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Bangladesh

Executive Summary

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 km 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 attract increasing investment, despite severe economic headwinds faced by the global outbreak of COVID-19.

Buoyed by a growing middle class, Bangladesh has enjoyed consistent annual GDP growth of more than six percent over the past decade. Much of this growth continues to be driven by the ready-made garment (RMG) industry, which exported $34.13 billion of apparel products in FY 2018-19, second only to China, and continued remittance inflows, reaching nearly $16.42 billion in FY 2018-19.

The Government of Bangladesh (GOB) actively seeks foreign investment, particularly in the 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 sectors. 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.

Bangladesh received $3.6 billion in foreign direct investment (FDI) in 2018, a 67.9 percent increase from the previous year. However, the rate of FDI inflows is only slightly above one 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. New government efforts to improve the business environment 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.

A series of terrorist attacks from 2015-17, including the July 1, 2016 Holey Bakery attack in Dhaka’s diplomatic enclave, resulted in increased security restrictions for many expatriates, including U.S. Embassy staff. National elections, which were held on December 30, 2018, are prone to instances of political violence. The influx of more than 700,000 Rohingya refugees since August 2017 has also raised security concerns.

International brands and the international community continue to press the GOB to meaningfully address worker rights and factory safety problems in Bangladesh. With unprecedented support from the international community and the private sector, Bangladesh has made significant progress on fire and structural safety. Critical work remains on safeguarding workers’ rights to freely associate and bargain collectively, including in the Export Processing Zones (EPZs).

The GOB 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.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 146 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2019 168 of 190 doingbusiness.org/rankings
Global Innovation Index 2019 116 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in Partner Country ($M USD, stock positions) 2018 USD 513 https://apps.bea.gov/
international/factsheet/
World Bank GNI per capita 2018 USD 1,750.0 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Bangladesh actively seeks foreign investment, particularly in the agribusiness, garment and textiles, leather and leather goods, light manufacturing, electronics, light engineering, energy and power, information and communications technology (ICT), plastic, healthcare, medical equipment, pharmaceutical, ship building, and infrastructure sectors. 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; and
  • Security printing.

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; and
  • Issues approvals of foreign loans and supplier credits.

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, three other Investment Promotion Agencies (IPAs) – the Bangladesh Export Processing Zone Authority (BEPZA), Bangladesh Economic Zones Authority (BEZA), and Bangladesh Hi-Tech Park Authority (BHTPA) — promote domestic and foreign investment. 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. BEZA plans to establish approximately 100 Economic Zones (EZs) throughout the country over the next several years, of which 11 are currently fully or partially operational. Site selections for 77 additional EZs have been completed as of March 2020. While EPZs accommodate exporting companies only, EZs are open for both export- and domestic-oriented companies. Additionally, Bangladesh is setting up several Hi-Tech Parks across the country under the supervision of the Bangladesh Hi-Tech Park Authority.

Limits on Foreign Control and Right to Private Ownership and Establishment

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:

a) Fishing in the deep sea

b) Bank/financial institutions in the private sector

c) Insurance companies in the private sector

d) Generation, supply, and distribution of power in the private sector

e) Exploration, extraction, and supply of natural gas/oil

f) Exploration, extraction, and supply of coal

g) Exploration, extraction, and supply of other mineral resources

h) Large-scale infrastructure projects (e.g. flyover, elevated expressway, monorail, economic zone, inland container depot/container freight station)

i) Crude oil refinery (recycling/refining of lube oil used as fuel)

j) Medium and large industries using natural gas/condensate and other minerals as raw material

k) Telecommunications service (mobile/cellular and land phone)

l) Satellite channels

m) Cargo/passenger aviation

n) Sea-bound ship transport

o) Seaports/deep seaports

p) VOIP/IP telephone

q) 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, following a prime ministerial directive. 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 clearance certificates 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.

