulation Act of 1947 by adding a “conditional provision” that permits outbound investment for export-related enterprises. Private sector contacts note the few international investments approved by the Bangladesh Bank have been limited to large exporting companies with international experience. However, the government is considering an overseas investment guideline to allow outbound investment opportunities for local exporters and any company operating in the domestic market for 10 years. This will allow local companies and NGOs with outbound investments to enlist in foreign stock markets. However, Bangladesh’s total outbound investment in a single fiscal year would be capped at 5 percent of the central bank’s foreign exchange reserves for that fiscal year under the regulation being considered. Bangladesh Investment Development Authority (BIDA) has been working to formulate a workable policy regarding this since 2016.
3. Legal Regime
Since 1989, the government has gradually moved to decrease regulatory obstruction of private business. Various chambers of commerce have called for privatization and for a greater voice for the private sector in government decisions, but at the same time many chambers support protectionism and subsidies for their own industries. The result is policy and regulations which are often unclear, inconsistent, or little publicized. Registration and regulatory processes are frequently alleged by businesses to be used as rent-seeking opportunities. The major rule-making and regulatory authority exists at the national level under each Ministry with many final decisions being made at the top-most levels, including the Prime Minister’s Office (PMO). The PMO is actively engaged in directing policies, as well as foreign investment in government-controlled projects.
Bangladesh has made incremental progress in using information technology both to improve the transparency and efficiency of some government services and develop independent agencies to regulate the energy and telecommunicationsectors. Some investors cited government laws, regulations, and lack of implementation as impediments to investment. The government has historically limited opportunities for the private sector to comment on proposed regulations. In 2009, Bangladesh adopted the Right to Information Act providing for multilevel stakeholder consultations through workshops or media outreach. Although the consultation process exists, it is still weak and in need of further improvement.
The Environment Conservation Act 1995 (ECA ’95) as amended in 2010 and the Biodiversity Act of 2018 are the main acts governing environmental protection in Bangladesh. The ECA ’95 replaced the earlier environment pollution control ordinance of 1992 and provides the legal basis for Environment Conservation Rules, 1997 (ECR’97). The objective of the Biodiversity Act is equitable sharing of benefits arising out of the use of biological resources. The main objectives of ECA’95 are conservation of the natural environment, improvement of environmental standards, and control and mitigation of environmental pollution. According to the act, all industrial projects require before being undertaken an Environmental Clearance Certificate from the Director General. In issuing the certificate, the projects are classified into the following four categories – Green, Orange-A, Orange-B, and Red.
Environmental Clearance for the Green category is through a comparatively simple procedure. In the case of Orange-A, Orange-B and Red Categories, site clearance is mandatory at the beginning, then Environmental Impact Assessment approval and finally Environmental Clearance is issued. The Environment Clearance is to be renewed after three years for the Green category and one year for Orange-A, Orange-B and Red categories. Red Category projects require an Environmental Impact Statement prior to approval.
Ministries and regulatory agencies do not generally publish or solicit comments on draft proposed legislation or regulations. However, several government organizations, including the Bangladesh Bank (the central bank), Bangladesh Securities and Exchange Commission, BIDA, the Ministry of Commerce, and the Bangladesh Telecommunications Regulatory Commission have occasionally posted draft legislation and regulations online and solicited feedback from the business community. In some instances, parliamentary committees have also reached out to relevant stakeholders for input on draft legislation. The media continues to be the main information source for the public on many draft proposals. There is also no legal obligation to publish proposed regulations, consider alternatives to proposed regulation, or solicit comments from the general public.
The government printing office, The Bangladesh Government Press (http://www.dpp.gov.bd/bgpress/), publishes the “Bangladesh Gazette” every Thursday and Extraordinary Gazettes as and when needed. The Gazette provides official notice of government actions, including issuance of government rules and regulations and the transfer and promotion of government employees. Laws can also be accessed at http://bdlaws.minlaw.gov.bd/.
Bangladesh passed the Financial Reporting Act of 2015 which created the Financial Reporting Council in 2016 aimed at establishing transparency and accountability in the accounting and auditing system. The country follows Bangladesh Accounting Standards and Bangladesh Financial Reporting Standards, which are largely derived from International Accounting Standards and International Financial Reporting Standards. However, the quality of reporting varies widely. Internationally known firms have begun establishing local offices in Bangladesh and their presence is positively influencing the accounting norms in the country. Some firms can provide financial reports audited to international standards while others maintain unreliable (or multiple) sets of accounting records. Regulatory agencies do not conduct impact assessments for proposed regulations; consequently, regulations are often not reviewed based on data-driven assessments. Not all national budget documents are prepared according to internationally accepted standards.
The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) aims to integrate regional regulatory systems among Bangladesh, India, Burma, Sri Lanka, Thailand, Nepal, and Bhutan. However, efforts to advance regional cooperation measures have stalled in recent years and regulatory systems remain uncoordinated.
Local laws are based on the English common law system but most fall short of international standards. The country’s regulatory system remains weak and many of the laws and regulations are not enforced and standards are not maintained.
Bangladesh has been a member of the World Trade Organization (WTO) since 1995. WTO requires all signatories to the Agreement on Technical Barriers to Trade (TBT) to establish a National Inquiry Point and Notification Authority to gather and efficiently distribute trade-related regulatory, standards, and conformity assessment information to the WTO Member community. The Bangladesh Standards and Testing Institute (BSTI) has been working as the National Enquiry Point for the WTO-TBT Agreement since 2002. There is an internal committee on WTO affairs in BSTI and it participates in notifying WTO activities through the Ministry of Commerce and the Ministry of Industries.
Focal Point for TBT:
Mr. Md. Golam Baki,Deputy Director (Certification Marks), BSTI
Email: email@example.comTel: +88-02-48116665Cell: +8801799828826, +8801712240702
Focal Point for other WTO related matters, except sanitary and phytosanitary systems:
Mr. Md. Hafizur Rahman,Director General, WTO Cell, Ministry of Commerce
Email: firstname.lastname@example.orgTel: +880-2-9545383Cell: +88 0171 1861056
Mr. Mohammad Ileas Mia,Director-1, WTO Cell, Ministry of Commerce
Email: email@example.comTel: +880-2-9540580Cell: +88 01786698321
Bangladesh is a common law-based jurisdiction. Many of the basic laws, such as the penal code, civil and criminal procedural codes, contract law, and company law are influenced by English common law. However, family laws, such as laws relating to marriage, dissolution of marriage, and inheritance are based on religious scripts and therefore differ among religious communities. The Bangladeshi legal system is based on a written constitution and the laws often take statutory forms that are enacted by the legislature and interpreted by the higher courts. Ordinarily, executive authorities and statutory corporations cannot make any law, but can make by-laws to the extent authorized by the legislature. Such subordinate legislation is known as rules or regulations and is also enforceable by the courts. However, as a common law system, the statutes are short and set out basic rights and responsibilities but are elaborated by the courts in the application and interpretation of those laws. The Bangladeshi judiciary acts through: (1) The Superior Judiciary, having appellate, revision, and original jurisdiction; and (2) The Sub-Ordinate Judiciary, having original jurisdiction.
Since 1971, Bangladesh has updated its legal system concerning company, banking, bankruptcy, and money loan court laws, and other commercial laws. An important impediment to investment in Bangladesh is its weak and slow legal system in which the enforceability of contracts is uncertain. The judicial system does not provide for interest to be charged in tort judgments, which means procedural delays carry no penalties. Bangladesh does not have a separate court or court division dedicated solely to commercial cases. The Joint District Judge court (a civil court) is responsible for enforcing contracts.
Some notable commercial laws include:
The Contract Act, 1872 (Act No. IX of 1930).
The Sale of Goods Act, 1930 (Act No. III of 1930).
The Partnership Act, 1932 (Act No. IX of 1932).
The Negotiable Instruments Act, 1881 (Act No. XXVI of 1881).
The Bankruptcy Act, 1997 (Act No. X of 1997).
The Arbitration Act, 2001 (Act No. I of 2001).
The judicial system of Bangladesh has never been completely independent from interference by the executive branch of the government. In a significant milestone, the government in 2007 separated the country’s judiciary from the executive but the executive retains strong influence over the judiciary through control of judicial appointments. Other pillars of the justice system, including the police, courts, and legal profession, are also closely aligned with the executive branch. In lower courts, corruption is widely perceived as a serious problem. Regulations or enforcement actions are appealable under the Appellate Division of the Supreme Court.
Major laws affecting foreign investment include: the Foreign Private Investment (Promotion and Protection) Act of 1980, the Bangladesh Export Processing Zones Authority Act of 1980, the Companies Act of 1994, the Telecommunications Act of 2001, and the Bangladesh Economic Zones Act of 2010.
Bangladesh industrial policy offers incentives for “green” (environmental) high-tech or “transformative” industries. It allows foreigners who invest $1 million or transfer $2 million to a recognized financial institution to apply for Bangladeshi citizenship. The GOB will provide financial and policy support for high-priority industries (those creating large-scale employment and earning substantial export revenue) and creative industries – architecture, arts and antiques, fashion design, film and video, interactive laser software, software, and computer and media programming. Specific importance is given to agriculture and food processing, RMG, ICT and software, pharmaceuticals, leather and leather products, and jute and jute goods.
In addition, Petrobangla, the state-owned oil and gas company, has modified its production sharing agreement contract for offshore gas exploration to include an option to export gas. In 2019, Parliament approved the Bangladesh Flag Vessels (Protection) Act 2019 with a provision to ensure Bangladeshi flagged vessels carry at least 50 percent of foreign cargo, up from 40 percent. In 2020, the Ministry of Commerce amended the digital commerce policy to allow fully foreign-owned e-commerce companies in Bangladesh and remove a previous joint venture requirement.
The One Stop Service (OSS) Act of 2018 mandated the four IPAs to provide OSS to local and foreign investors in their respective jurisdictions. The move aims to facilitate business services on behalf of multiple government agencies to improve ease of doing business. In 2020, BIDA issued time-bound rules to implement the Act of 2018. Although the IPAs have started to offer a few services under the OSS, corruption and excessive bureaucracy have held back the complete and effective roll out of the OSS. BIDA has a “one-stop” website that provides information on relevant laws, rules, procedures, and reporting requirements for investors at: http://www.bida.gov.bd/.
Aside from information on relevant business laws and licenses, the website includes information on Bangladesh’s investment climate, opportunities for businesses, potential sectors, and how to do business in Bangladesh. The website also has an eService Portal for Investors which provides services such as visa recommendations for foreign investors, approval/extension of work permits for expatriates, approval of foreign borrowing, and approval/renewal of branch/liaison and representative offices.
Bangladesh formed an independent agency in 2011 called the “Bangladesh Competition Commission (BCC)” under the Ministry of Commerce. Parliament then passed the Competition Act in 2012. However, the BCC has not received sufficient resources to operate effectively.
In 2018, the Bangladesh Telecommunication Regulatory Commission (BTRC) finalized Significant Market Power (SMP) regulations to promote competition in the industry. In 2019, BTRC declared the country’s largest telecom operator, Grameenphone (GP), the first SMP based on its revenue share of more than 50 percent and customer shares of about 47 percent. Since the declaration, the BTRC has attempted to impose restrictions on GP’s operations, which GP has challenged in the judicial system.
Since the Foreign Investment Act of 1980 banned nationalization or expropriation without adequate compensation, Bangladesh has not nationalized or expropriated property from foreign investors. In the years immediately following independence in 1971, widespread nationalization resulted in government ownership of more than 90 percent of fixed assets in the modern manufacturing sector, including the textile, jute and sugar industries and all banking and insurance interests, except those in foreign (but non-Pakistani) hands. However, the government has taken steps to privatize many of these industries since the late 1970s and the private sector has developed into a main driver of the country’s sustained economic growth.
Many laws affecting investment in Bangladesh are outdated. Bankruptcy laws, which apply mainly to individual insolvency, are sometimes disregarded in business cases because of the numerous falsified assets and uncollectible cross-indebtedness supporting insolvent banks and companies. A Bankruptcy Act was passed by Parliament in 1997 but has been ineffective in addressing these issues. Some bankruptcy cases fall under the Money Loan Court Act-2003 which has more stringent and timely procedures.
4. Industrial Policies
Current regulations permit a tax holiday for designated “thrust” (strategic) sectors and infrastructure projects established between July 1, 2019 and June 30, 2024. The thrust sectors enjoy tax exemptions graduated from 90 percent to 20 percent over a period of five to ten years depending on the zone where the business is established. Industries set up in Export Processing Zones (EPZs) and Special Economic Zones (SEZs) are also eligible for tax holidays. Details of fiscal and non-fiscal incentives are available on the following websites:
Strategic sectors eligible for tax exemptions include: certain pharmaceuticals, automobile manufacturing, contraceptives, rubber latex, chemicals or dyes, certain electronics, bicycles, fertilizer, biotechnology, commercial boilers, certain brickmaking technologies, compressors, computer hardware, home appliances, insecticides, pesticides, petrochemicals, fruit and vegetable processing, textile machinery, tissue grafting, tire manufacturing industries, agricultural machineries, furniture, leather and leather goods, cell phones, plastic recycling, and toy manufacturing.
Eligible physical infrastructure projects are allowed tax exemptions graduated from 90 percent to 20 percent over a period of 10 years. Physical infrastructure projects eligible for exemptions include deep seaports, elevated expressways, road overpasses, toll roads and bridges, EPZs, gas pipelines, information technology parks, industrial waste and water treatment facilities, liquefied natural gas (LNG) terminals, electricity transmission, rapid transit projects, renewable energy projects, and ports.
Independent non-coal fired power plants (IPPs) commencing production after January 1, 2015 are granted a 100 percent tax exemption for five years, a 50 percent exemption for years six to eight, and a 25 percent exemption for years nine to 10. For new coal-fired IPPs commencing production before June 30, 2023 (provided operators contracted with the government before June 30, 2020), the tax exemption rate is 100 percent for the first 15 years of operations. For power projects, import duties are waived for imports of capital machinery and spare parts.
The valued-added tax (VAT) rate on exports is zero. For companies exporting only, duties are waived on imports of capital machinery and spare parts. For companies primarily exporting (80 percent of production and above), an import duty rate of 1 percent is charged for imports of capital machinery and spare parts identified and listed in notifications to relevant regulators. Import duties are also waived for EPZ industries and other export-oriented industries for imports of raw materials consumed in production.
The GOB provides special incentives to encourage non-resident Bangladeshis to invest in the country. Incentives include the ability to buy newly issued shares and debentures in Bangladeshi companies. Further, non-resident Bangladeshis can maintain foreign currency deposits in Non-resident Foreign Currency Deposit (NFCD) accounts.
In the past several years, U.S. companies have experienced difficulties securing the investment incentives initially offered by Bangladesh. Several companies have reported instances where infrastructure guarantees (ranging from electricity to gas connections) are not fully delivered or tax exemptions are delayed, either temporarily or indefinitely. These challenges are not specific to U.S. or foreign companies and reflect broader challenges in the business environment.
Bangladesh government does not provide any specific incentives for businesses owned by women.
In 2020, the Government of Bangladesh established that all power generation companies will enjoy full tax exemption with the exception of coal-based generation. This incentive will be available to all power generation companies who start operation before December 31, 2022. The government is seeking to increase use of renewable energy and has offered incentives such as tax breaks for net-metered solar rooftop installation.
Under the Bangladesh Export Processing Zones Authority Act of 1980, the government established the first EPZ in Chattogram in 1983. Additional EPZs now operate in Dhaka (Savar), Mongla, Ishwardi, Cumilla, Uttara, Karnaphuli (Chattogram), and Adamjee (Dhaka). Korean investors are also operating a separate and private EPZ in Chattogram.
Joint ventures, wholly foreign-owned investments, and wholly Bangladeshi-owned companies are all permitted to operate and enjoy equal treatment in the EPZs.
In 2010, Bangladesh enacted the Special Economic Zone Act allowing for the creation of privately owned SEZs to produce for export and domestic markets. The SEZs provide special fiscal and non-fiscal incentives to domestic and foreign investors in designated underdeveloped areas throughout Bangladesh.
5. Protection of Property Rights
Although land, whether for purchase or lease, is often critical for investment and as security against loans, antiquated real property laws and poor record-keeping systems can complicate land and property transactions. Instruments take effect from the date of execution, not the date of registration, so a bona fide purchaser can often be uncertain of title. Land registration records have been historically prone to competing claims. Land disputes are common, and both U.S. companies and citizens have filed complaints about fraudulent land sales. For example, sellers fraudulently claiming ownership have transferred land to good faith purchasers while the actual owners were living outside of Bangladesh. In other instances, U.S.-Bangladeshi dual citizens have purchased land from legitimate owners only to have third parties make fraudulent claims of title to extort settlement compensation. A 2015 study by leading Bangladeshi think tank Policy Research Institute (PRI) revealed one in seven households in the country faced land disputes. Bangladesh ranks 184 among 190 countries for ease of registering property in the World Bank’s Doing Business 2020 Report.
While property owners can obtain mortgages, parties generally avoid registering mortgages, liens, and encumbrances due to the high cost of stamp duties (i.e., transaction taxes based on property value) and other charges. There are also concerns that non-registered mortgages are often unenforceable.
Article 42 of the Bangladesh Constitution guarantees a right to property for all citizens, but property rights are often not protected due to a weak judicial system. The Transfer of Property Act of 1882 and the Registration Act of 1908 are the two main laws regulating transfer of property in Bangladesh but these laws have no specific provisions covering foreign and/or non-resident investors. Currently, foreigners and non-residents can incorporate a company with the Registrar of Joint Stock Companies and Firms. The company would be considered a local entity and would be able to buy land in its name.
Intellectual property rights (IPR) and rights enforcement is not a priority for the Government of Bangladesh and it has not invested heavily in IPR protection. As a result, counterfeit goods are readily available in Bangladesh, and a significant portion of business software is pirated. Several U.S. firms, including fast-moving consumer goods manufacturers, film studios, pharmaceutical products, apparel goods, and software firms, have reported systematic violations of their IPRs. Investors note police are willing to investigate counterfeit goods producers when informed but are unlikely to initiate independent investigations.
The Government of Bangladesh has recently taken steps to develop its IP system. In February 2021, the Cabinet gave its final approval of a draft Bangladesh Patents Bill and in-principal approval of a draft Bangladesh Industry-Designs Bill to replace the Patents and Designs Act 1911. The bills aim to make necessary updates to existing regulations and improve IPR in Bangladesh. However, as of March 2022 the potential impact of the bills remains uncertain because the government had yet to make the drafts public for stakeholder review. The bills require approval by the Parliament before going into effect. A National IP policy was developed in 2018 but has not been fully implemented. Public awareness of IPR is slowly growing through efforts from industry associations like the Intellectual Property Rights Association of Bangladesh, AMCHAM, Bangladesh, and REACT. Bangladesh is a member of the World Intellectual Property Organization (WIPO) and acceded to the Paris Convention on Intellectual Property in 1991.