Other Investment Policy Reviews

In 2013 Bangladesh completed an investment policy review (IPR) with the United Nations Conference on Trade and Development (UNCTAD): https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=756 

A Trade Policy Review was done by the World Trade Organization in April 2019 and can be found at: https://www.wto.org/english/tratop_e/tpr_e/tp485_e.htm 

Business Facilitation

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. These and other regulatory changes led to an improvement of eight ranks on the World Bank’s Doing Business score. BIDA offers 18 services under its online OSS as of April 2020, and has a plan to expand to 154 services covering 35 agencies. The Bangladesh government 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 can 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, 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 now takes one or two days to complete. The process for trade licensing, tax registration, and VAT registration requires seven days, one day, and one week, respectively.

Outward Investment

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 1947 Act by adding a “conditional provision” that permits outbound investment for export-related enterprises. Private sector contacts note that the few international investments approved by the Bangladesh Bank have been limited to large exporting companies with international experience.

3. Legal Regime

Transparency of the Regulatory System

Since 1989, the government has gradually moved to decrease regulatory obstruction of private business. The chambers of commerce have called for a greater voice for the private sector in government decisions and for privatization, but at the same time many support protectionism and subsidies for their own industries. The result is that policy and regulations in Bangladesh are often not clear, consistent, or publicized. Registration and regulatory processes are alleged to be frequently 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 controlling policies, as well as foreign investment in government-controlled projects.

Bangladesh has achieved incremental progress in using information technology to improve the transparency and efficiency of some government services and to develop independent agencies to regulate the energy and telecommunication sectors. 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 that provides for multilevel stakeholder consultations through workshops or media outreach. Although the consultation process exists, it is still weak and in need of further improvement.

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 (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 weekly “Bangladesh Gazette” every Thursday and Extraordinary Gazettes from time to time. The gazette provides official notice of government actions, including the 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 (FRC) in 2016 in an aim to establish transparency and accountability in the accounting and auditing system. The country follows Bangladesh Accounting Standards (BAS) and Bangladesh Financial Reporting Standards (BFRS), which are largely derived from International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). However, the quality of reporting varies widely in Bangladesh. Internationally known and recognized firms have begun establishing local offices in Bangladesh and the presence of these firms is positively influencing the accounting norms in the country. Some firms are capable of providing financial reports audited to international standards while others maintain unreliable (or multiple) sets of accounting reports. Regulatory agencies also do not conduct impact assessments of proposed regulations; hence, regulations are often not reviewed on the basis of data-driven assessments. Not all national budget documents are prepared according to internationally accepted standards.

International Regulatory Considerations

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 law is 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 January 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 notification to WTO activities through the Ministry of Commerce and the Ministry of Industries.

General Contact for WTO-TBT National Enquiry Point:
Email: bsti_std@bangla.net; bsti_ad@bangla.net
Website: http://www.bsti.gov.bd/ 

Focal Points for TBT:

Mr. Md. Golam Baki,
Deputy Director (Certification Marks), BSTI;
Email: baki_cm@bsti.gov.bd,
Tel: +88-02-9131582,
Cell: 01799828826

Mr. Mohammad Arafat Hossain Sarker,
Assistant Director (Certification Marks), BSTI;
Email: arafat_cm@bsti.gov.bd,
Tel: +88-02-9131582,
Cell: +8801715023589

Focal Point for other WTO related matters:

Mr. Md. Hafizur Rahman,
Director-1, WTO Cell, Ministry of Commerce
Email: director1.wto@mincom.gov.bd,
Tel: +880-2-9552105,
Cell: +88 0171 1861056

Mr. Mohammad Mahbubur Rahman Patwary,
Director-3, WTO Cell, Ministry of Commerce
Email: director3.wto@mincom.gov.bd,
Tel: +880-2-9540580,
Cell: +88 0171 2148758

Legal System and Judicial Independence

Bangladesh is a common law-based jurisdiction. Many of the basic laws of Bangladesh, 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, being a common law system, the statutes are short and set out basic rights and responsibilities but are elaborated by the courts in their application and interpretation of those laws. The Judiciary of Bangladesh acts through (1) The Superior Judiciary, having appellate, revision, and original jurisdiction and (2) The Sub-Ordinate Judiciary, having original jurisdiction.

Since 1971, Bangladesh’s legal system has been updated in the areas of company, banking, bankruptcy, and money loan court laws and other commercial laws. An important impediment to investment in Bangladesh is a 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 delays in proceedings carry no penalties. Bangladesh does not have a separate court or division of a court dedicated solely to hearing 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 the interference of 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.

Bangladesh scored 3.33 in the World Bank’s 2017 Judicial Independence Index out of a 1-7 band score with 7 being the best. That was up from 2016 when it scored 2.38. In the Rule of Law Index 2020 published by the independent, non-profit World Justice Project (WJP), Bangladesh ranked 115 among 128 countries and jurisdictions, dropping two positions from 2019.

Laws and Regulations on Foreign Direct Investment

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, the Industrial Policy Act of 2005, the Industrial Policy Act of 2010, and the Bangladesh Economic Zones Act of 2010. The Industrial Policy Act of 2016 was approved by the Cabinet Committee on Industrial Purchase on February 24, 2016 and replaces the Industrial Policy of 2010.

The National Industrial Policy of 2016 offers incentives for “green” (environmental) high-tech or “transformative” industries. Foreigners who invest $1 million or transfer $2 million to a recognized financial institution can apply for Bangladeshi citizenship. The Government of Bangladesh will provide financial and policy support for high-priority industries (those that create large-scale employment and earn substantial export revenue) and creative (architecture, arts and antiques, fashion design, film and video, interactive laser software, software, and computer and media programming) industries. Specific importance will be given to agriculture and food processing, ready-made garments (RMG), information and communication technology (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 November 2019, Parliament approved the Bangladesh Flag Vessels (Protection) Act 2019 with a provision to ensure Bangladeshi flag vessels to carry at least 50 percent of foreign cargo, up from 40 percent.

The One Stop Service 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. Although the IPAs have started to offer a few services under the OSS, corruption and excessive bureaucracy have hindered the complete roll out of the OSS. BIDA has a “one-stop” website that provides relevant laws, rules, procedure, 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.

Competition and Anti-Trust Laws

The GOB formed an independent agency in 2011 called the “Bangladesh Competition Commission (BCC)” under the Ministry of Commerce. The Bangladesh Parliament then passed the Competition Act in June of 2012. However, the BCC has experienced operational delays and it has not received sufficient resources to operate effectively.

In November 2018, the Bangladesh Telecommunication Regulatory Commission (BTRC) finalized Significant Market Power (SMP) regulations to promote competition in the industry. In February 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.

Expropriation and Compensation

Since the Foreign Investment Act of 1980 banned nationalization or expropriation without adequate compensation, the GOB 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.

Dispute Settlement

ICSID Convention and New York Convention

Bangladesh is a signatory to the International Convention for the Settlement of Disputes (ICSID) and it acceded in May 1992 to the United Nations Convention for the Recognition and Enforcement of Foreign Arbitral Awards. Alternative dispute resolutions are possible under the Bangladesh Arbitration Act of 2001. The current legislation allows for enforcement of arbitral awards.

Investor-State Dispute Settlement

Bangladeshi law allows contracts to refer investor-state dispute settlement to third country fora for resolution. The U.S.-Bangladesh Bilateral Investment Treaty also stipulates that parties may, upon the initiative of either and as a part of their consultations and negotiations, agree to rely upon non-binding, third-party procedures, such as the fact-finding facility available under the Rules of the “Additional Facility (“Facility”) of the International Centre for the Settlement of Investment Disputes (“Centre”).” If the dispute cannot be resolved through consultation and negotiation, then the dispute shall be submitted for settlement in accordance with the applicable dispute-settlement procedures upon which the parties have previously agreed. Bangladesh is also a party to the South Asia Association for Regional Cooperation (SAARC) Agreement for the Establishment of an Arbitration Council, signed November 2005, which aims to establish a permanent center for alternative dispute resolution in one of the SAARC member countries.