Bangladesh has slowly made progress toward bringing its legislative framework into compliance with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The government enacted a Copyright Law in 2000 (amended in 2005), a Trademarks Act in 2009, and a Geographical Indication of Goods (Registration and Protection) Act in 2013, in addition to the recent action on bills replacing the Patents and Designs Act.
Several government agencies are empowered to act against counterfeiting, including the National Board of Revenue (NBR), Customs, Mobile Courts, the Rapid Action Battalion (RAB), and the Bangladesh Police. However, enforcement agencies do not have appropriate resources nor are given the appropriate attention or priority to execute complaints filed by IP right holders. Accordingly, enforcement actions such as raids and seizures have become costly, time-consuming, and often nonproductive. In a positive development, in December 2019, the National Board of Revenue implemented the Intellectual Property Rights of Receipts of Imports: Rules of Implementation 2018. The rules intend to help stakeholders, though the bond requirement, for taking any enforcement action is a concern for the stakeholders. As per Rule 5 of the Intellectual Property Rights (Imported Goods) Enforcement Rules,2007, Industry is required to execute a specific bond of an amount equal to 110 percent of the value of the goods and furnish security in the form of a Bank Guarantee of an amount equal to 25 percent of the bond value within three days from date of confiscation of the goods. It is an issue as it is challenging to get all internal approval and get the bond executed within three days. Secondly, the bond is on hold until the case is disposed of, and thirdly it isn’t easy to do the valuation of a product.
The Department of National Consumer Rights Protection (DNCRP) is charged with tracking and reporting on counterfeit goods, and the NBR/Customs tracks counterfeit goods seizures at ports of entry. However, reports are not publicly available.
Resources for Intellectual Property Rights Holders:
Intellectual Property Counselor for South Asia
U.S. Patent and Trademark Office
Foreign Commercial Service
Capital markets in Bangladesh are still developing, and the financial sector remains highly dependent on bank lending. Current regulatory infrastructure inhibits the development of a tradeable bond market.
Bangladesh is home to the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE), both of which are regulated by the Bangladesh Securities and Exchange Commission (BSEC), a statutory body formed in 1993 and attached to the Ministry of Finance. The DSE market capitalization stood at $64.8 billion at the end of January 2022, rising 16.3 percent year-over-year as stock prices rose amid speculative behavior and increased liquidity due to relaxed monetary policy.
Although the Bangladeshi government has a positive attitude toward foreign portfolio investors, participation in the exchanges remains low due to what is still limited liquidity for shares and the lack of publicly available and reliable company information. The DSE has attracted some foreign portfolio investors to the country’s capital market. However, the volume of foreign investment in Bangladesh remains a small fraction of total market capitalization. As a result, foreign portfolio investment has had limited influence on market trends and Bangladesh’s capital markets have been largely insulated from the volatility of international financial markets. Bangladeshi markets continue to rely primarily on domestic investors.
In 2019, BSEC undertook a number of initiatives to launch derivatives products, allow short selling, and invigorate the bond market. To this end, BSEC introduced three rules: Exchange Traded Derivatives Rules 2019, Short-Sale Rules 2019, and Investment Sukuk Rules 2019. Other recent, notable BSEC initiatives include forming a central clearing and settlement company – the Central Counterparty Bangladesh Limited (CCBL) – and promoting private equity and venture capital firms under the 2015 Alternative Investment Rules. In 2013, BSEC became a full signatory of the International Organization of Securities Commissions (IOSCO) Memorandum of Understanding.
BSEC has taken steps to improve regulatory oversight, including installing a modern surveillance system, the “Instant Market Watch,” providing real time connectivity with exchanges and depository institutions. As a result, the market abuse detection capabilities of BSEC have improved significantly. A mandatory Corporate Governance Code for listed companies was introduced in 2012 but the overall quality of corporate governance remains substandard. Demutualization of both the DSE and CSE was completed in 2013 to separate ownership of the exchanges from trading rights. A majority of the members of the Demutualization Board, including the Chairman, are independent directors. Apart from this, a separate tribunal has been established to resolve capital market-related criminal cases expeditiously. However, both domestic and foreign investor confidence on the stock exchanges’ governance standards remains low.
The Demutualization Act 2013 also directed DSE to pursue a strategic investor who would acquire a 25 percent stake in the bourse. Through a bidding process DSE selected a consortium of the Shenzhen and Shanghai stock exchanges in China as its strategic partner, with the consortium buying the 25 percent share of DSE for taka 9.47 billion ($112.7 million).
According to the International Monetary Fund (IMF), Bangladesh is an Article VIII member and maintains restrictions on the unapproved exchange, conversion, and/or transfer of proceeds of international transactions into non-resident taka-denominated accounts. Since 2015, authorities have relaxed restrictions by allowing some debits of balances in such accounts for outward remittances, but there is currently no established timetable for the complete removal of the restrictions.
The Bangladesh Bank (BB) acts as the central bank of Bangladesh. It was established through the enactment of the Bangladesh Bank Order of 1972. General supervision and strategic direction of the BB has been entrusted to a nine-member Board of Directors, which is headed by the BB Governor. A list of the bank’s departments and branches is on its website: https://www.bb.org.bd/aboutus/dept/depts.php.
According to the BB, four types of banks operate in the formal financial system: State Owned Commercial Banks (SOCBs), Specialized Banks, Private Commercial Banks (PCBs), and Foreign Commercial Banks (FCBs). Some 61 “scheduled” banks in Bangladesh operate under the control and supervision of the central bank as per the Bangladesh Bank Order of 1972. The scheduled banks, include six SOCBs, three specialized government banks established for specific objectives such as agricultural or industrial development or expatriates’ welfare, 43 PCBs, and nine FCBs as of February 2021. The scheduled banks are licensed to operate under the Bank Company Act of 1991 (Amended 2013). There are also five non-scheduled banks in Bangladesh, including Nobel Prize recipient Grameen Bank, established for special and definite objectives and operating under legislation enacted to meet those objectives.
Currently, 34 non-bank financial institutions (FIs) are operating in Bangladesh. They are regulated under the Financial Institution Act, 1993 and controlled by the BB. Of these, two are fully government-owned, one is a subsidiary of a state-owned commercial bank, and the rest are private financial institutions. Major sources of funds for these financial institutions are term deposits (at least three months’ tenure), credit facilities from banks and other financial institutions, and call money, as well as bonds and securitization.
Unlike banks, FIs are prohibited from:
Issuing checks, pay-orders, or demand drafts.
Receiving demand deposits.
Involvement in foreign exchange financing.
Microfinance institutions (MFIs) remain the dominant players in rural financial markets. The Microcredit Regulatory Authority (MRA), the primary regulator of this sector, oversees 746 licensed microfinance institutions as of October 2021, excluding Grameen Bank which is governed under a separate law. In 2020, the MRA-listed microfinance institutions had 33.3 million members while Grameen Bank had an additional 9.3 million members.
The banking sector has had a mixed record of performance over the past several years. Industry experts have reported a rise in risky assets because of poor governance as well as the economic fallout of the COVID-19 pandemic. Total domestic credit stood at 50.4 percent of gross domestic product at end of November 2021. The state-owned Sonali Bank is the largest bank in the country while Islami Bank Bangladesh and Standard Chartered Bangladesh are the largest local private and foreign banks respectively. The gross non-performing loan (NPL) ratio was 8.1 percent at the end of September 2021, down from 8.9 percent in September 2020. However, the decline in the NPLs was primarily caused by regulatory forbearance rather than actual reduction of stressed loans. At 20.1 percent SCBs had the highest NPL ratio, followed by 11.4 percent of Specialized Banks, 5.5 percent of PCBs, and4.1 percent of FCBs as of September 2021.
In 2017, the BB issued a circular warning citizens and financial institutions about the risks associated with cryptocurrencies. The circular noted that using cryptocurrencies may violate existing money laundering and terrorist financing regulations and cautioned users may incur financial losses. The BB issued similar warnings against cryptocurrencies in 2014.
Foreign investors may open temporary bank accounts called Non-Resident Taka Accounts (NRTA) in the proposed company name without prior approval from the BB to receive incoming capital remittances and encashment certificates. Once the proposed company is registered, it can open a new account to transfer capital from the NRTA account. Branch, representative, or liaison offices of foreign companies can open bank accounts to receive initial suspense payments from headquarters without opening NRTA accounts. In 2019, the BB relaxed regulations on the types of bank branches foreigners could use to open NRTAs, removing a previous requirement limiting use of NRTA’s solely to Authorized Dealers (ADs).
In 2015, the Bangladesh Finance Ministry announced it was exploring establishing a sovereign wealth fund in which to invest a portion of Bangladesh’s foreign currency reserves. In 2017, the Cabinet initially approved a $10 billion “Bangladesh Sovereign Wealth Fund,” (BSWF) to be created with funds from excess foreign exchange reserves but the plan was subsequently scrapped by the Finance Ministry.
8. Responsible Business Conduct
The business community is increasingly aware of and engaged in responsible business conduct (RBC) activities with multinational firms leading the way. While many firms in Bangladesh fall short on RBC activities and instead often focus on philanthropic giving, some of the leading local conglomerates have begun to incorporate increasingly rigorous environmental and safety standards in their workplaces. U.S. companies present in Bangladesh maintain diverse RBC activities. Consumers in Bangladesh are generally less aware of RBC, and consumers and shareholders exert little pressure on companies to engage in RBC activities.
While many international firms are aware of OECD guidelines and international best practices concerning RBC, many local firms have limited familiarity with international standards. There are currently two RBC NGOs active in Bangladesh:
CSR Centre Bangladesh:
Along with the Bangladesh Enterprise Institute, the CSR Centre is the joint focal point for the United Nations Global Compact (UNGC) and its corporate social responsibility principles in Bangladesh. The UN Global Compact is the world’s largest corporate citizenship and sustainability initiative. The Centre is a member of a regional RBC platform called the South Asian Network on Sustainability and Responsibility, with members including Bangladesh, Afghanistan, India, Nepal, and Pakistan.
While several NGOs have proposed National Corporate Social Responsibility Guidelines, the government has yet to adopt any such standards for RBC. As a result, the government encourages enterprises to follow generally accepted RBC principles but does not mandate any specific guidelines.
Bangladesh has natural resources, but it has not joined the Extractive Industries Transparency Initiative (EITI). The country does not adhere to the Voluntary Principles on Security and Human Rights.
Bangladesh is one of the most climate-vulnerable countries in the world. The government established the Bangladesh Climate Change Strategy and Action Plan (BCCSAP) to address the adverse effects of climate change. In this plan, 44 programs under six thematic areas were identified. The Bangladesh Climate Change Trust Fund (BCCTF) was created in 2010 from the Government’s own revenue sources to combat climate change impacts as well as to implement the BCCSAP. The BCCTF has funded $449.3M in approximately 800 projects to implement key aspects of the BCCSAP. Taking into account the challenges of environment, environment and biodiversity conservation and management, the government has finalized the National Environment Policy 2018 and published it in 2019 with the aim of developing the overall environmental conservation management of the country. The Department of Environment, under the Ministry of Environment, Forest and Climate Change, has adopted a “blue-economy” action plan to conserve marine environment, prevent marine pollution, ensure environmental management, and conserve marine and coastal biodiversity while ensuring marine resource extraction and mainstream development activities.
Bangladesh aims to reach 30 percent renewable energy by 2030 and at least 40 percent by 2041. Bangladesh launched the Mujib Climate Prosperity Plan (MCPP) in November 2021. The MCPP is built on the foundation of the Eighth Five Year Plan (2021-2025) and shifts Bangladesh’s trajectory from one of vulnerability to resilience and then prosperity. The plan highlights engagement with domestic implementation partners including the Public Private Partnership (PPP) Authority and the Bangladesh Investment Development Authority (BIDA). The MCPP expects investment opportunities of approximately $80 billion in resilient projects in energy, water, transport, supply chains and value chains. Optimized finance structures to attract FDI and mobilize domestic private sector capital include the use of public private partnerships as a key solution to climate investment with the PPP Authority. The Bangladesh Bank can use different tools to incentivize investment in low-carbon and climate-resilient infrastructure.
The MCPP further outlines opportunities for technology-transfer partnerships and building manufacturing capacity in Bangladesh including in areas such as green hydrogen, solar, electric vehicles, modernized power grid and other resilient infrastructure.
According to a BloombergNEF’s Climatescope report, in 2021 Bangladesh ranked 24 among 109 countries as an emerging attractive market for energy transition investment. Bangladesh ranks 69th in the MIT Technology Review’s Green Future Index. The overall ranking shows the performance of the economies relative to each other and aggregates scores generated across the following five pillars: carbon emissions, energy transition, green society, clean innovation and climate policy. In the Global Green Growth Institute’s Global Green Growth Index, Bangladesh Ranked 18th among 33 Asian countries. This index measures sustainability targets for four green growth dimensions – efficient and sustainable resource use, natural capital protection, green economic opportunities, and social inclusion.
Corruption remains a serious impediment to investment and economic growth in Bangladesh. While the government has established legislation to combat bribery, embezzlement, and other forms of corruption, enforcement is inconsistent. The Anti-Corruption Commission (ACC) is the main institutional anti-corruption watchdog. With amendments to the Money Laundering Prevention Act, the ACC is no longer the sole authority to probe money-laundering offenses. Although it still has primary authority for bribery and corruption, other agencies will now investigate related offenses, including:
The Bangladesh Police (Criminal Investigation Department) – Most predicate offenses.
The National Board of Revenue – VAT, taxation, and customs offenses.
The Department of Narcotics Control – drug related offenses.
The current Awami League-led government has publicly underscored its commitment to fighting corruption and reaffirmed the need for a strong ACC, but opposition parties claim the ACC is used by the government to harass political opponents. Efforts to ease public procurement rules and a recent constitutional amendment diminishing the independence of the ACC may undermine institutional safeguards against corruption. Bangladesh is a party to the UN Anticorruption Convention but has not joined the OECD Convention on Combating Bribery of Public Officials. Corruption is common in public procurement, tax and customs collection, and among regulatory authorities. Corruption, including bribery, raises the costs and risks of doing business. By some estimates, off-the-record payments by firms may result in an annual reduction of two to three percent of GDP. Corruption has a corrosive impact on the broader business climate market and opportunities for U.S. companies in Bangladesh. It also deters investment, stifles economic growth and development, distorts prices, and undermines the rule of law.
Mohammad Moinuddin AbdullahChairmanAnti-Corruption Commission, Bangladesh1, Segun Bagicha, Dhaka firstname.lastname@example.org
Prime Minister Hasina’s ruling Awami League party won 289 parliamentary seats out of 300 in a December 30, 2018 election marred by wide-spread vote-rigging, ballot-box stuffing and intimidation. Intimidation, harassment, and violence during the pre-election period made it difficult for many opposition candidates and their supporters to meet, hold rallies, and/or campaign freely. The clashes between rival political parties and general strikes that previously characterized the political environment in Bangladesh have become far less frequent in the wake of the Awami League’s increasing dominance and crackdown on dissent. Many civil society groups have expressed concern about the trend toward a one-party state and the marginalization of all political opposition groups.
Bangladesh’s comparative advantage in cheap labor for manufacturing is partially offset by lower productivity due to poor skills development, inefficient management, pervasive corruption, and inadequate infrastructure. According to the 2016-2017 Labor Force Survey, 85 percent of the Bangladeshi labor force is employed in the informal economy. Bangladeshi workers have a strong reputation for hard work, entrepreneurial spirit, and a positive and optimistic attitude. With an average age of 26 years, the country boasts one of the largest and youngest labor forces in the world. However, training is not well aligned with labor demand. Bangladesh’s labor laws specify acceptable employment conditions, working hours, minimum wage levels, leave policies, health and sanitary conditions, and compensation for injured workers. Freedom of association and the right to join unions are guaranteed in the constitution. In practice, however, compliance and enforcement of labor laws are weak, and companies frequently discourage or prevent formation of worker-led labor unions, preferring pro-factory management unions. In a notable exception to the national labor law, Export Processing Zones (EPZs) do not allow trade unions and heavily restrict other labor activity normally permitted under the broader Bangladesh Labor Act. The EPZ labor law does allow worker welfare associations, to which 74 percent of workers belong, according to the government.
Since two back-to-back tragedies killed over 1,250 workers – the Tazreen Fashions fire in 2012 and the Rana Plaza collapse in 2013 – Bangladesh made significant progress in garment factory fire and structural safety remediation, thanks mostly to two Western brand-led initiatives, the Alliance for Bangladesh Worker Safety (Alliance), comprised of North American brands, and the Accord on Fire and Building Safety in Bangladesh (Accord), which was formed by European brands. Major accidents and workplace deaths in the garment sector dropped precipitously as a result – only four workers died in 2021. Monitoring and remediation of RMG factories exporting to non-Western countries was overseen by the government, with assistance from the International Labor Organization (ILO) under the National Initiative. By 2021, fewer than half the factories under the National Initiative had completed initial remediation of safety issues, and both the Alliance and Accord had closed their Bangladesh operations. North American brands continued to monitor manufacturers’ safety maintenance and training through a new organization, Nirapon. The Accord, under High Court order, transitioned its staff and operations to the newly formed RMG Sustainability Council (RSC), overseen by a board consisting of manufacturers, brands, and worker representatives. The government has announced plans to form an Industrial Safety Unit to oversee factory safety in National Initiative garment factories as well as all manufacturing. On July 8, 2021, a devastating fire at the Hashem Foods Factory Ltd took the lives of 54 workers including 19 children. In the wake of the fire on July 15, the Prime Minister’s Office announced the formation of a 24-member national committee led by the Bangladesh Investment Development Authority (BIDA) and headed by the Prime Minister’s Private Sector Advisor Salman Rahman. The committee prioritized 32 industrial sectors considering their propensity for and likelihood of accidents. BIDA announced in December 2021 it would produce a sector-wide report after analyzing the inspection data and will take steps to enforce workplace safety compliance in the non-export sectors.
The U.S. government suspended Bangladesh’s access to the U.S. Generalized System of Preferences (GSP) over labor rights violations following a six-year formal review conducted by the U.S. Trade Representative. The decision, announced in 2013 in the months following the Rana Plaza collapse, was accompanied by a 16-point GSP Action Plan to help start Bangladesh’s path to reinstatement of the trade benefits. While some progress was made in the intervening years, several key issues have not been adequately addressed. Despite revisions intended to make Bangladesh more compliant with international labor standards, the Bangladesh Labor Act (BLA) and EPZ Labor Act (ELA) still restrict the freedom of association and formation of unions and maintain separate administrative systems for workers inside and outside of export processing zones.
Under the current BLA, legally registered unions are entitled to submit charters of demands and bargain collectively with employers, but this has rarely occurred in practice. The government counts nearly 1,000 registered trade unions, but labor leaders estimate there are fewer than 100 active trade unions in the country’s dominant sector, RMG, and only 30 to 40 are capable enough to negotiate with owners. The law provides criminal penalties for conducting unfair labor practices such as retaliation against union members for exercising their legal rights, but charges are rarely brought against employers and the labor courts have a large backlog of cases. Labor organizations reported most workers did not exercise their rights to form unions, attend meetings, or bargain collectively due to fear of reprisal. From January to December 2021, a total of 6 workers died and 163 were injured due to police interference and about 137 of them belonged to the garment sector. The garment sector is reeling from the skilled labor crisis and missing opportunities to secure new orders from eager buyers coming to Bangladesh to procure garments after COVID-19-related factory closures in Vietnam, Cambodia, and Burma. The local apparel industry has long courted buyers who historically have sourced from other countries to buy from Bangladesh producers. However, in 2020, at the peak of Covid-19, Bangladesh apparel industries furloughed around 357,000 workers; following lockdown restrictions, the sector re-hired just a handful of the workers. Some of those furloughed returned to their villages and others switched to new professions. Industry groups are focusing on developing automation technologies and processes to boost productivity and increase production capacity.
The labor law differentiates between layoffs and terminations; no severance is paid if a worker is fired for misconduct. In the case of downsizing or “retrenchment,” workers must be notified and paid 30 days’ wages for each year of service. The law requires factories and establishments to notify Bangladesh’s Department of Inspection for Factories and Establishments a week prior to temporarily laying off workers due to a shortage of work or material. Laid off workers are entitled to their full housing allowance. For the first 45 days, they are also entitled to half their basic wages, then 25 percent thereafter. Workers who were employed for less than one year are not eligible for compensation during a layoff. However, the press and trade unions report employers not only fail to pay workers their severance or benefits, but also their regular wages. In 2021 alone, workers and organizers staged 172 labor protests in the garment sector over back wages, factory layoffs, and demands to reopen closed factories. No unemployment insurance or other social safety net programs exist, although the government had begun discussing how to establish them with the help of development partners and brands. In early 2022, the Government of Bangladesh announced a universal pension scheme from fiscal year (FY) 2022-23.
The government does not consistently and effectively enforce applicable labor laws. For example, the law establishes mechanisms for conciliation, arbitration, and dispute resolution by a labor court and workers in a collective bargaining union have the right to strike in the event of a failure to reach a settlement. In practice, few strikers followed the cumbersome and time-consuming legal requirements for settlements and strikes or walkouts often occur spontaneously. The government was partnered with the ILO to introduce a dispute settlement system within its Department of Labor.
The BLA guarantees workers the right to conduct lawful strikes, but with many limitations. For example, the government may prohibit a strike deemed to pose a “serious hardship to the community” and may terminate any strike lasting more than 30 days. The BLA also prohibits strikes at factories in the first three years of commercial production, and at factories controlled by foreign investors.
The U.S. government funds efforts to improve occupational safety and health alongside labor rights in the readymade garment sector in partnership with other international partners, civil society, businesses, and the Bangladeshi government. The United States works with other governments and the International Labor Organization (ILO) to discuss and assist with additional labor reforms needed to fully comply with international labor conventions. In early 2021, the government submitted a draft action plan to the EU and ILO describing how it planned to bring its laws and practices into compliance with international labor standards over time. In February 2022, the government submitted the progress report to ILO and the report will be discussed in the ILO Governing Body on March 21. The U.S. government is closely monitoring the development and implementation of the plan to ensure it sufficiently addresses long-standing recommendations.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical Source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD)
*Host Country Source: Bangladesh Bank, Bangladesh Bureau of Statistics
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (December 2020)
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
The United States
The United Kingdom
China, P.R. Mainland
China, P.R. Mainland
United Arab Emirates
“0” reflects amounts rounded to +/- USD 500,000.
14. Contact for More Information
Embassy of the United States of America
Madani Avenue, BaridharaDhaka — 1212
Tel: +880 2 5566-2000
The Republic of Maldives comprises 1,190 islands in 20 atolls spread over 348 square miles in the Indian Ocean. Tourism is the main source of economic activity for Maldives, directly contributing close to 30 percent of GDP and generating more than 60 percent of foreign currency earnings. The tourism sector experienced impressive growth, from 655,852 arrivals in 2009 to 1.7 million in 2019, before a steep decline in 2020 resulting from the COVID-19 pandemic. Tourism began to recover in late 2020 and reached 1.3 million in 2021. This recovery in tourism will likely continue to drive the economy. Following the COVID-19 outbreak, the government re-emphasized the need to diversify, with a focus on the fisheries and agricultural sectors.
GDP growth averaged six percent during the decade through 2019, lifting Maldives to middle-income country status. Per capita GDP is estimated at USD 6,698 in 2020, the highest in South Asia. However, income inequality and a lack of employment opportunities remain a major concern for Maldivians, especially those in isolated atolls. Following the COVID-19 outbreak, GDP fell 33.5% percent in 2020. With the tourism industry’s recovery, GDP grew 31.6 percent in 2021.
Maldives is a multi-party constitutional democracy, but the transition from long-time autocracy to democracy has been challenging. Maldives’ parliament ratified a new constitution in 2008 that provided for the first multi-party presidential elections. In 2018, Ibrahim Mohamed Solih of the Maldivian Democratic Party was elected president, running on a platform of economic and political reforms and transparency, following former President Abdulla Yameen whose term in office was marked by corruption, systemic limitations on the independence of parliament and the judiciary, and restrictions on freedom of speech, press, and association. The MDP also won a super majority (65 out of 87) seats in parliamentary elections in April 2019, the first single-party majority in Maldives since 2008. President Solih pledged to restore democratic institutions and the freedom of the press, re-establish the justice system, and protect fundamental rights. Corruption across all sectors, including tourism, was a significant issue under the previous government and remains a concern.
Serious concerns also remain about a small number of violent Maldivian extremists who advocate for attacks against secular Maldivians and may be involved with transnational terrorist groups. In February 2020, attackers stabbed three foreign nationals – two Chinese and one Australian – in several locations in Hulhumalé. ISIS claimed responsibility for an April arson incident on Mahibadhoo Island in Alifu Dhaalu atoll that destroyed eight sea vessels, including one police boat, according to ISIS’ online newsletter al-Naba. There were no injuries or fatalities. Speaker of Parliament and former President Mohamed Nasheed was nearly killed in a May 6, 2021, IED attack motivated by religious extremism. Nasheed sustained life threatening injuries and several members of his security and bystanders were also injured. Nine individuals have been charged in connection with the attack, with one already convicted.
Large scale infrastructure construction in recent years contributed to economic growth but has resulted in a significant rise in debt. The Maldives’ debt-to-GDP ratio increased from 58.5 percent in 2018 to an estimated 61.8 percent in 2019 according to the World Bank (WB); this further increased to 138 percent in 2020 according to the Ministry of Finance (MoF), an increase driven by a sharp drop-off in government revenue.
Maldives welcomes foreign investment, although the ambiguity of codified law and competition from politically influential local businesses act as deterrents. U.S. investment in Maldives has been limited and focused on the tourism sector, particularly hotel franchising and air transportation. In 2021, construction, transportation, fisheries, and renewable energy also benefited from increased FDI.
On December 28, 2020, Maldives submitted an updated Nationally Determined Contribution (NDC) which includes an enhanced ambition of 26 percent decrease in emissions and carbon neutrality by 2030, conditioned on receiving financial, technological, and technical support.
1. Openness To, and Restrictions Upon, Foreign Investment
Maldives opened to foreign investment in the late 1980s and currently pursues an open policy for foreign investment. A weak and, in some cases, arcane system of laws and regulations deters some investment. Foreign investment in Maldives has primarily involved resort management, but also includes telecommunications, accounting, banking, insurance, air transport, real estate, courier services, and some manufacturing.
Invest Maldives, an organization within the Ministry of Economic Development, is the government’s lead investment promotion arm. Services provided by Invest Maldives include promoting Maldives as an investment destination, providing information to potential investors about Maldives, guidance on investment approval and business registration, and facilitating the licensing of business. Every year, Invest Maldives holds forums in collaboration with foreign consulates and embassies, business councils, and other institutions to attract foreign investment. Invest Maldives plans to expand its reach with the aim of diversifying Maldives economy.
Maldives allows foreign parties to register companies and partnerships but does not allow foreign parties to register cooperative societies or as a sole proprietor. Under a new Foreign Direct Investment policy established in February 2020, foreign investment is allowed in all major sectors of the economy apart from the following areas, which are restricted for locals only:
Mining of sand
Other mining and quarrying
Manufacture of tobacco products
Manufacture of wood and of products of wood and cork except furniture
Manufacture of rubber and plastics products
Manufacture of handicrafts and souvenirs
Wholesale trade in sectors except construction materials
Land transport services and transport via pipelines
Postal and courier activities
Logistics activities (in transportation and storage)
Operating picnic islands
Food and beverage service activities (including café, restaurants, bakeries, and other eateries)
Programming and broadcasting activities
Legal activities (law firms etc.)
Photography and videography
Rental and leasing activities (including lease of heavy-duty machineries etc.)
Employment activities such as employment agencies and recruitment services
Travel agency, tour operator, reservation service and related activities
Services to building and landscape activities
Public administration and defense; compulsory social security
Clinics except physiotherapy clinics
Repair of computers and personal and household goods
The following sectors are open for foreign investment, but with a cap on equity ownership:
Manufacture of fish products (75 percent)
Manufacture of agricultural products (75 percent)
Printing and reproduction of recorded media (49 percent)
Manufacture of furniture (75 percent)
Repair and installation of machinery and equipment (75 percent)
Installation of equipment that forms an integral part of buildings or similar structures, such as installation of escalators and elevators (40 percent)
Construction of buildings (65 percent)
Civil engineering (65 percent)
Wholesale trade of construction materials (75 percent)
Franchising in international airports and approved locations (including products & services) (75 percent)
Sea transport services (including ownership of vessels) (49 percent)
Air transport services (including freight services) (75 percent)
Warehousing and support activities for transportation (75 percent)
Guest houses in approved locations (inclusive of all services) (49 percent)
Real estate activities (65 percent)
Accounting activities (75 percent)
Architecture and engineering activities; technical testing and analysis (75 percent)
Advertising (60 percent)
Other professional, scientific, and technical activities (75 percent)
Veterinary services (75 percent)
Security and investigation activities (75 percent)
Office administrative, office support and other business support activities (75 percent)
Universities and colleges (75 percent)
Private schools (75 percent)
Computer training institutions (75 percent)
Vocational and technical educational institutes (75 percent)
Sports and recreation education (75 percent)
Engineering schools (training and conduction of courses related to aircraft engineering) (75 percent)
Educational support activities (75 percent)
Residential care services (75 percent)
Social work activities without accommodation (75 percent)
Physiotherapy clinics (75 percent)
Creative, arts and entertainment activities (excluding live music bands and DJs) (75 percent)
Libraries, archives, museums, and other cultural activities (75 percent)
Sports activities and amusement and recreation activities (75 percent)
Water sports activities (49 percent)
Dive centers and dive schools (75 percent)
The following conditions are applied to foreign investments in the construction sector, as per the foreign contractor regulation:
Construction companies valued below USD 5,000,000 are required to be at least 35 percent Maldivian owned.
Construction companies valued above USD 5,000,000 may be 100 percent foreign owned.
There is little private ownership of land; most land is leased from the government, but Maldivians are permitted to hold title to land. In August 2019, parliament repealed a July 2015 constitutional amendment that allowed foreigners to own land and islands in connection with major projects, provided they invested at least USD 1 billion and at least 70 percent of the land was reclaimed. Currently, there are no property and real estate laws or mechanisms to allow foreign persons to hold title to land.
The Land Act allows foreigners to lease land on inhabited islands for up to a maximum of 50 years, but there is no formal process for registration of leasehold titles. The Uninhabited Land Act allows foreigners to lease land on uninhabited islands for purposes other than tourism for a maximum of 21 years for investments amounting to less than USD 1 million and up to a maximum of 50 years for investments over USD 10 million. A 2010 amendment to the Tourism Act allows investors to lease an island for 50 years in general. A subsequent 2014 amendment allows the extension of resort leases up to 99 years for a payment of USD 5 million. The changes aim to incentivize investors, make it easier to obtain financing from international institutions, and increase revenue for the government. Leases can be renewed at the end of their terms, but the formula for assessing compensation value of a resort at the end of a lease has not been developed. In 2016, Parliament approved additional amendments to the Tourism Act, whereby islands and lagoons can be leased for tourism development based on unsolicited proposals submitted to the Tourism Ministry (Law No: 13/2016).
The Ministry of Economic Development screens and reviews all foreign investment proposals. The process includes standard due diligence efforts such as a local police screening of all investors, determining the financial standing of the proposed shareholders through a bank reference, and performing a background check on the investors involved. According to the government, each case is reviewed based on its merits accounting for factors such as the number of existing investors in the sector and the potential for employment and technology transfer. In practice, the investment review process is not as transparent as policy would indicate, with potential for corruption to influence the decision-making process.
The approval procedure for foreign investments is as follows:
Submit a completed Foreign Investment Application form to the Ministry of Economic Development, available at .
Walk-in consultations are available for foreign investors wishing to discuss their proposals prior to submitting an application.
The standard processing time is three working days; however, if relevant ministries must be consulted, the approval may take 10-14 days.
Register a business vehicle
Once approval is received, an investor must register as a company, partnership, or a company which has been incorporated in another jurisdiction.
Application forms for registering as a legal vehicle are available from the ministry’s website.
Sign the Foreign Investment Agreement with the Ministry of Economic Development.
This Agreement outlines the terms and conditions related to carrying out the specific business in Maldives. For tourism sector investments, a Foreign Investment Agreement is not required as the land lease signed with the Ministry of Tourism governs all matters relating to tourism businesses in Maldives.
Obtain licenses and permits.
Sectors which require operating licenses include fisheries and agriculture, banking and finance, health, tourism, transport, construction, and education.
The most recent World Trade Organization trade policy review was conducted in March 2016:
Maldives ranked 147 out of 190 on the World Bank’s Ease of Doing Business index in 2019, scoring especially low on getting electricity; registering property; trading across borders; protecting minority investors; getting credit; and resolving insolvency. On average, it takes six steps and 12 days to start a business.
The Ministry of Economic Development manages the process for business incorporations, permits, licenses and registration of logos, trade markets, seals, and other processes. The Ministry’s website details relevant policies and procedures: http://www.trade.gov.mv
The Ministry of Economic Development also maintains an online business portal at https://business.egov.mv to access the following services: Name Reservation; Business Name Registration; Sole Proprietorship registration submission; Company Registration Submission; SME Categorization; Issuance of Corporate Profile Sheet; Logo Registration; Seal Registration; Trade Mark Registration, Request for Certificate of Incumbency; Request for Letter of Good Standing; and a Request for re-issuance of registration certificate. Foreign investment companies, including entities with any foreign shareholding, must receive foreign investment approval before they can register online.
As of March 2022, the government had completed draft amendments to the Companies Act, which are scheduled to be submitted to parliament during the first session of 2022. As of March 2022, the Electronic Transactions Bill has been submitted to parliament and was undergoing committee review. A Bankruptcy Bill was submitted to Parliament in 2020 and was in the committee stage as of March 2022. The passage of these bills could affect business facilitation. In June 2019, the government signed a USD 10 million project with the Asian Development Bank to develop a National Single Window project designed to establish a national single window system for international trade and reengineered trade processes which was still ongoing as of March 2022.
The government does not promote or incentivize outward investment but does not restrict domestic investors from investing abroad either. According to UNCTAD’s 2019 World Investment Report, Maldives has not registered any outward investment since 2005.
3. Legal Regime
Maldives’ Parliament (the People’s Majlis) formulates legislation, while ministries and agencies, primarily the Ministry of Economic Development, develop regulations pertaining to investment. The Ministry of Tourism develops regulations relevant to the tourism sector. Certain business sectors require sector-level operating licenses from other ministries/agencies, including fisheries and agriculture, banking and finance, health, tourism, transport, construction, and education. The Maldives Monetary Authority (MMA) regulates the financial sector and issues banking licenses. The Capital Market Development Authority develops regulations for the capital market and pension industry and licenses securities market intermediaries. The current Parliament, sworn in in April 2019, regularly makes draft bills and regulations available for public comment.
Since its inauguration in November 2018, the Solih administration has taken steps to improve fiscal transparency. For example, beginning in December 2018, the MoF began issuing weekly updates on fiscal operations on its public website. A limited write-up on total annual debt obligations for 2022 and projected annual debt obligations for 2023 and 2024 were included in a “budget book” published on the MoF website, along with the 2022 proposed budget. It includes the total amount of debt, disaggregated into the totals of domestic and foreign debt; however, it does not include details of contingent or state-owned enterprise (SOE) debt. Statistics on Central Government debt and on debt guaranteed by the government are published on the MoF website on a quarterly basis. Details of government-held debt are published bi-annually. Quarterly debt statistics include details on disbursed outstanding debt (both domestic and guaranteed), active external loans, external grants, and active sovereign guarantees. Quarterly debt can be found at https://www.finance.gov.mv/debt-management/debt-statistics.
The website of the Attorney General’s Office (AGO) (www.mvlaw.gov.mv) publishes the full text of all existing laws and regulations, but most of the documents are in the Dhivehi language. The AGO is establishing an English language database of laws and regulations while the Judiciary is working on a database of court judgements.
Environmental, social, and governance (ESG) reporting is voluntary. Listed PLCs voluntarily report on sustainability aspects and Corporate Governance reporting is mandatory for all listed companies. Annual Reports of listed companies: https://www.cmda.gov.mv/en/public/listed-companies.
Maldives is a member of the South Asian Association for Regional Cooperation (SAARC) and is a signatory of the South Asian Free Trade Area (SAFTA).
Trade and investment related legislation and regulation are influenced by common law principles from the United Kingdom and other western jurisdictions. The judiciary has cited foreign case law from jurisdictions from the United Kingdom, the United States, and Australia when interpreting local trade-related statues.
Maldives is a member of the World Trade Organization (WTO) and has submitted some of the notifications under Technical Barriers to Trade. However, the Ministry of Economic Development reports that technical assistance is required for Maldives to fully comply with WTO obligations.
The sources of law in Maldives are its constitution, Islamic Sharia law, regulations, presidential decrees, international law, and English common law, with the latter being most influential in commercial matters. The Maldives has a Contract Law (Law No. 4/91) that codifies English common law practices on contracts. The Civil Court is specialized to hear commercial cases. The Employment Tribunal is mandated to hear claims of unfair labor practices. A bill proposing the establishment of a Mercantile Court has been pending in Parliament since 2013. The Judicial Services Commission is responsible for nominating, dismissing, and examining the conduct of all judges. The Attorney General acts as legal advisor to the government and represents the government in all courts except on criminal proceedings, which are represented by the Prosecutor General.
A Supreme Court was established as the highest judicial authority in Maldives in 2008 under the new Maldives Constitution. In addition to the Supreme Court, there are six courts: the High Court; Civil Court; Criminal Court; Family Court; Juvenile Court; and a Drug Court. There are approximately 200 magistrate courts, one in each inhabited island. The Supreme Court and the High Court serve as courts of appeal. There are no jury trials. In February 2020, President Solih stated his intent to submit a bill introducing a circuit court system in Maldives. As of March 2022, the government was working on legislative amendments to the Judicature Act to establish the circuit court.
Historically, the judicial process has been slow and, often, arbitrary. In August 2010, the Judicial Services Commission (JSC), the judicial watchdog, reappointed—and confirmed for life—191 of the 200 existing judges. Many of these judges held only a certificate in Sharia law, not a law degree. The Maldivian judiciary is a semi-independent institution but has been subjected frequently to executive influence, particularly the Supreme Court. The United Nations Office of the High Commissioner for Human Rights in 2015 stated the judicial system is perceived as politicized, inadequate, and subject to external influence. An estimated 25 percent of judges have criminal records. The media, human rights organizations, and civil society had repeatedly criticized the JSC for appointing judges deemed unqualified.
This history led President Solih’s administration to make judicial reform a top priority. In 2019, the JSC was overhauled; it removed the former Supreme Court bench and initiated investigations into ethics standards complaints against several judges from the High Court, Criminal Court, Civil Court, Family Court, and several island magistrate courts. In August 2019, Parliament amended the Judicial Service Commission Act to return control of the Department of Judicial Administration (DJA), which is responsible for the management of courts, to the JSC. This amendment was intended to overcome longstanding issues of the former Supreme Court using its direct supervision of the DJA to punish judges exhibiting judicial independence by transferring them to a lower court or another island as retribution.
Foreign parties can invest in Maldives through the Foreign Investment Law or the Special Economic Zones (SEZ) Act. Details are available on the Ministry of Economic Development’s Doing Business in the Maldives Guide and in the tax guide:
Invest Maldives (https://investmaldives.gov.mv) is the primary website for investments and provides information on areas that are open for investment in Maldives. Sector-wise, broad investment opportunities are presented on the website with links to conceptual project briefs for which Invest Maldives is seeking investment from potential investors.
A Foreign Direct Investment (FDI) policy was published in February 2020 to consolidate existing practices and introduce new guidelines, including two new routes to get government approval for foreign direct investments and new caps on equity ownership for investments in certain sectors. The first and second amendments to the FDI policy were announced on June 13 and 15, 2021 respectively. The policy is available at https://trade.gov.mv/laws-regulations under Foreign Investment Act.
Foreign investment in Maldives is governed by Law No. 25/79, covering agreements between the government and investors. The Business Registration Act (18/2014) requires foreign businesses to register as a company or partnership. The Companies Act (10/96) governs the registration and regulatory and operational requirements for public and private companies. The Partnership Act of 2011 governs the formation and regulation of partnerships. Foreign investments are currently approved for an initial period of five years, with the option to renew.
Maldives introduced income taxes through an Income Tax Act in December 2019. Taxation under the act was set to commence on January 1, 2020 but remuneration was to come within the purview of income effective April 1, 2020. The Business Profit Tax regime imposed under the Business Profit Tax Act and the Remittance Tax regime imposed under the Remittance Tax Act was repealed with the commencement of the Income Tax Act. Under the Act, tax rates remain unchanged for banks at 25 percent on profits, while taxes of 15 percent on profits that exceed USD 32,425 (MVR 500,000) would be levied on corporations, partnerships, and other business entities.
In September 2020, President Solih ratified the sixth amendment to the Employment Act, which provides a standalone regulatory framework for overseas employees. It includes guidance on registering with the online x-pat system (work permit processing portal), grant of quotas, collection of quota fees, grant of entry passes and work permits to enter and remain in the country for work, deposits and refunds, accommodation arrangements and standards, regularization and penalties for breaches.
In November 2020, President Solih ratified the second amendment to the Maldives Immigration Act. Under the new amendment, there are two additional visa options for foreigners travelling to Maldives: a corporate resident visa and a meeting visa. The corporate resident visa is a permit issued to foreigners who have invested over $250,000 in Maldives or by maintaining $250,000 in a fixed deposit account in a Maldivian bank for five years. According to the amendment, shareholders and partners of companies registered and operating in Maldives may acquire a corporate resident visa for themselves and their families under the established rules and regulations. The meeting visa is a short-duration permit under which foreigners may visit Maldives for professional reasons. This may include attending a business conference, professional convention or a meeting approved by a government agency. A meeting visa is issued according to the guidelines defined by the Registrar of Businesses.
In 2019, Maldives drafted the Competition and Fair Business Practices Act to ensure a fair market and equitable opportunities for all small and medium enterprises. President Solih ratified the bill on August 31, 2020, and it came into force in February 2021. The Ministry of Economic Development is the principal agency responsible for implementing the Act, including hearing, reviewing, and acting on competition-related complaints. No competition-related cases have been submitted to Ministry of Economic Development as of March 2022.
According to the Law on Foreign Investment (No. 25/79), the government may, with or without notice, suspend an investment when an investor indulges in an act detrimental to the security of the country or where temporary closure is necessary for national security. If, after due investigation, it cannot be concluded within 60 days of the temporary closure that the foreign investor had indulged in an activity detrimental to the security of Maldives, the government will pay compensation. Capital belonging to an investment that is closed for these reasons may be taken out of the country in a mutually agreed upon manner.
In December 2012, the Maldivian government took over operation of the Malé International Airport from GMR Infrastructure Limited, an Indian company, after the Maldivian government repudiated the 2012 contract. In 2016, the Maldivian government paid GMR USD 271 million in damages as ordered by a Singaporean Arbitration Tribunal.
4. Industrial Policies
Maldives introduced a Special Economic Zones Act (Law No.: 24/2014) in September 2014, with the goal of encouraging private investment in large-scale projects in priority areas, including: export processing activities; transportation and transshipment; universities, hospitals, and research facilities; information communication and technology parks; international financial services; oil and gas exploration; and initiatives that introduce new technologies. SEZ investments in excess of USD 150 million qualify for special tax and regulatory incentives guaranteed under the SEZ law. The list of priority sectors is reviewed by the President on a yearly basis.
Incentives under the SEZ law include:
Exemption from business profit tax
Exemption from goods and services tax
Exemption from withholding tax:
Flexible procedures in foreign employment
Exemption from taxes on sale and purchase of land
Option of acquiring freehold land by registered companies in Maldives with at least 50 percent local shareholding
The duration of these tax exemptions depends on the business area of the investment and the scale of the investment.
As of March 2021, no companies have invested in Maldives under the SEZ law.
There are no discounts or tax incentives for clean energy investments issued through the government budget. However, there are some active Power Purchase Agreements between public utility companies and renewable energy investors. There is no set feed-in tariff. However, project proponents may propose a cost-effective tariff. There is no specific discount for electricity generated from renewable energy sources. Depending on the size and type of the investment, the government grants import duty exemptions, such as for items imported for renewable energy and energy efficiency projects.
As mentioned immediately above Maldives introduced a Special Economic Zones Act (Law No.: 24/2014) in September 2014. Please refer to the above section for details of investment incentives provided for under the Act.
The Law on Foreign Investments requires Maldivian nationals to be employed unless employment of foreigners is a necessity. Qualifying employers are provided a quota, limiting the number of expatriates who can be employed. Quota levels depend on the sector and size of the investment. Employers obtain quotas from the Ministry of Economic Development before applying for employment approval. SEZ investments receive some exceptions to these rules. A report by the International Labor Organization (ILO) found that the quota system is cumbersome and difficult to implement and that inefficiencies and red tape create unnecessary administrative burdens while doing little to increase local employment. In addition, the ILO reported that when labor is not available because of quota requirements, employers often resort to the irregular labor market, providing incentives to the phenomena of visa trading.
5. Protection of Property Rights
Secured interests in property, movable and real, are recognized and enforced under the 2002 Land Act, and the councils on each island maintain registries. Rights in real estate are governed by the Land Act, the Uninhabited Islands Act (20/98) and the Tourism Act (2/99). Foreign parties cannot own land but can lease land for periods no longer than 99 years for business activity under the remaining regimes.
Although the government has an intellectual property unit within the Ministry of Economic Development, it is not active. The government has not yet signed international agreements or conventions on intellectual property rights. A Trademarks Bill is in the legislative agenda for 2022 and Ministry of Economic Development is in the final stages of drafting process of the bill which is planned to be submitted to Parliament during the first parliamentary session of 2022.
The World Intellectual Property Organization (WIPO) is providing assistance to the government on the drafting of bills regarding trademarks and geographical indicators. For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en
6. Financial Sector
Maldives Stock Exchange (MSE), first opened in 2002 as a small securities trading floor, was licensed as a private stock exchange in 2008. The Securities Act of January 2006 created the Capital Market Development Authority (CMDA) to regulate the capital markets. The MSE functions under the CMDA. The only investment opportunities available to the public are shares in the Bank of Maldives, Islamic Bank of Maldives, five state-owned public companies, a foreign insurance company, a foreign telecommunications company, and a local shipping company. The market capitalization of all listed companies listed was 1.25 billion dollars as of March 2022.
Foreigners can invest in the capital market as both retail and institutional investors. Capital market license holders from other jurisdictions can also seek licenses to carry out services in the Maldives capital market. There are no restrictions on foreign investors obtaining credit from banks in Maldives nor are there restrictions on payments and transfers for current international transactions.
The Maldives financial sector is dominated by banking. The banking sector consists of eight banks, of which three are locally incorporated, four are branches of foreign banks and one is a fully owned subsidiary of a foreign bank. There are 52 branches of these banks throughout the country of which 33 are in the rural areas. Additionally, at the end of 2017 there were 116 automatic teller machines (of which 51 were in rural areas) and 230 agent banking service providers. Maldives has correspondent banking relationships with six banks. Maldives has not announced intentions to allow the implementation of blockchain technologies (cryptocurrencies) in its banking system. In October 2021, following an announcement by an international resort management company saying it would accept cryptocurrencies as payment for their services, the MMA announced that Maldivian law does not permit cryptocurrencies for valid business transactions. International money transfer services are offered by four remittance companies through global remittance networks. Two telecommunications companies offer mobile payment services through mobile wallet accounts and this service does not require customers to hold bank accounts.
Non-bank financial institutions in the country consist of four insurance companies, a pension fund, and a finance leasing company, a specialized housing finance institution and money transfer businesses. Maldives Real Time Gross Settlement System and Automated Clearing House system is housed in the MMA for interbank payments settlements for large value and small value batch processing transactions respectively. There has been an increase in usage of electronic payments such as card payments and internet banking. All financial institutions currently operate under the supervision of the MMA.
Rules relating to the foreign exchange market are stipulated in the Monetary Regulation of the MMA. Both residents and non-residents may freely trade and purchase currency in the foreign exchange market. Residents do not need permission to maintain foreign currency accounts either at home or abroad and there is no distinction made between foreign national or non-resident accounts held with the banks operating in Maldives. The exchange rate is maintained within a horizontal band, with the value of the Rufiyaa allowed to fluctuate against the U.S. dollar within a band of 20 percent on either side of a central parity of MVR12.85 per U.S. dollar. In practice, however, the rufiyaa has been virtually fixed at the band’s weaker end of Rf 15.42 per dollar, according to the IMF.
Rules regarding foreign remittances are governed by the Regulation for Remittance Businesses under the Maldives Monetary Authority Act of 1981. There are no restrictions on repatriation of profits or earnings from investments. In 2016, the government imposed a three percent remittance tax on money transferred out of Maldives by foreigners employed in the Maldives. However, Maldives Inland Revenue Authority (MIRA) repealed the remittance tax effective from January 1, 2020, to reduce “out-of-bank” money transactions that had become commonplace following implementation of the tax.
In 2016, Maldives Finance Minister announced plans to establish a “Sovereign Development Fund (SDF)” that would support foreign currency obligations incurred to executive public sector development projects. The government has not published any documents related to the SDF and does not have a published policy document regulating funding or a general approach to withdrawals regarding SDF. As of March 2022, the MoF is in the process of drafting a Sovereign Development Fund Act.
Allocations to the SDF are included in the budget and published in the MoF’s weekly and monthly fiscal development reports published regularly on its website. The Ministry reported two sources of funding for the SDF – revenue gathered through Airport Development Fees charged to all travelers entering and departing Maldives and ad hoc allocations made by the MoF at its discretion. Expected ADF receipts are included in the Revenue Tables of the Budget. Reports from the MoF show that the size of the SDF fund had amassed USD 206.5 million as of February 25, 2021.
8. Responsible Business Conduct
There is limited but growing awareness of responsible business conduct (RBC) or corporate social responsibility (CSR) among the business elite and tourism resort owners. All new government leases for tourism resorts contain CSR requirements and individual resorts often implement their own RBC programs. However, the government does not have a consistent policy or national action plan to promote responsible business conduct. As of March 2022, the Ministry of Economic Development is in the final stages of drafting an Industrial Relations bill and an Occupational Health and Safety bill. Both bills are scheduled to be submitted to Parliament during the first session of 2022.
Several workers’ organizations monitor and advocate for RBC regarding workers’ rights, the most active of which is the Tourism Employees Association of the Maldives (TEAM). Further, many NGOs advocate for RBC in environment-related issues. Civil society organizations (CSOs) often work together to campaign for the introduction of new laws such as an Industrial Relations Law and an Occupational Health and Safety Law. These CSOs can function without harassment from the government, though COVID-related restrictions during the pandemic made conducting their activities difficult.
On December 28, 2020, Maldives submitted its updated Nationally Determined Contribution (NDC), which includes an enhanced ambition for a 26 percent decrease in emissions and carbon neutrality by 2030, conditioned on receiving financial, technological, and technical support. The new NDC lists various actions the government must undertake to achieve the targets:
Increase renewable energy electricity production, including storage and grid stabilization.
Increase supply and demand side efficiency. Increase generator efficiency and upgrade electrical grids to minimize loss. Implement a standard labelling program and improve building standards for energy efficiency.
Increase waste to energy conversion. Complete installation of 8 MW production facility in Thilafushi and 1.5 MW production facility in Addu City, optimizing electrical production and grid connectivity for both.
Establish vehicle/vessel emissions standard and an efficient transport management system. Promote hybrid-vehicles.
Use Liquefied Natural Gas (LNG) for electricity generation within the greater Malé region. Replace diesel power production in the greater Malé region with the proposed LNG plant in Thilafushi.
The government grants import duty exemptions on all items imported for renewable energy and energy efficiency projects. As of March 2022, the government was in the process of developing a natural capital accounting mechanism. The Ministry of Finance is working with the Ministry of Environment, Energy, and Climate Change to develop policies on sustainable procurement for all government agencies.
Maldives made significant progress in its efforts to increase its transparency, jumping from 130 out of 180 countries in the Transparency International Corruption Perception index in 2019 to 75th in 2020. Its score increased from 29 out of 100 to 43 out of 100, surpassing that of regional competitors like Sri Lanka, India, and Pakistan. In 2021, Maldives fell ten spots in the rankings and saw its score fall to 40. Still, corruption practices exist at all levels of society, threatening inclusive and sustainable economic growth.
The Solih administration has publicly pledged to tackle widespread corruption and judicial reform. As part of President Solih’s first 100 business day agenda, he established a Presidential Commission on Corruption and Asset Recovery to investigate corruption cases originating between February 2012 and November 2018. As of March 2022, the commission had not issued a report of its findings. Additional measures towards increased transparency include requiring public financial disclosures for cabinet members, political appointees, and all members of parliament. On December 15, 2021, the Parliament voted to dismiss all members of the Anti-Corruption Commission (ACC) following a performance audit, which found that more than 16,000 cases were still pending.
Maldives law provides criminal penalties for corruption by officials, but enforcement is weak. The law on prevention and punishment of corruption (2000) defines bribery and improper pecuniary advantage and prescribes punishments. The law also outlines procedures for the confiscation of property and funds obtained through the included offenses. Penalties range from six months to 10 years banishment, or jail terms. According to non-governmental organizations, a narrow definition of corruption in the law, and the lack of a provision to investigate and prosecute illicit enrichment, limited the Anti-Corruption Commission’s work.
Maldives acceded to the United Nations Convention against Corruption in March 2007, and under the 2008 Constitution, an independent Anti-Corruption Commission was established in December 2008. The responsibilities of the Commission include inquiring into and investigating all allegations of corruption by government officials; recommending further inquiries and investigations by other investigatory bodies; and recommending prosecution of alleged offenses to the prosecutor general, where warranted. The Commission does not have a mandate to investigate cases of corruption of government officials by the private sector.
Maldives is a party to the UN Anticorruption Convention. Maldives is not a party to the OECD Convention on Combatting Bribery.
A number of domestic human rights groups generally operated without government restriction, investigating and publishing their findings on human rights cases. Government officials, however, often have not been cooperative or responsive to their views. Upon assumption of office, President Solih’s administration pledged to submit a new NGO bill that would increase protections for non-government organizations. The bill completed parliamentary debate and is undergoing committee review as of March 2022.
Contact at the government agency or agencies that are responsible for combating corruption:
Maldives is a multi-party constitutional democracy, but the transition from long term autocracy to democracy has been challenging. Maldives gained its independence from Britain in 1965. For the first 40 years of independence, Maldives was run by President Ibrahim Nasir and then President Maumoon Abdul Gayoom, who was elected to six successive terms by single-party referenda. August 2003 demonstrations forced Gayoom to begin a democratic reform process, leading to the legalization of political parties in 2005, a new constitution in August 2008, and the first multiparty presidential elections later that year, through which Mohamed Nasheed was elected president.
In February 2012 Nasheed resigned under disputed circumstances. President Abdulla Yameen’s tenure, beginning in 2013, was marked by corruption, systemic limitations on the independence of parliament and the judiciary, and restrictions on freedom of speech, press, and association. Yameen’s tenure was also characterized by increased reliance on PRC-financing for large scale infrastructure projects, which were decided largely under non-transparent circumstances and procedures. External debt rose rapidly during his tenure.
In September 2018, Solih won his campaign for president running on a platform of economic and political reforms and transparency. His party, the MDP, then won a super majority (65 out of 87) seats in parliamentary elections in April 2019, the first single-party majority since the advent of multi-party democracy. President Solih pledged to restore democratic institutions and the freedom of the press, re-establish the justice system, and protect fundamental rights.
There is a global threat from terrorism to U.S. citizens and interests. Attacks could be indiscriminate, including in places visited by foreigners and “soft targets” such as restaurants, hotels, recreational events, resorts, beaches, maritime facilities, and aircraft. Concerns have increased about a small number of potentially violent Maldivian extremists who advocate for attacks against secular Maldivians and are involved with transnational terrorist groups. For more information, travelers may consult the 2020 Country Reports on Terrorism at https://www.state.gov/reports/country-reports-on-terrorism-2020/maldives/.
Maldives has a history of political protests. Some of these protests have involved use of anti-Western rhetoric. There are no reports of unrest or demonstrations on the resort islands or at the main Velana International Airport. Travelers should not engage in political activity in Maldives. Visitors should exercise caution, particularly at night, and should steer clear of demonstrations and spontaneous gatherings. Those who encounter demonstrations or large crowds should avoid confrontation, remain calm, and depart the area quickly. While traveling in Maldives, travelers should refer to news sources, check the U.S. Mission to Maldives website and https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Maldives.html for possible security updates, and remain aware of their surroundings at all times.
Expatriate labor is allowed into Maldives to meet shortages. Maldives Immigration reported approximately 200,000 registered expatriate workers in the country in 2019, mostly in tourism, construction, and personal services. The government reported 63,000 unregistered expatriate migrant workers, but non-governmental sources estimate the number is even higher. During May 2020, President Solih announced that the government would repatriate unregistered Bangladeshi nationals in the Maldives, following which the Ministry of Foreign Affairs, the Ministry of Economic Development and the Bangladeshi High Commission collaboratively began a repatriation exercise, with the assistance from the Bangladeshi government. Close to 9,000 unregistered migrant workers were repatriated under the program as of March 2022.
Notwithstanding the labor shortage, unemployment in Maldives is high, as many youths leaving lower secondary school have few in-country avenues to pursue higher secondary education. Although resorts may offer employment opportunities, locals are less likely to take advantage of these jobs as resort employment practices require employees to live and work on the island for long stretches of time, away from family. Religious and cultural reasons also discourage women from seeking employment on distant islands.
The Law on Foreign Investments requires Maldivian nationals to be employed unless employment of foreigners is necessary. See section on “Performance and Data Localization” for more detail.
The 2008 the Employment Act and a subsequent amendment to the Employment Act recognize workers’ right to strike and establish trade unions; however, current law does not adequately govern the formation of trade unions, collective bargaining, and the right to association. While the constitution provides for workers’ freedom of association, there is no law protecting it, which is required to allow unions to register and operate without interference and discrimination. As a matter of practice, workers’ organizations are treated as civil society.
A regulation on strikes requires employees to negotiate with the employer first, and if this is unsuccessful, then the employees must file advance notice prior to a strike. The Freedom of Peaceful Assembly Act effectively prohibits strikes by workers in the resort sector, the country’s largest money earner. Employees in the following services are also prohibited from striking: hospitals and health centers, electricity companies, water providers, telecommunications providers, prison guards, and air traffic controllers.
Maldives became a member of the International Labor Organization in 2008 and has ratified the eight core ILO Conventions. Maldives has not ratified the four priority governance ILO Conventions. In 2019, the ILO called on the Government to take the necessary measures to eliminate child labor, including through adopting a national policy and a national action plan to combat child labor in the country. In November 2019, President Solih ratified the Child Rights Protection Act, which prohibits child labor. On August 2020, the government published the General Regulations under the Child Rights Protection Act.
14. Contact for More Information
Political and Economic Officer
U.S. Mission Maldives
Colombo, Sri Lanka
Nepal’s annual Gross Domestic Product (GDP) is approximately USD33.7 billion, and trade totaling USD13.6 billion. Despite considerable potential – particularly in the energy, tourism, information and communication technology (ICT), infrastructure and agriculture sectors – political instability, widespread corruption, cumbersome bureaucracy, and inconsistent implementation of laws and regulations have deterred potential investment. While the Government of Nepal (GoN) publicly states its keenness to attract foreign investment, this has yet to translate into meaningful practice. The COVID pandemic further slowed reform efforts that might have made Nepal a more attractive investment destination. Despite these challenges, foreign direct investment (FDI) into the country has been increasing in recent years. Historically, few American companies have invested in Nepal; and yet the U.S. still features among the top 10 foreign investors in Nepal, constituting about 3% of the total FDI stock.
In 2017, the Millennium Challenge Corporation (MCC) signed a USD500 million Compact with the GoN that will focus on electricity transmission and road maintenance. The GoN has agreed to contribute an additional USD130 million for these Compact programs. Following years of delay, the GoN ratified the Compact on February 27 and attention has now turned to implementation. Despite the delay, MCC ratification showed that the GoN is committed to honoring its international commitments.
Nepal’s location between India and China presents opportunities for foreign investors. Nepal also possesses natural resources that have significant commercial potential.
Hydropower – Nepal has an estimated 40,000 megawatts (MW) of commercially-viable hydropower electricity generation potential, which could become a major source of income through electricity exports.
Other sectors offering potential investment opportunities include agriculture, tourism, the ICT sector, and infrastructure. The tourism sector is slowly recovering from the downturn due to the pandemic.
Nepal offers opportunities for investors willing to accept inherent risks and the unpredictability of doing business in the country and possess the resilience to invest with a long-term mindset. While Nepal has established some investment-friendly laws and regulations in recent years, significant barriers to investment remain.
Corruption, laws limiting the operations of foreign banks, lingering challenges in the repatriation of profits, controlled currency exchange facilities, prohibition of FDI in certain sectors as well as a minimum foreign investment threshold of NPR 50 million (USD415,000), and the government’s monopoly over certain sectors of the economy (such as electricity transmission and petroleum distribution), undermine foreign investment in Nepal.
Millions of Nepalis seek employment overseas, creating a talent drain, especially among educated youth.
A lack of understanding of international business standards and practices among the political and bureaucratic class, and a legal and regulatory regime that is not quite aligned with international practices also hinder, impede and frustrate foreign investors. Nepal’s tax regime, in particular, may be inconsistent with international practices, and could trip-up foreign investors as has happened in two cases in recent years.
Immigration laws and visa policies for foreign workers are cumbersome. Inefficient government bureaucratic processes, a high rate of turnover among civil servants, and corruption exacerbate the difficulties for foreigners seeking to work in Nepal.
Political uncertainty is another continuing challenge for foreign investors. Nepal’s ruling parties have spent much of their energy over the last years on internal political squabbles instead of governance.
Nepal’s geography also presents challenges. The country’s mountainous terrain, land-locked geography, and poor transportation infrastructure increases costs for raw materials and exports of finished goods.
Trade unions – each typically affiliated with parties or even factions within a political party – and unpredictable general strikes create business risk.
The persistent use of intimidation, extortion, and violence – including the use of improvised explosive devices – by insurgent groups targeting domestic political leaders, GoN entities, and businesses remains a source of potential instability, although the country’s most prominent insurgent group (led by Netra Bikram Chand, also known as Biplav) agreed in March 2021, to enter peaceful politics, which may reduce this threat.
1. Openness To, and Restrictions Upon, Foreign Investment
There is recognition within the GoN that foreign investment is necessary to boost economic growth to meet the GoN’s target of becoming a middle-income country by 2030. While the GoN’s stated attitude toward FDI is positive, this has yet to translate into meaningful practice.
The most significant foreign investment laws are the revised Foreign Investment and Technology Transfer Act (FITTA) of 2019, the Public-Private Partnership and Investment Act (PPIA) of 2019, the Foreign Exchange Regulation Act of 1962, the Immigration Rules of 1994, the Customs Act of 2007 (a revised act is under Parliamentary review), the Industrial Enterprise Act of 2016 (and its 2020 revision), the Special Economic Zone (SEZ) Act of 2016 (and its 2019 amendment), the Company Act (2006), the Electricity Act of 1992, the Privatization Act of 1994, and the Income Tax Act (2002). Also important is the annual budget, which outlines customs, duties, export service charges, sales, airfreight and income taxes, and other excise taxes that affect foreign investment.
The FITTA attempted to create a friendlier environment for foreign investors. It streamlined the process for inbound foreign investment by requiring approval of FDI within seven days of application. Similarly, the FITTA streamlined the profit repatriation approval process, mandating decisions within 15 days. The revised FITTA set up a Single Window Service Center, through which foreign investors can avail themselves of the full range of services provided by the various government entities involved in investment approvals, including the Ministry of Industry, Commerce, and Supplies (MOICS), the Labor and Immigration Departments, and the Central Bank. The FITTA included a provision requiring the government to set a minimum threshold for foreign investment and publish it in the Nepal Gazette. On May 23, 2019, citing that provision, the government raised the minimum foreign investment threshold ten-fold to NPR 50 million (USD415,000) from the existing NPR 5 million (USD41,500). The new FITTA commits to providing “national treatment” to all foreign investors and that foreign companies will not be nationalized. Under the FITTA, investments up to NPR 6 billion (USD52 million) come under the purview, including approval authority, of the MOICS Department of Industry (DOI), and anything above that amount falls under the authority of the Investment Board of Nepal (IBN).
Other relevant laws include the Industrial Enterprise Act, the SEZ Act, an updated Labor Act (2017), and a pending Intellectual Property Rights Act. The Industrial Enterprise Act is intended to promote industrial growth in the private sector, includes a “no work, no pay” provision, and allows companies to take certain steps – such as buying land and establishing a line of credit – while environmental assessments and other regulatory requirements are being carried out. In practice, U.S. and other foreign companies comment that corruption, bureaucracy, inefficient implementation of existing procedures and requirements, and a weak regulatory environment make investing in Nepal a tough proposition.
Another significant piece of legislation that could affect investment decisions in Nepal is the Customs Act (2007), which established invoice-based customs valuations and replaced many investment tax incentives with a lower, uniform rate. In 2017, the Department of Customs started to use the Automated System for Customs Data (ASYCUDA) world software platform. In addition, the Electricity Act includes special terms and conditions for investment in hydropower development and the Privatization Act of 1994 authorizes and defines the procedures for privatization of state-owned enterprises.
There is no public evidence of direct executive interference in the court system that could affect foreign investors. However, in recent years there has been public and media criticism of the politicization of the judiciary, including appointments of judges to Appellate Courts and the Supreme Court allegedly based on their political affiliations.
The IBN, a high-level government body chaired by the Prime Minister, was formed in 2011 to promote economic development in Nepal. In addition to approving large-scale investment projects, the IBN is also the GoN body charged with assessing and managing public-private partnership (PPP) projects. It has the task of attracting large foreign investors to Nepal and was a key organizer of the last two Investment Summits in 2017 and 2019. It is the primary point of contact for large investors (above USD50 million), especially those engaged in public infrastructure projects.
The Nepal Business Forum (http://www.nepalbusinessforum.org/) was formed in 2010 with the “aim of improving the business environment in Nepal through better interaction between the business community and government officials.” The NBF does not meet according to a regularized schedule, and the Embassy is not aware of any formal mechanisms or platforms to enable on-going dialogue, aside from the IBN, DOI, and the NBF.
Foreign and domestic private entities have the right to establish and own business enterprises in Nepal and engage in various forms of remunerative activity. The FITTA 2019 slightly increased the number of sectors open to foreign investment. Outside of the restricted sectors listed below, foreign investment up to 100 percent ownership is permitted in most sectors. The GoN announced the opening of FDI in the primary agricultural sector for exports in January 2021. However, the matter is sub judice at the Supreme Court (as of March 2022), and so remains unimplemented.
During 2018 and 2019, the Market Monitoring Unit of the MOICS’s Department of Supply Management raided business establishments, seized records, closed business outlets, and brought charges against private businesses in various sectors, including retail, healthcare, and education, alleging that companies were charging prices that were too high. Such raids are sporadic rather than a matter of sustained policy but contribute to creating an uncertain business environment.
The sectors excluded from foreign investment are listed in the annex of the FITTA 2019 and include:
Primary agricultural sectors including animal husbandry, fisheries, beekeeping, oil-processing (from seeds or legumes), milk-based product processing; (Note: The GoN is attempting to open this sector for FDI if 75 percent of the products are exported. However, the matter is under review at the Supreme Court.)
Small and cottage enterprises;
Personal business services (haircutting, tailoring, driving, etc.);
Arms and ammunition, bullets, gunpowder and explosives, nuclear, chemical and biological weapons, industries related to atomic energy and radioactive materials;
Real estate (excluding construction industries), retail business, domestic courier services, catering services, money exchange and remittance services;
Tourism-related services – trekking, mountaineering and travel agents, tourist guides, rural tourism including arranging homestays;
Mass media (print, radio, television, and online news), feature films in national languages;
Management, accounting, engineering, legal consultancy services, language, music, and computer training; and
Any consultancy services in which foreign investment is above 51 percent.
Investment proposals are screened by the DOI or the IBN to ensure compliance with the FITTA and other relevant laws. Historically, the lack of clear, objective criteria and timeframes for decisions have resulted in complaints from prospective investors. While the GoN intended the FITTA to address these issues, the regulations enabling the implementation of the Act were only completed in January 2021, and anecdotal evidence suggests services to prospective investors through the One Window Service Center at the DOI are slowly improving.
U.S. investors are not disadvantaged or singled out relative to other foreign investors by any of the ownership or control mechanisms, sector restrictions, or investment screening mechanisms. U.S. companies often note that they struggle to compete with firms from neighboring countries when it comes to cost, but this is not a factor resulting from any specific GoN policy.
In recent years, GoN officials have proclaimed Nepal “open for business” and explicitly welcomed foreign investment. While the GoN likes to appear enthusiastic in its efforts to attract foreign investors, the reality has not yet matched the rhetoric. Three laws directly affecting foreign investment (FITTA, PPP, and SEZ) were hurriedly revised and passed by Parliament but left little time for stakeholder consultations or transparency in the process. Both foreign and domestic private sector representatives often state that the GoN has not done enough to improve the business environment. While welcome provisions were included in the FITTA—for example, a streamlined approval process and single window service center—an assessment of the true effects of the reforms await full implementation.
After obtaining a letter of approval from DOI or IBN, Nepal’s Office of Company Registrar (OCR) maintains a website (http://ocr.gov.np/index.php) on which foreign companies can register. OCR’s website also links to an information portal (http://www.theiguides.org/public-docs/guides/nepal), maintained by UNCTAD and the International Chamber of Commerce, with resources and information for potential investors interested in Nepal. According to the portal, registering a company takes “between three days and a week with the law authorizing up to 15 days.” Independent think tanks, however, have noted the online system does not eliminate corruption, and bureaucrats frequently request additional documentation that must be submitted in person, rather than online. Users ranked the Nepal portion of the OCR business registration website a four out of ten, according to the UNCTAD supported Global Enterprise Registration website www.GER.co.
The Act Restricting Investment Abroad (ARIA) of 1964 prohibits outbound investment from Nepal. Some enterprising Nepalis have found ways around the Act, but for most Nepali investors, outward investment is a practical impossibility. The GoN is currently in the process of revising the Foreign Exchange Regulation Act, which is expected to annul the ARIA, paving the way to limited capital account convertibility.
2. Bilateral Investment Agreements and Taxation Treaties
Nepal has Bilateral Investment Agreements in force with four countries: France (1985), Germany (1988), the United Kingdom (1993), and Finland (2011). In addition, Nepal has Bilateral Investment Agreement signed (but not in force) with Mauritius (signed 1999). Another one was signed with India in 2011 but was terminated in 2017.
Nepal has a free trade agreement with India, the Indo-Nepal Treaty of Trade, signed in 2002. Nepal is a member of the South Asian Free Trade Area (SAFTA) along with Bangladesh, Bhutan, India, Pakistan, Sri Lanka, and the Maldives.
Nepal is also a member of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Free Trade Area, along with Bhutan, Myanmar, Sri Lanka, Bangladesh, India, and Thailand.
Nepal does not have a bilateral investment treaty or free trade agreement with the United States, but has a Trade and Investment Framework Agreement (TIFA). Nepal has “Double Tax Avoidance” treaties with China, India, Mauritius, Sri Lanka, Pakistan, South Korea, Thailand, Austria, Norway, and Qatar. The United States Embassy in Nepal (Post) is not aware of any recent or upcoming changes to the taxation regime. Nepal’s shift to a federalist structure, however, means that there will be new tax policies at the local and provincial levels.
How consistent Nepal’s tax regime is with international standards is questionable. In 2019, a Malaysian company, Axiata (owner of NCell, the largest private telecom company in Nepal), was made to pay $450 million for alleged tax evasion over the 2016 transfer of NCell’s ownership from its previous owners, Swedish firm Telia Sonera. The Supreme Court’s verdict on this case has set the precedent for placing buyers on the hook for the tax liabilities of the sellers. Axiata has taken the matter to the International Center for Settlement of Investment Disputes (ICSID), which is still deliberating on the case. More recently, Bottlers Nepal Ltd (BNL), a subsidiary of the Coca-Cola Company, is similarly embroiled in a tax evasion dispute with the GoN in relation to a 2014 offshore transfer of ownership. Nepal’s Department of Revenue Investigation (DRI) has taken BNL to court under the Income Tax Act 2002 and the Revenue Leakage (Investigation and Control) Act 1996. While the final verdict is pending from the ICSID (on Ncell) and BNL’s case has only just entered the local court, the current implication of both these cases is that Nepal’s tax regime—particularly the above two Acts—needs to be carefully considered by foreign investors when buying/selling companies in Nepal to understand their local tax liabilities.
3. Legal Regime
The GoN has many laws, policies, and regulations that look good on paper, but are often not fully and consistently enforced. Frequent government changes and staff rotations within the civil service result in officials who are often unclear on applicable laws and policies or interpret them differently than their predecessors. Many foreign investors note that Nepal’s regulatory system is based largely on personal relationships with government officials, rather than systematic and routine processes. Legal, regulatory, and accounting systems are not transparent and are not consistent with international norms. The World Bank gives Nepal a score of 1.75 (on a scale of one to five) on its “Global Indicators of Regulatory Governance” index https://rulemaking.worldbank.org/en/data/explorecountries/nepal, and notes that ministries in Nepal do not routinely create lists of “anticipated regulatory changes or proposals” and do not have the “legal obligation to publish the text of proposed regulations before their enactment.”
Historically, rule-making and regulatory authority resided almost exclusively with the central government in Kathmandu. Nepal’s 2015 Constitution outlines a three-tiered federalist model. Following elections in 2017, seven provincial governments and 753 local government units were established. Foreign businesses can expect to continue to interact with bureaucrats at the central government level in the near term, as national regulations remain the most relevant for foreign businesses. However, this could change over time as provincial governments become more established.
Traditionally, once acts are drafted and passed by Parliament, it has been incumbent upon the related government agencies and ministries to draft regulations to enforce the acts. Regulations are passed by the cabinet and do not need parliamentary approval. Nepal still lacks an established mechanism or system for the review of regulations based on scientific or data-driven assessments, or for conducting quantitative analyses for such purposes. The World Bank notes that the GoN is not required by law to solicit comments on proposed regulations, nor do ministries or regulatory agencies report on the results of the consultation on proposed regulations. Post is not aware of any informal regulatory processes that are managed by nongovernmental organizations or private sector associations.
Legal, regulatory, and accounting systems are neither fully transparent nor consistent with international norms. Though auditing is mandatory, professional accounting standards are low, and practitioners may be poorly trained. As a result, published financial reports can be unreliable, and investors often rely instead on businesses reputations unless companies voluntarily use international accounting standards.
Publicly listed companies in Nepal follow the 2013 Nepal Financial Reporting Standards (NFRSs), which were prepared on the basis of the International Financial Reporting Standards (IFRSs) 2012, developed by the IFRS Foundation and their standard-setting body, the International Accounting Standards Board. Audited reports of publicly listed companies are usually made available.
Draft bills or regulations are sometimes made available for public comment, although there is no legal obligation to do so. The government agency that drafts the bill is responsible for undertaking a public consultation process with key stakeholders by issuing federal notices for comments and recommendations, although it is unclear in practice how many government agencies actually do so. Additionally, all parliamentarians are given copies of the draft bills to share with their constituencies. This applies to all draft laws, regulations, and policies. Parliamentary rules, however, require that draft amendments to bills be proposed only within 72 hours of a bill’s introduction, giving minimal time for lawmakers, constituents, or stakeholders to submit considered feedback. In practice, post’s observation has been that there is no clear timeline for the process of creating and passing bills, including the time period provided for public or stakeholder consultation.
Generally, the government agency that drafted the bill, legislation, policy, or regulation posts the actual draft (in Nepali language) online. Once approved, the Department of Printing, an office that is part of the Ministry of Communications and Information Technology, posts all acts online. Regulatory actions and summaries of these actions are available at the Office of the Auditor General and the Ministry of Finance. Both of these government agencies post periodic reports on the regulatory actions taken against agencies violating laws, rules, and regulations. Such summaries and reports are available online in Nepali.
Individual ministries are responsible for enforcement of regulations under their purview. The enforcement process is legally reviewable, making the agencies publicly accountable. There are several government entities, including the Parliamentary Accounts Committee, the Office of the Auditor General, and the Commission for the Investigation of Abuse of Authority (CIAA) that oversee the government’s administrative and regulatory processes. Post is not aware of any regulatory reform efforts.
Nepal’s budget and information on debt obligations are widely and easily accessible to the general public. The annual budget is substantially complete and considered generally reliable. Nepal’s supreme audit institution reviews the government’s accounts, and its reports are publicly available.
Nepal is one of eight members of the South Asian Association for Regional Cooperation (SAARC), an intergovernmental organization and geopolitical union of nations in South Asia including: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Under SAARC, Nepal is also a member of the South Asian Free Trade Area (SAFTA) which came into force on January 1, 2006 with the goal of creating a duty-free trade regime among SAARC member countries. According to SAFTA rules, member countries were supposed to reduce formal tariff rates to zero by 2016. However, tariff barriers remain in place for hundreds of “sensitive” goods produced by various SAARC member countries that do not qualify for duty-free status.
Nepal is also a member of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), an international organization of seven South Asian and Southeast Asian nations: Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan, and Nepal.
Bangladesh, Bhutan, India, and Nepal – known collectively as BBIN – are working together to develop a platform for sub-regional cooperation in such areas as water resources management, power connectivity, transportation, and infrastructure development. The four BBIN nations agreed on a motor vehicle agreement (MVA – both cargo and passengers) in 2015. In early 2018, Bangladesh, India, and Nepal also agreed on operating procedures for the movement of passenger vehicles, and in early 2020, the same three countries met to draft a memorandum of understanding to implement the MVA, without obligation to Bhutan.
Nepal’s regulatory system generally relies on international norms and standards developed by the United Nations, World Bank, World Trade Organization (WTO), and other international organizations and regulatory agencies.
Nepal joined the WTO in March 2004. According to its WTO accession commitments, the GoN agreed to provide notice of all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). However, GoN officials are unable to confirm whether this procedure is followed consistently.
Nepal ratified the WTO’s Trade Facilitation Agreement (TFA) in January 2017. As a least developed country (LDC), Nepal could benefit from additional technical assistance from WTO members through the TFA Facility. A 2017 Asia Development Bank report noted, “Nepal has been making progress in undertaking trade facilitation reforms over the years, particularly those related to the customs.” The WTO’s December 2018 policy review (https://www.wto.org/english/tratop_e/tpr_e/tp481_crc_e.htm) noted Nepal’s efforts to diversify its narrow production and export base and encouraged Nepal to pursue further economic reform, including through its National Trade Integration Strategy (https://www.oecd.org/aidfortrade/countryprofiles/dtis/Napal-DTIS-2016.pdf) as well as address its supply side constraints, most notably high transit and transportation costs. According to the TFA Facility’s website (http://www.tfafacility.org), Nepal has submitted provisions for all three categories, a key step for implementing TFA Category A, B, and C requisites.
Nepal’s court system is based on common law and its legal system is generally categorized under civil and criminal offences and laws. Contract law is codified. In theory, contracts are automatically enforced, and a breach of contract can be challenged in a court of law. In practice, enforcement of contracts is weak. Nepal’s contracts are guided by the Contract Act of 2000. Nepal does not have a commercial code. All civil courts are authorized to hear commercial complaints. A ‘commercial bench’ has been established at the High Court, but judges who preside on this bench are the same judges dealing with civil and criminal cases as well.
The judicial system is independent of the executive branch. Regulations or enforcement actions are appealable, and they are adjudicated in the national court system. In general, the judicial process is procedurally competent, fair, and reliable. In some isolated or high-profile cases, however, court judgments have come under criticism for alleged political interference favoring particular individuals and groups. There remains widespread public perception that bribery and judicial conflicts of interest affect some judicial outcomes.
In March 2019, three laws directly affecting foreign investment (FITTA, PPP, and SEZ) were hurriedly revised and passed by Parliament ahead of the 2019 Investment Summit. This left little time for effective stakeholder consultations and transparency. While welcome provisions were included in the FITTA (a promised single window service center and a streamlined approval process, for example), the regulations to implement the reforms were only completed in January 2021 and observers remain skeptical given the GoN’s record of making lofty announcements without delivering on them in practice. As drafted, even these pieces of reform legislation retain various institutional and procedural impediments to smooth businesses practices which will dissuade all but the most risk-tolerant investors.
The Competition Promotion and Market Protection Board, comprised of GoN officials from various ministries and chaired by the Minister of Industry, Commerce, and Supplies, is responsible for reviewing competition-related concerns. Post is not aware of any competition cases that have involved foreign investors. MOICS’ Department of Supplies Management has a mandate to crack down on cartels and protect consumers. In the previous two years, it has played a more active role in cracking down on businesses—ranging from retailers to healthcare facilities to private schools—for alleged price-gouging. However, private sector representatives have said that this department is interfering with the free market and is being used by businesses with political connections to target competitors, rather than as a mechanism to protect consumers.
Nepal’s private sector is dominated by cartels and syndicates—often under the banner of business associations – which are often successful in limiting competition from new market entrants in multiple sectors. In 2018, the GoN issued new permits for transportation companies, and the Minister of Physical Infrastructure and Transport called the cartels “a curse to the nation.” Subsequently, however, the GoN has taken few additional steps to crack down on cartels.
The Industrial Enterprise Act of 2016 states that “no industry shall be nationalized.” To date, there have been no cases of nationalization in Nepal, nor are there any official policies that suggest expropriation should be a concern for prospective investors. However, companies can be sealed or confiscated if they do not pay taxes in accordance with Nepali law, and bank accounts can be frozen if authorities have suspicions of money laundering or other financial crimes. Nepal does not have a history of expropriations. There have been no government actions or shifts in government policy that indicate expropriations will become more likely in the foreseeable future.
There is no single specific act in Nepal that exclusively covers bankruptcy. The 2006 Insolvency Act provides guidelines for insolvency proceedings in Nepal and specifies the conditions under which such proceedings can occur. Additionally, the General Code of 1963 covers bankruptcy-related issues. Creditors, shareholders, or debenture holders can initiate insolvency proceedings against a company by filing a petition at the court.
If a company is solvent, its liquidation is covered by the Company Act of 2006. If the company is insolvent and unable to pay its liabilities, or if its liabilities exceed its assets, then liquidation is covered by the Insolvency Act of 2006. Under the Company Act, the order of claimant priority is as follows: 1) government revenue; 2) creditors; and 3) shareholders. Under the Insolvency Act, the government is equal to all other unsecured creditors. Monetary judgments are made in local currency. Firms and entrepreneurs who have declared bankruptcy are blacklisted from receiving loans for 10 years.
4. Industrial Policies
The Nepal Laws Revision Act of 2000 eliminated most tax incentives, however, exports are still favored, as is investment in certain “priority” sectors, such as agriculture, tourism, and hydropower. Incentives for these sectors usually take the form of reduced or subsidized interest rates on bank loans. There is no discrimination against foreign investors with respect to export/import policies or non-tariff barriers. The GoN also offers tax incentives to encourage industries to locate outside the Kathmandu Valley. Newly formed provincial governments are likely to consider offering their own investment incentives in the future. Post is unaware of the GoN issuing guarantees for FDI projects, but it has been open to joint financing arrangements.
In August 2016, Nepal’s Parliament approved the Special Economic Zone (SEZ) Act, which provides numerous incentives for investors in SEZs, including exemptions on customs duties for raw materials, streamlined registration processes, guaranteed access to electricity, and prohibition of labor strikes. A revision to the SEZ Act in 2019 provided more incentives, including reducing to 60 percent the requirement that industries within an SEZ export 75 percent of their production. The GoN maintains plans to have a network of up to 15 SEZs throughout the country and is currently developing the country’s first two special economic zones in Bhairahawa and Simara, which are partly operational. Both are located in southern Nepal near the border with India.
There are no mandates for local employment. However, numerous foreign investors and foreign workers have complained that obtaining work visas is an extremely onerous process, requiring the approval of multiple GoN agencies and instances of demands for bribes when obtaining and renewing visas. (For information on work visas, http://www.nepalimmigration.gov.np. A recommendation letter from the relevant ministry overseeing the investment has become a de facto requirement. The GoN limits the number of expatriate employees permitted to work at a company, expressing concern that foreign workers are “taking jobs” from Nepali citizens. Representatives of foreign companies have told Post that these attitudes and extremely inflexible immigration laws make it difficult to legally get a visa for short-term employees or consultants. There are no mandates for local employees in senior management and on boards of directors.
There are no government-imposed conditions on permission to invest, other than those already discussed above, such as the list of sectors from which foreign investment is restricted. The GoN does not use “forced localization” policies designed to compel companies to relocate all or part of their global business operations within its borders.
Nepal also does not have any requirements for IT providers to turn over source code or provide access to encryption. In late 2018, parliament passed the Privacy Act and implementing regulations are being drafted. While the new regulations may clarify restrictions and responsibilities of companies around personal data management, Nepal has not previously had any regulations that would impede companies from freely transmitting customer or other business-related data outside Nepal. Similarly, there are no laws related to storage of data for law enforcement or privacy purposes.
Post is unaware of any Nepali laws regarding performance requirement, defined by the United Nations Conference on Trade and Development as “stipulations, imposed on investors, requiring them to meet certain specified goals with respect to their operations in the host country.”
5. Protection of Property Rights
The Secured Transactions Act (2006) applies to all transactions involving mortgages or liens where the effect is to secure an obligation with collateral, including pledge (when lender takes actual possession of goods), hypothecation (when possession remains with the borrower), hire-purchase, sale of accounts and secured sales contracts, and lease of goods. The GoN has established the Secured Transactions Registry Office for registering notices under this Act. Pursuant to this Act, the GoN may also designate any office to perform the notice registration function. There are no debt markets in which securitization (use of a physical asset to back up a financial instrument) would be used. However, physical assets, particularly property and land, are often used to secure personal and small business loans.
Nepal is ranked 97th in the World Bank’s 2020 Doing Business Report for registering property. The report notes that registering property requires four procedures that typically take six days to complete. There are no exclusive regulations for land lease or acquisition by foreign and/or non-resident investors. The FITTA and related laws governing foreign investment clearly state that investors can own property, but the title rests with the business/company rather than the foreign investor in an individual capacity.
The GoN does not maintain official statistics on untitled land. The Ministry for Agriculture, Land Management and Cooperatives (previously known as the Ministry of Land Reform and Management) has been working for decades to identify property titles and registration. Political instability, poor record-keeping, and resistance from stakeholders, however, has made this a difficult task. Most arable land has a title, although titles have sometimes been acquired in a fraudulent manner.
For legally purchased property, ownership does not revert to other owners. But, if that property remains unoccupied or unused for an extended period, there is the possibility that squatters may occupy and claim the land. Although such occupation is not legally enforceable, there are hundreds of cases of unsettled or unlawful occupation of property languishing in Nepal’s court system, most dating back to the 1996-2006 Maoist insurgency.
In 2007, Nepal ratified the International Labour Organization’s (ILO) Indigenous and Tribal Peoples Convention (1989), which guarantees the rights of indigenous peoples. Post is not aware of any legal case in Nepal citing this convention.
Nepal has a consolidated act on IP (The Patent, Design, and Trademark Act of 1965) that provides protection for industrial property, including patents, designs, and trademarks and a separate act on Copyright (The Copyright Act of 2002). Patent protection is afforded to inventions, principles, formulae, and design protection, including physical shape and appearance. Trademark protections include the word, sign, picture, or a combination thereof to differentiate the product from others in the market. The Copyright Act of 2002 covers most modern forms of authorship and provides for adequate periods of protection. Unlike other jurisdictions, Trademarks must be registered in Nepal to receive protection. Once registered, trademarks are protected for a period of seven years. For registration and grant of industrial designs and patents, an applicant must file formal applications with Nepal’s Intellectual Property office.
The Ministry of Industry, Commerce, & Supplies’ Department of Industry looks after patent and trademark issues, while the Ministry of Culture, Tourism, and Civil Aviation oversee copyright issues. The Department of Industry also acts as a semi-judiciary unit in cases of protection of industrial property and the settlement of disputes and other administrative procedures. Nepal is a signatory to the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), a member of the World Intellectual Property Organization (WIPO), and the Paris Convention for Industrial Property. In 2017, the Government of Nepal (GoN) finalized an IPR Policy to be used as the foundation for new IPR legislation. In 2018, GoN came out with a comprehensive draft law on IP. However, the draft is still under governmental review. The draft legislation substantially improves existing IP laws and regulations and endeavors to codify all industrial property laws in one place. Once enacted, the law on IPR aims to bring the Nepalese national law in line with international IP standards. Nepal is not included in the U.S. Trade Representative’s (USTR) Special 301 Report or Notorious Markets List. However, enforcement of existing IPR violations is sporadic at best. Law enforcement officials do not have adequate training on IPR issues and offenders can often pay a small bribe to avoid prosecution. Nepal’s IPR laws are several decades old and penalties are too low to have deterrent effect. Awareness of IPR issues is low in the private sector and in the legal system. As a result, Nepal faces serious challenges in preventing the sale of counterfeit goods. The primary marketplaces in Nepal are flooded with counterfeit products, including electronic equipment, clothing, digital media, and pharmaceutical products. Nepal does not track seizures of counterfeit goods, neither does it have a strong track record of prosecuting IPR violations.
Improving Nepal’s IPR policies has been a top priority for the U.S. Embassy, and the United States Patent and Trademark Office (USPTO) has conducted nearly a dozen training courses on various aspects of IPR policy for Nepali officials over the past several years. As a result, Nepal’s Cabinet approved a new IPR Policy in March 2017 that has served as the foundation for new IPR legislation. Representatives from USPTO have reviewed the draft IPR bill, most recently in 2019, and provided the GoN recommendations on how the policy could be strengthened. This IPR Bill is currently awaiting clearance by the Ministry of Finance and will then be presented to the cabinet and parliament for ratification. It is expected that this new IP Act will be enacted some time in 2022; however, as this is an election year, it could be postponed to 2023. As Nepal works to update its IPR legislation, USPTO and the U.S. Embassy continue to advocate for stronger IPR protection.
6. Financial Sector
The Nepal Stock Exchange (NEPSE) is the only stock exchange in Nepal. The majority of NEPSE’s 255 listed companies are hydropower companies and banks, with the NEPSE listings for banks driven primarily by a regulatory requirement rather than commercial considerations. There are few opportunities for foreign portfolio investment in Nepal. Foreign investors are not allowed to invest in the Nepal Stock Exchange nor permitted to trade in the shares of publicly listed Nepali companies; only Nepali citizens and Non-Resident Nepalis (NRNs) are allowed to invest in NEPSE and trade stock. The FITTA, however, allows for the creation of a “venture capital fund” to enable foreign institutional investors to take equity stakes in Nepali companies.
The Securities Board of Nepal (SEBON) regulates NEPSE, but the Board does little to encourage and facilitate portfolio investment. While both NEPSE and SEBON have been enhancing their capabilities in recent years, Post’s view is that the NEPSE is far from becoming a mature stock exchange and likely does not have sufficient liquidity to allow for the entry and exit of sizeable positions. Some experts have raised concerns about the Ministry of Finance’s degree of influence over both SEBON and NEPSE and have cited lack of independence from government influence as an impediment to the development of Nepal’s capital market. (See: https://milkeninstitute.org/reports/framing-issues-modernizing-public-equity-market-nepal.)
Nepal moved to full convertibility (no foreign exchange restrictions for transactions in the current account) when it accepted Article VIII obligations of IMF’s Articles of Agreement in May 1994. In line with this, the GoN and NRB refrain from imposing restrictions on payments and transfers for current international transactions.
Credit is generally allocated on market terms, although special credit arrangements exist for farmers and rural producers through the Agricultural Development Bank of Nepal. Foreign-owned companies can obtain loans on the local market. The private sector has access to a variety of credit and investment instruments. These include public stock and direct loans from finance companies and joint venture commercial banks. Foreign investors can access equity financing locally, but in order to do so, the investor must be incorporated in Nepal under the Companies Act of 2006 and listed on the stock exchange. The banking sector has grappled with shortages of loanable funds in the last couple of years resulting in high interest rates on loans. One of the major reasons for this is slow and inefficient government spending leading to lack of liquidity in the system. With the return of relative political stability in 2018, it was hoped this problem would be reduced but it has continued.
The NRB has promoted mergers in the financial sector and published merger bylaws in 2011 to help consolidate and better regulate the banking sector. As of January 2021, there were 27 commercial banks, 19 development banks, and 21 finance companies registered with the NRB. This total does not include micro-finance institutions, savings and credit cooperatives, non-government organizations (NGOs), and other institutions, which provide many of the functions of banks and financial institutions. There are no legal provisions to defend against hostile takeovers, but there have been no reports of hostile takeovers in the banking system.
Nepal’s poor infrastructure and challenging terrain has meant that many parts of the country do not have access to financial services. A 2015 study by the UN Capital Development Fund
(UNCDF) reported that 61 percent of Nepalis had access to formal financial services (40 percent to formal banking). Following local elections in 2017, the GoN established 753 local government units and promised that each unit would be served by at least one bank. As of January 2020, 8 local units were still without a bank. Most of the local units without banks are in remote locations with few suitable buildings and a lack of proper security and internet connectivity.
Nepal’s banking sector is relatively healthy, though fragmented, and NRB bank supervision, while improving, remains weak, allegedly due to political influence according to several private sector representatives. The GoN hopes to strengthen the banking system by reducing the number of smaller banks and it has actively encouraged consolidation of commercial banks; there are currently 27 commercial banks, down from 78 in 2012. Most banks locate their branches in and around Kathmandu and in the large cities of southern Nepal. Some banks are owned by prominent business houses, which could create conflicts of interest. There are also a large number of cooperative banks that are governed not by the NRB but by the Ministry of Agricultural, Land Management, and Cooperatives. These cooperatives compete with banks for customers.
In January 2017, Parliament approved the Bank and Financial Institutions (BAFI) Act. First introduced in 2013, BAFI is designed to strengthen corporate governance by setting term limits for Chief Executive Officers and board members at banks and financial institutions. The legislation also aims to reduce potential conflicts of interest by prohibiting business owners from serving on the board of any bank from which their business has taken loans.
In 2018, NRB was criticized for not taking action to relieve a liquidity crunch and the Nepal Banker’s Association came to a gentlemen’s agreement to limit deposit rates. The NRB did not protest this action, leading to some criticism that it was not fulfilling its role as a regulator against what many perceived as cartel behavior.
The NRB regulates the national banking system and also functions as the government’s central bank. As a regulator, NRB controls foreign exchange; supervises, monitors, and governs operations of banking and non-banking financial institutions; determines interest rates for commercial loans and deposits; and determines exchange rates for foreign currencies. As the government’s bank, NRB manages all government income and expenditure accounts, issues Nepali bills and treasury notes, makes loans to the government, and determines monetary policy.
Existing banking laws do not allow retail branch operations by foreign banks, which compels foreign banks to set up a local bank if choosing to operate in Nepal. For example, Standard Chartered formed Standard Chartered Nepal. All commercial banks have correspondent banking arrangements with foreign commercial banks, which they use for transfers and payments. Standard Chartered is the only correspondent bank with a physical presence in Nepal and handles foreign transactions for the NRB. Nepal will be undergoing a review by the Financial Action Task Force (FATF) in 2021 to assess its anti-money laundering regime. Although unlikely, Nepal risks losing its correspondent banking relationships or increased FATF monitoring if it fails this assessment. Foreigners who are legal residents of Nepal with proper work permits and business visas are allowed to open bank accounts.
Nepal has no sovereign wealth funds.
7. State-Owned Enterprises
There are 36 state-owned enterprises (SOEs) in Nepal, including Nepal Airlines Corporation, Nepal Oil Corporation, and the Nepal Electricity Authority. Since 1993, Nepal has initiated numerous market policy and regulatory reforms in an effort to open eligible government-controlled sectors to domestic and foreign private investment. These efforts have had mixed results. The majority of private investment has been made in manufacturing and tourism—sectors where there is little government involvement and existing state-owned enterprises are not competitive. Many state-owned sectors are not open for foreign investment. Information on the annual performance of Nepal’s SOEs’ can be found on this website. https://mof.gov.np/uploads/document/file/Annual%20Status%20Review%20of%20Public%20Enterprises%202019_20200213054242.pdf.
Corporate governance of SOEs remains a challenge and executive positions have reportedly been filled by people connected to politically appointed government ministers. Board seats are generally allocated to senior government officials and the SOEs are often required to consult with government officials before making any major business decisions. A 2011 executive order mandates a competitive and merit-based selection process but has encountered resistance within some ministries. Third-party market analysts consider most Nepali SOEs to be poorly managed and characterized by excessive government control and political interference. According to local economic analysts, SOEs are sometimes given preference for government tenders, although official policy states that SOEs and private companies are to compete under the same terms and conditions.
Private enterprises do not have the same access to finance as SOEs. Private enterprises mostly rely on commercial banks and financial institutions for business and project financing. SOEs, however, also have access to financing from state-owned banks, development banks, and other state-owned investment vehicles. Similar concessions or facilities are not granted to private enterprises. SOEs receive non-market-based advantages, given their proximity to government officials, although these advantages can be hard to quantify. Some SOEs, such as the Nepal Electricity Authority or the Nepal Oil Corporation have monopolies that prevent foreign competitors from entering those market sectors.
The World Bank in Nepal assesses corporate governance benchmarks (both law and practice) against the OECD Principles of Corporate Governance, focusing on companies listed on the stock market. Awareness of the importance of corporate governance is growing. The NRB has introduced higher corporate governance standards for banks and other financial institutions. Under the OECD Principles of Corporate Governance, the World Bank recommended in 2011 that the GoN strengthen capital market institutions and overhaul the OCR. Although some reforms were initiated, many were never finalized and no reforms have been instituted at the OCR.
The Privatization Act of 1994 authorizes and defines the procedures for privatization of state-owned enterprises to broaden participation of the private sector in the operation of such enterprises. The Privatization Act of 1994 generally does not discriminate between national and foreign investors, however, in cases where proposals from two or more investors are identical, the government gives priority to Nepali investors.
Economic reforms, deregulation, privatization of businesses and industries under government control, and liberalized policies toward FDI were initiated in the early 1990s. During this time, sectors such as telecommunications, civil aviation, coal imports, print and electronic media, insurance, and hydropower generation were opened for private investment, both domestic and foreign. The first privatization of a state-owned corporation was conducted in October 1992 through a Cabinet decision (executive order). Since then, a total of 23 state-owned corporations have been privatized, liquidated, or dissolved, though the process has been static since 2008.
The last company to be (partially) privatized was Nepal Telecom in 2008 (although the GoN still is the majority shareholder). Since then, no SOEs have been privatized. In the past, privatization was initiated with a public bidding process that was transparent and non-discriminatory. Procedural delays, resistance from trade unions, and a lack of will within the GoN, however, have created obstacles to the privatization process. The Corporate Coordination and Privatization Division of the Ministry of Finance is responsible for management of the privatization program. Foreign investors can participate in privatization programs of state-owned enterprises.
8. Responsible Business Conduct
Awareness of the general international expectations of responsible business conduct (RBC) remains very low in Nepal. Government rules, policies, and standards related to RBC are mostly limited to environmental issues. Social and governance issues are poorly promoted and enforced by the government.
Government laws, policies, and rules concerning RBC, including environmental and social standards, are in place. However, the government agencies and officials responsible for enforcing them have been criticized for failing to fulfill their responsibilities. The GoN has not drafted a national action plan for RBC and does not factor RBC policies into procurement decisions. Workers’ organizations and unions are the most vocal entities promoting or monitoring RBC. Other than the Department of Labor, which works with workers’ organizations and unions, government agencies do not actively encourage foreign and domestic enterprises to follow generally accepted RBC principles. The ILO is working to promote RBC in the agricultural sector, focusing on the tea, ginger, cardamom, and dairy industries.
The GoN’s efforts to develop and enforce laws for environmental protection, consumer protection, labor rights, and human rights have been sporadic and lacking in efficacy. Ministries and concerned departments occasionally initiate special campaigns to enforce laws and regulations protecting these rights, but this is not standard practice. Government agencies often do not enforce these laws, and the minor penalties imposed provide minimal deterrent effect. Post is not aware of any cases of private sector projects’ effects on human rights.
Various government agencies monitor business entities’ compliance with different standards and codes. For example, OCR looks after governance issues, the Inland Revenue Department monitors accounting, and the Department of Labor monitors executive compensation standards. There are no independent NGOs or investment funds focusing on promoting or monitoring RBC, although organizations like Goodweave help promote child labor-free products.
The GoN does not encourage adherence to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are virtually no extractive industries in Nepal, other than sand mining in riverbeds and the country does not participate in the Extractive Industries Transparency Initiative.
Some report that corruption is rampant in Nepal. In the words of a World Bank official, corruption in Nepal is “endemic, institutionalized, and driven from the top.” Corruption takes many forms but is pervasive in the awarding of licenses, government procurement, and revenue management. The primary law used to combat corruption in Nepal is the Prevention of Corruption Act 2002. This law prohibits corruption, bribery, money laundering, abuse of office, and payments to facilitate services, both in the public and private sector. According to a report by GAN Integrity, a company that works with businesses to mitigate corporate risk, “implementation and enforcement [of the Prevention of Corruption Act] is inadequate, leaving the levels of corruption in the country unchallenged.” The report goes on to note that Nepal’s judicial system is “subject to pervasive corruption and executive influence,” that “corruption is rife among low-level [police] officers,” and that “Nepali tax officials are prone to corruption, and some seek positions in the sector specifically for personal enrichment.” The full report is available at: https://www.ganintegrity.com/portal/country-profiles/nepal.
The CIAA is Nepal’s constitutional body for corruption control. The 2015 constitution empowers the CIAA to conduct “investigations of any abuse of authority committed through corruption by any person holding public office.” In practice, CIAA arrests and investigations tend to focus on lower-level government bureaucrats. According to the 2020 Corruption Perception Index released by Transparency International (TI), Nepal ranked 117th among 180 countries, placing it in the range of “highly corrupt” countries. In January 2018, local media reported that the CIAA is drafting a bill to replace the Prevention of Corruption Act, with the goal of making the new law compatible with the UN Convention against Corruption that Nepal signed in 2011. Nepal is not a member of the OEDC Anti-Bribery Convention.
While anti-corruption laws extend to family members of officials and to political parties, there are no laws or regulations that are specifically designed to counter conflict-of-interest in awarding contracts or government procurement. GoN officials are aware that there should be no conflict of interest when contracts are awarded, but how this is implemented is left to the discretion of the concerned government agency.
The GoN does not require companies to establish codes of conduct. Post is not aware of private companies that use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials, however, this does not mean that there are no companies that use such programs. American consulting firm Frost and Sullivan (www.frost.com) maintains an office in Kathmandu and investigates local investment partners for a fee. NGOs involved in investigating corruption do not receive special protections.
Contact at government agency or agencies are responsible for combating corruption:
Commission for the Investigation of Abuse of Authority
CIAA Headquarter, P.O. Box No. 9996, Tangal, Kathmandu, Nepal
Phone: +9771-4440151, 4429688, 4432708
International nongovernmental organization:
Mr. Bharat Bahadur Thapa
President, Transparency International Nepal
P.O. Box 11486, Chakhkhu Bakhkhu Marga, New Baneshwor, Kathmandu
+977 1 4475112, 4475262
Local nongovernmental organization:
Prof. Dr. Srikrishna Shrestha
President, Pro Public
P.O. Box: 14307, Gautambuddha Marg, Annamnagar
Phone: +977-01-4268681, 4265023; Fax: +977-01-4268022
10. Political and Security Environment
In 2017, Nepal successfully held local, provincial, and national elections to fully implement its 2015 constitution. The Madhesi population in Nepal’s southern Terai belt, together with other traditionally marginalized ethnic and caste groups, believes the constitution is insufficiently inclusive and that its grievances are not being addressed. Post-election, however, this feeling of disenfranchisement may be somewhat assuaged due to the fact that Madhesi parties achieved a majority in the Province 2 provincial assembly elections. The Nepal Communist Party (NCP)—formed by the merger of the Communist Party of Nepal (Unified Marxist Leninist (UML)) and the Communist Party of Nepal (Maoist Center)—swept the 2017 elections to form a two-thirds majority government in 2018. However, internal wrangling within the NCP broke into the open and dominated much of 2020, resulting in Prime Minister KP Sharma Oli dissolving the parliament in December 2020. Although the parliament was reinstated by the Supreme Court on February 23, 2021, a March 7 Supreme Court ruling broke up the NCP into its original constituents, the Communist Party of Nepal (CPN)-United Marxist Leninist (CPN-UML) and CPN-Maoist Center (CPN-MC) parties. Eventually, PM Oli was ousted, and a coalition government under Nepali Congress PM Sher Bahadur Deuba is currently in office with the responsibility to hold new elections during 2022.
Criminal violence, sometimes conducted under the guise of political activism, remains a problem. Bandhs (general strikes) called by political parties and other agitating groups sometimes halt transport and shut down businesses, sometimes nationwide. However, in the last several years, few bandhs have been successfully carried out in Kathmandu. Americans and other Westerners are generally not targets of violence.
U.S. citizens who travel to or reside in Nepal are urged to register with the Consular Section of the Embassy by accessing the Department of State’s travel registration site at https://step.state.gov/step,. The Consular Section provides updated information on travel and security on the embassy website, http://np.usembassy.gov., and can be reached through the Embassy switchboard at (977) (1) 423-4500, by fax at (977) (1) 400-7281, by email at email@example.com.
U.S. citizens also should consult the Department of State’s Consular Information Sheet for Nepal and Worldwide Caution Public Announcement on the Department of State’s home page at http://travel.state.gov, by calling 1-888-407-4747 toll free in the United States and Canada, or, for callers outside the United States and Canada, by a regular toll line at 1-202-501-4444. These numbers are available from 8:00 a.m. to 8:00 p.m. Eastern Time, Monday through Friday (except U.S. federal holidays).
Over the last ten years, there have been frequent calls for strikes, particularly in the Terai. Occasionally, protesters have vandalized or damaged factories and other businesses. On February 22, 2019, a small improvised explosive device (IED) was placed overnight outside the entrance of NCell, Nepal’s second largest mobile carrier. One person died and two others were injured. The Indian-run Arun 3 hydro-power plant has been targeted by IEDs on three occasions and in early-2018 the U.S. Embassy issued a security notice about credible threats of violence targeting the private Chandragiri Hills Cable Car attraction. Such incidents remain infrequent, but unpredictable. Demonstrations have on occasion turned violent, although these activities generally are not directed at U.S. citizens or businesses. Biplav, a splinter Maoist group that threatened or attempted to extort NGOs, businesses, and educational institutions across Nepal in recent years, reached an agreement with the government in March 2021 to give up violence and enter peaceful politics.
11. Labor Policies and Practices
Nepal’s labor force is characterized by an acute lack of skilled workers and an abundance of political party-affiliated unions. Only a small proportion (14%) of Nepal’s working age population has a secondary or above secondary education. In Nepal, there is little demand for skilled workers, and prior to the COVID pandemic, thousands of skilled and unskilled Nepalis departed each year to work in foreign countries, primarily Qatar, the United Arab Emirates, Saudi Arabia, Kuwait, South Korea, Japan, and Malaysia. Thousands more also sought employment in India, which shares an open border with Nepal. Nepal’s unemployment rate of 11% and high rates of underemployment have provided push factors, but the gap between overseas migrant workers’ and domestic wage rates has made it difficult for Nepal’s agricultural and construction sectors to find enough workers, and many companies import laborers willing to work for lower wages from India.
According to the Central Bureau of Statistics, the country’s literacy rate is 65.9 percent, with the literacy rate for men at 75.1 percent and 57.4 percent for women. Vocational and technical training are poorly developed, and the national system of higher education is overwhelmed by high enrollment and inadequate resources. Many secondary school and college graduates are unable to find jobs commensurate with their education levels. Hiring non-Nepali workers is not, with the exception of India, a viable option as the employment of foreigners is restricted and requires the approval of the Department of Labor. The Act and Labor Regulations of 2018 limit the number of foreign employees a firm can employ and the length of time foreign employees can remain in Nepal to three years for those with non-specialized skills and five years for those with technical expertise. These terms are renewable, but only after the employee has departed Nepal for at least one-year, further undermining firm’s ability to retain needed staff based on business needs.
Under Nepali law, it has historically been difficult to dismiss employees. Labor laws differentiate between layoffs and firing. In some cases, Nepal’s labor laws have forced companies to retain employees, even after a business has closed. Workers at state-owned enterprises often receive generous severance packages if they are laid off. Unemployment insurance does not exist. Many private enterprises hire workers on a contract basis for jobs that are not temporary in nature as a way to avoid cumbersome labor laws. In some commercial banks and other businesses, security guards, drivers, and administrative staff jobs are filled by contract workers. The Industrial Enterprise Act of 2016 and the Labor Act of 2017 both include a “no work, no pay” provision, and the later clarifies processes for hiring and firing employees. In practice, it remains difficult to fire workers in Nepal and the Labor Act encourages the hiring of Nepali citizens wherever possible. Some labor union representatives said the new Labor Act 2017 is generally worker friendly. It is unclear how effectively this law is being enforced. The new act details requirements for time off, payment, and termination of employees. It also has some provisions to end discrimination in the workplace. According to the act, the employer is prohibited from discriminating against any employee based on religion, color, sex, caste and ethnicity, origin, language or belief or any other related basis. The Labor Act also confirms that employees shall have the right to form a trade union.
By law, labor unions in Nepal are independent of the government and employer. In practice, however, all labor unions are affiliated with political parties, and have significant influence within the government. The constitution provides for the freedom to establish and join unions and associations. It permits restrictions on unions only in cases of subversion, sedition, or similar circumstances. Labor laws permit strikes, except by employees in essential services such as water supply, electricity, and telecommunications. Sixty percent of a union’s membership must vote in favor of a strike for it to be legal, though this law is often ignored. Laws also empower the government to halt a strike or suspend a union’s activities if the union disturbs the peace or adversely affects the nation’s economic interests; in practice, this is rarely done. Labor unions have staged frequent strikes, often unrelated to working conditions, although they have become less frequent and less effective in recent years. Political parties will frequently call for national strikes that are observed only in particular regions or that only last for a few hours. In the past year, Post is not aware of any strike that lasted long enough to pose an investment risk. The SEZ Act approved in August 2016 prohibits workers from striking in any SEZ. There are two SEZs that are partially operational, but the GoN hopes to eventually have as many as 15. However, private sector interest in SEZs has been lukewarm.
Total union participation is estimated at about one million, or about 10 percent of the total workforce. The three largest trade unions are affiliated with political parties. The Maoist-affiliated All Nepal Trade Union Federation (ANTUF) is the most active and its organizing tactics have led to violent clashes with other trade unions in the past. The ANTUF and its splinter group, the ANTUF-R, are aggressive in their defense of members and frequently engage in disputes with management. Labor union agitation is often conducted in violation of valid contracts and existing laws, and unions are rarely held accountable for their actions.
Collective bargaining is only applied in establishing workers’ salaries. Trade unions, employers, and government representatives actively engage in this practice. Nepal’s Labor Act, updated in 2017, includes two types of labor dispute resolution mechanisms, one for individual disputes and one for collective disputes for businesses with 10 or more employees. If a dispute cannot be resolved by the employee and management, the case is forwarded for mediation. If mediation is unsuccessful, it is settled through arbitration. For individual disputes, the employee is required to submit an application to the business regarding their claim. The company’s management should then discuss the claim with the employee in order to settle it within 15 days. If a claim made by the employee cannot be settled between the employee and the company, the issue may be forwarded to the Department of Labor where discussions shall be held in the presence of Department of Labor officials. If the employee is not satisfied with the decision made by the Department of Labor, they can appeal to the Labor Court.
The Labor Act is applicable only to companies, private firms, partnerships, cooperatives, associations, or other organizations in operation or established, incorporated, registered, or formed under prevailing laws of Nepal regardless of their objective to earn profit or not. The Labor Act does not apply to the following entities: Civil Service, Nepal Army, Nepal Police, Armed Police Force, entities incorporated under other prevailing laws or situated in Special Economic Zones to the extent separate provisions are provided, and working journalists, unless specifically provided in the contract.
Nepal’s enforcement of regulations to monitor labor abuses and health and safety standards is weak. Operations in small towns and rural areas are rarely monitored. International labor rights are recognized within domestic law. No new labor-related laws have been enacted in the past year.
The GoN does not fully meet the minimum standards for the elimination of trafficking in persons, though it is making significant efforts to do so. The definition of human trafficking under Nepal’s Human Trafficking and Transportation (Control) Act (HTTCA) does not match the definition of human trafficking under international law. In June 2020, Nepal formally acceded to the Palermo Protocol. Children in Nepal are engaged in child labor, including in the production of bricks, carpets, and embellished textiles, although the GoN claims to be serious about ending child labor. The Labor Inspectorate’s budget, the number of labor inspectors, and relevant resources and training are all insufficient for effective enforcement of Nepal’s labor laws, including those related to child labor. The most recent Human Rights Report can be found at: https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/. The Department of Labor’s 2018 Findings on the Worst Forms of Child Labor is available at: https://www.dol.gov/agencies/ilab/resources/reports/child-labor/nepal
Nepal has a modest level of trade with the United States, with USD180 million in bilateral trade in 2020 (down from USD214 million the previous year). In late 2016, the Nepal Trade Preferences Program – which grants duty free access to certain products made in Nepal – went into effect. Nepal exported approximately USD2.4 million worth of goods in 2020 under this program (down from USD3.1 million the previous year). To remain eligible for this program, Nepal must meet certain labor standards.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD)
* Source for Host Country Data: Nepal Rastra (central) Bank
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
China, P.R.: Mainland
West Indies (St. Kitts & Nevis)
“0” reflects amounts rounded to +/- USD 500,000.
Nepalis are prohibited from investing abroad as per the Act Restricting Investment Abroad (ARIA), 1964. Post has heard this Law might be abrogated soon, but as of April 2022, no outward investment is permitted from Nepal.
Sri Lanka, a lower middle-income country with a Gross Domestic Product (GDP) per capita of about $3,680 and a population of approximately 22 million, is experiencing an economic crisis stemming from an unsustainable debt load and perennial deficits on both the international balance of payments and the government budget. The island’s strategic location off the southern coast of India along the main east-west Indian Ocean shipping lanes gives Sri Lanka a regional logistical advantage, especially as India does not have deep-water ports comparable to what Sri Lanka offers. Sri Lanka is transitioning from a predominantly rural-based economy to a more urbanized economy focused on manufacturing and services. Sri Lanka’s export economy is dominated by apparel and cash-crop exports, mainly tea, but technology service exports are a significant growth sector.
Prior to the April 21, 2019, Easter Sunday attacks, the tourism industry was rapidly expanding, but the attacks led to a significant decline in tourism that continued into 2020 and 2021 due to COVID-19 and the government’s related decision to close its main international airport for commercial passenger arrivals in March 2020. After reopening to visitors early in 2021, tourism revenue for the year reached $261 million, dropping 61 percent year-over-year (YoY) compared to $682 million in 2020. Migrant labor remittances are a significant source of foreign exchange, which saw an increase in 2020 due to the collapse of informal money transfer systems during the pandemic, despite the job losses to Sri Lankan migrant workers, especially in the Middle East. However, worker remittances saw a decline of 22.7 percent in 2021, largely due to inflationary pressures and the expectation of a future depreciation of the exchange rate, which occurred in March 2022. Remittances totaled $5.4 billion for 2021 in comparison to $7.1 billion in 2020.
The administration of President Gotabaya Rajapaksa, who was elected in November 2019, has attempted to promote pro-business positions, including announcing tax benefits for new investments to attract foreign direct investment (FDI). As outlined in its election manifesto, the Rajapaksa government’s economic goals include positioning Sri Lanka as an export-oriented economic hub at the center of the Indian Ocean (with government control of strategic assets such as Sri Lankan Airlines), improving trade logistics, attracting export-oriented FDI, and boosting firms’ abilities to compete in global markets. However, COVID-19 and the subsequent lockdowns brought new economic challenges, forcing the government to adapt policies to the situation on the ground. In April 2020, the Ministry of Finance restricted imports of luxury and semi-luxury consumer products such as consumer durables, motor vehicles, and the import of certain agricultural products as a means of saving foreign reserves and creating employment in labor intensive agriculture. Further restrictions on goods deemed non-essential were added in March 2022. With the IMF estimating a public debt-to-GDP ratio at 118.9 percent (of which 65.6 percent is foreign debt), Sri Lanka is facing a liquidity crisis that is exacerbated by an increasing trade deficit. Exports have helped buoy Sri Lankas FX reserves, growing 19.9 percent in 2021. However, imports continued to outstrip this growth by a significant margin with an increase of 46.8 percent in 2021. Exports of goods increased by 24.4 percent to $12.5 billion in 2021, up from $10 billion in 2020. Exports of services for the year 2020 amounted to $3 billion, down from $7.5 billion in 2019.
In September 2021, the government committed to cease building new coal-fired power plants and achieve net-zero carbon emissions by 2050 at the United Nations International Energy Forum. Sri Lanka has set a target of achieving 70 percent of all its electricity generation from renewable sources by 2030. However, renewable energy companies accuse the Ceylon Electricity Board of being in arrears to the tune of $60 million (as of May 2022) after not paying for renewable energy supplied to the national grid since August 2021.
FDI in Sri Lanka has largely been concentrated in tourism, real estate, mixed development projects, ports, and telecommunications in recent years. With a growing middle class, investors also see opportunities in franchising, information technology services, and light manufacturing for the domestic market. The Board of Investment (BOI) is the primary government authority responsible for investment, particularly foreign investment, aiming to provide “one-stop” services for foreign investors. The BOI is committed to facilitating FDI and can offer project incentives, arrange utility services, assist in obtaining resident visas for expatriate personnel, and facilitate import and export clearances.
Sri Lanka’s GDP grew by 3.6 percent according to the International Monetary Fund (IMF) in 2021 and is expected to grow by 3.3 percent in 2022. FDI rose to approximately 0.9 percent of GDP in 2021, higher than the 0.5 percent in 2020 and 0.8 percent in 2019 and half of the 1.8 percent in 2018. The IMF projects a GDP growth of 1.2 percent in 2022.
1. Openness To, and Restrictions Upon, Foreign 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. While the incumbent government largely promoted pro-business positions, including announcing tax benefits for new investments to attract FDI, the government also made interventionist policies to arrest the ongoing economic fallout from COVID-19. This in turn has altered the field of foreign direct investment towards manufacturing intended to the domestic market.
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 government does 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. These restrictions, quickly imposed without consulting the private sector, further complicated Sri Lanka’s import regime. Similarly, stakeholders have raised concerns that the government does not allow adequate time to implement new regulations. Additionally, the Sri Lankan government has banned the importation of several “non-essential” items since April 2020 in an attempt to curtail foreign exchange outflow which has now expanded in 2022 to additional goods subject to import licenses.
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. Public sector corruption is a significant challenge for U.S. firms operating in Sri Lanka and a constraint on foreign investment. 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. Historically, the main political parties do not pursue corruption cases against each other after gaining or losing political positions.
While Sri Lanka is a challenging place for businesses to operate, 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. Investors note that employee retention is generally 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. A leading international consulting firm claims the primary issue affecting investment is lack of policy consistency.
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.
The government allows up to 100 percent foreign investment in any 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.
Sri Lanka has not undergone any third-party investment policy reviews in the last five years.
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.
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. (Note: 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)
3. Legal Regime
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 National Economic Council, 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, similar to 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.
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.
Sri Lanka’s legal system reflects diverse cultural influences. Criminal law is fundamentally British-based while civil law is Roman-Dutch. 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 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.” https://investsrilanka.com/
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.
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.
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.
Sri Lanka ranked 94 out of 190 countries in the resolving insolvency index in the World Bank’s Doing Business Report 2020. Resolving insolvency takes, on average, 1.7 years at a cost equivalent to 10 percent of the estate’s value.
4. Industrial Policies
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.
As per the 2021 budget revisions, which still apply, the standard rate of corporate tax is 14 percent for: a) small and medium companies (with an annual income of less than LKR 500 million or $3.2 million); b) companies exporting goods and services; and c) companies engaged in education services; promotion of tourism; d) companies engaged in construction and e) companies engaged in healthcare services. Companies engaged in information technology services and agricultural business are exempt from taxes. A 40 percent corporate tax rate applies to companies engaged in gaming, liquor, and tobacco related businesses. An 18 percent tax on manufacturing and 24 percent tax on Trading, banking, finance, insurance, and similar businesses. The 2022 budget introduced a retroactive surcharge Tax at 25 percent on persons and entities with taxable income exceeding Rs. 2 billion for the financial year 2020/21.
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 (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.
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. 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.
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: (http://www.immigration.gov.lk/web/index.php?option=com_content&view=article&id=154&Itemid=200&lang=en). 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. The government is currently formulating data protection legislation. There is no ban on the sale of electronic data for marketing purposes.
5. Protection of Property Rights
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.)
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.
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 parliamentary discussion on possible amendments to the IP Act. The objective of the proposed amendment is to incorporate changes to include a fair use exemption for copyrighted audio works to be copied and edited into an accessible format (for disabled persons) and provide protection to Geographical Indications 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 special anti-piracy and counterfeit unit in the Criminal Investigation Division (CID) of the police to address IPR concerns specifically. 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 laws and judicial redressal being time-consuming and challenging has led to freely available counterfeit products in Sri Lanka. Counterfeit goods, particularly imports, are still 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 among enforcement authorities and government institutions – such as the NIPO, Sri Lankan Customs, Sri Lankan Police, and more 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.
Sri Lanka is currently not on the Special 301 report Watch List or the Notorious Markets List. Sri Lanka does not track and report on its seizures of counterfeit goods.
Resources for Intellectual Property Rights Holders:
The Securities and Exchange Commission (SEC) governs the 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 Central Bank of Sri Lanka (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 2022. Further, 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. On a year-to-year basis, inflation was approximately 17.5 percent in February of 2022, and the average prime lending rate was 9.91 percent. 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.
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 2020 there were over 3,619 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.
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, banks must increase capital to meet CBSL’s new minimum capital requirements deadline, which is set for December 31, 2022. A staggered application of capital provisions for smaller banks unable to meet capital requirements immediately will likely be allowed.
Total assets of the banking industry stood at LKR 16,923 billion ($64 billion) as of December 31, 2020. The two fully state-owned commercial banks – Bank of Ceylon and People’s Bank – are significant players, accounting for about 33 percent of all banking assets. The Bank of Ceylon currently holds a non-performing loan (NPL) ratio of 6 percent (up from 4.89 percent in 2020). The People’s Bank currently holds a NPL ratio of 3.85 percent (up from 3.68 percent in 2019). Both banks have significant exposure to SOEs but, these banks are implicitly guaranteed by the state. The debt moratorium issued by the CBSL for distressed borrowers will expired in 2022, the impact of this is yet to be reflected on the banking sector NPLs.
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.
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. 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.
The current government has not adopted a strategy of privatizing SOEs. Several attempts to sell the government’s stake in the heavily indebted national carrier, Sri Lankan Airlines, were not successful. The government is also seeking to improve the efficiency of SOEs through private sector management practices. 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.
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.
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. In September 2021 President Gotabaya Rajapaksa committed to ceasing of building new coal-fired power plants and achieve net-zero carbon emissions by 2050 at the United Nations International Energy Forum. Sri Lanka has set a target of achieving 70 percent of all its 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) has not announced any retail tariff revisions since 2014. 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. The Ceylon Electricity Board (CEB)’s short-term borrowings from state banks and total debt to the Ceylon Petroleum Corporation (CPC) and independent power producers (IPPs) increased to Rs. 223 billion by the end of 2019, from Rs. 142 billion by end 2018. Its long-term outstanding liabilities rose to Rs.421 billion by end 2019, from Rs. 392 billion by end of 2018. 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 Government of Sri Lanka 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.
While Sri Lanka has generally adequate laws and regulations to combat corruption, enforcement is often weak and inconsistent. U.S. firms identify corruption as a major constraint on foreign investment, but generally not a major threat to operating in Sri Lanka once contracts have been established. The business community claims that corruption has the greatest effect on investors in large projects and on those pursuing government procurement contracts. Projects geared toward exports face fewer problems. A Right to Information Act came into effect in February of 2017 which increased government transparency.
The Commission to Investigate Allegations of Bribery or Corruption (CIABOC or Bribery Commission) is the main body responsible for investigating bribery allegations, but it is widely considered ineffective and has reportedly made little progress pursuing cases of national significance. The law states that a public official’s offer or acceptance of a bribe constitutes a criminal offense and carries a maximum sentence of seven years imprisonment and fine. Bribery laws extend to family members of public officials, but political parties are not covered. A bribe by a local company to a foreign official is also not covered by the Bribery Act and the government does not require private companies to establish internal codes of conduct that prohibit bribery of public officials. Thus far, the Bribery Commission has focused on minor cases such as bribes taken by traffic police, wildlife officers, and school principals. These cases reportedly follow a pattern of targeting low-level offenses with prosecutions years after the offense followed by the imposition of sentences not always proportionate to the conduct (i.e., sometimes overly strict, other times overly lenient).
Government procurement regulations contain provisions on conflicts-of-interest in awarding contracts or government procurement. While financial crime investigators have developed a number of cases involving the misappropriation of government funds, these cases have often not moved forward due to lack of political will, political interference, and lack of investigative capacity. Sri Lanka signed and ratified the UN Convention against Corruption in March of 2004 and the UN Convention against Transnational Organized Crime in 2006. Sri Lanka is a signatory to the OECD-ADB Anti-Corruption Regional Plan but has not joined the OECD Anti-Bribery Convention.
Contact at the government agency or agencies that are responsible for combating corruption:
Commission to Investigate Allegations of Bribery or Corruption
No 36, Malalasekara Mawatha, Colombo 7
T+94 112 596360 / 2595039
Email: firstname.lastname@example.org or email@example.com
The government’s military campaign against the Liberation Tigers of Tamil Eelam (LTTE) ended in May 2009 with the defeat of the LTTE. During the civil war, the LTTE had a history of attacks against civilians, although none of the attacks were intentionally directed against U.S. citizens. On April 21, 2019, terrorist attacks targeted several churches and hotels throughout Colombo and in the eastern city of Batticaloa, killing more than 250 people, including over 40 foreigners, five of whom were Americans. In the aftermath of the attacks, the government imposed nationwide curfews and a temporary ban on some social media outlets.
Public opposition to the current government and growing outrage over power, fuel, and food shortages morphed into a largescale protest movement in March 2022. Since then, peaceful protests have been noted nearly every day both in Colombo and across the country, including an ongoing encampment in central Colombo next to the Presidential Secretariat. As public concern grows, some protests have turned violence due to clashes with pro-government protesters or security forces, such as a confrontation between protesters and police on April 19 in a city about 100 km from Colombo. In addition, protesters have surrounded and entered (or attempted to enter) the residences and offices of MPs and officials, and police have sometimes used tear gas and water cannons to disperse protesters. The worst violence occurred on May 9, when attacks by pro-government supporters on two major protest sites in Colombo triggered a wave of retaliatory violence in which anti-government protesters set fire to or vandalized approximately 100 homes and other properties around the country belonging to or affiliated with government MPs and officials. Violence continued into the next day, with busses and cars burned on the streets and dozens of people seriously injured. Declaring a state of emergency, the government worked with the military to restore order to the streets. While subsequent protests have mostly been peaceful, the situation remains volatile and ongoing shortages of essentials and power cuts continue to cause distress.
11. Labor Policies and Practices
Both local and international businesses have cited labor shortages as a major problem in Sri Lanka.In 2020, 8.1 million Sri Lankans were employed: 46 percent in services, 27 percent in industry and 26 percent in agriculture. Approximately 70 percent of the employed are in the informal sector. The government sector also employs over 1.4 million people.
Sri Lanka’s labor laws afford many employee protections. Many investors consider this legal framework somewhat rigid, making it difficult for companies to reduce their workforce even when market conditions warrant doing so. The cost of dismissing an employee in Sri Lanka is calculated based upon a percentage of wages averaged over 54 salary weeks, one of the highest in the world. There is no unemployment insurance or social safety net for laid off workers.
Labor is available at relatively low cost, though higher than in other South Asian countries. Sri Lanka’s labor force is largely literate (particularly in local languages), although weak in certain technical skills and English. The average worker has eight years of schooling, and two-thirds of the labor force is male. The government has initiated educational reforms to better prepare students for the labor market, including revamping technical and vocational education and training. While the number of students pursuing computer, accounting, business skills, and English language training programs is increasing, the demand for these skills still outpaces supply with many top graduates seeking employment outside of the country.
Youth are increasingly uninterested in labor-intensive manual jobs, and the construction, plantation, apparel, and other manufacturing industries report a severe shortage of workers. The garment industry reports up to a 40 percent staff turnover rate. Lack of labor mobility in the North and East is also a problem, with workers reluctant to leave their families and villages for employment elsewhere
A significant proportion of the unemployed seek “white collar” employment, often preferring stable government jobs. Most sectors seeking employees offer manual or semi-skilled jobs or require technical or professional skills such as management, marketing, information technology, accountancy and finance, and English language proficiency. Investors often struggle to find employees with the requisite skills, a situation particularly noticeable as the tourism industry opens new hotels.
Many service sector companies rely on Sri Lankan engineers, researchers, technicians, and analysts to deliver high-quality, high-precision products and retention is reasonably good in the information technology sector. Foreign and local companies report a strong worker commitment to excellence in Sri Lanka, with rapid adaptation to quality standards.
Women face workforce restrictions such as caps on overtime work, limits on nighttime shifts and restrictions from certain jobs. In 2021 the labor market was characterized by high female unemployment and low female labor force participation: an estimated 55 percent of public sector employees were men and 45 percent women while 70 percent of employees outside the public sector were men and only 30 percent women.
As of 2021 due the covid pandemic a total of 807,800 Sri Lankan registered as migrant workers working abroad with the respective Sri Lankan embassies overseas. Remittances from migrant workers, averaged about $5.49 billion in 2021, making up Sri Lanka’s second largest source of foreign exchange. 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.
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.
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 2019 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.