International Commercial Arbitration and Foreign Courts

The Bangladesh Arbitration Act of 2001 and amendments in 2004 reformed alternative dispute resolution procedures. The Act consolidated the law relating to both domestic and international commercial arbitration. It thus creates a single and unified legal regime for arbitration. Although the new Act is principally based on the UNCITRAL Model Law, it is a patchwork as some unique provisions are derived from the Indian Arbitration and Conciliation Act 1996 and some from the English Arbitration Act 1996.

In practice, enforcement of arbitration results is applied unevenly and the GOB has challenged ICSID rulings, especially those that involve rulings against the GOB. The timeframe for dispute resolution is unpredictable and has no set limit. It can be done as quickly as a few months, but often takes years depending on the type of dispute. Anecdotal information indicates average resolution time can be as high as 16 years. Local courts may be biased against foreign investors in resolving disputes.

Bangladesh is a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and recognizes the enforcement of international arbitration awards. Domestic arbitration is under the authority of the district court bench and foreign arbitration is under the authority of the relevant high court bench.

The ability of the Bangladeshi judicial system to enforce its own awards is weak. Senior members of the government have been effective in using their offices to resolve investment disputes on several occasions, but the GOB’s ability to resolve investment disputes at a lower level is mixed. The GOB does not publish the numbers of investment disputes involving U.S. or foreign investors. Anecdotal evidence indicates investment disputes occur with limited frequency and the involved parties often resolve the disputes privately rather than seeking government intervention.

The practice of alternative dispute resolution (ADR) in Bangladesh has many challenges, including lack of funding for courts to provide ADR services, lack of lawyer cooperation, and lack of good faith. Slow adoption of ADR mechanisms and sluggish judicial processes impede the enforcement of contracts and the resolution of business disputes in Bangladesh.

As in many countries, Bangladesh has adopted a “conflicts of law” approach to determining whether a judgment from a foreign legal jurisdiction is enforceable in Bangladesh. This single criterion allows Bangladesh courts broad discretion in choosing whether to enforce foreign judgments with significant effects on matrimonial, adoption, corporate, and property disputes. Most enterprises in Bangladesh, and especially state-owned enterprises (SOEs), whose leadership is nominated by the ruling government party, maintain strong ties with the government.  Thus, domestic courts strongly tend to favor SOEs and local companies in investment disputes.

Investors are also increasingly turning to the Bangladesh International Arbitration Center (BIAC) for dispute resolution. BIAC is an independent arbitration center established by prominent local business leaders in April 2011 to improve commercial dispute resolution in Bangladesh to stimulate economic growth. The BIAC Board is headed by the President of the International Chamber of Commerce – Bangladesh (ICCB) and includes the presidents of other prominent chambers such as the Dhaka Chamber of Commerce and Industry (DCCI) and the Metropolitan Chamber of Commerce and Industry (MCCI), among others. The center operates under the Bangladesh Arbitration Act of 2001. According to BIAC, fast track cases are resolved in approximately six months while typical cases are resolved in one year. Major Bangladeshi trade and business associations such as the American Chamber of Commerce in Bangladesh (AmCham) can sometimes help resolve transaction disputes.

Bankruptcy Regulations

Many laws affecting investment in Bangladesh are old and 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 which has more stringent and timely procedures.

4. Industrial Policies

Investment Incentives

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 graduated tax exemption 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:

BIDA: http://bida.gov.bd/?page_id=146

BEPZA: https://www.bepza.gov.bd/investor_details/incentives-facilities

BEZA: https://www.beza.gov.bd/investing-in-zones/incentive-package/

Thrust sectors subject to tax exemption 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, petro-chemicals, 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 graduated tax exemption from 90 percent to 20 percent over a period of 10 years.

Physical infrastructure projects eligible for exemptions include: deep sea ports, elevated expressways, road overpasses, toll road 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 (COD) after January 1, 2015 are granted a 100 percent tax exemption for 5 years, a 50 percent exemption for years 6-8, and a 25 percent exemption for years 9-10. For coal-fired IPPs contracting with the GOB before June 30, 2020 and COD before June 30, 2023, 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 that only export, import duties are waived for imports of capital machinery and spare parts. For companies that primarily export (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.

Special incentives are provided to encourage non-resident Bangladeshis to invest in the country. Incentives include the ability to buy newly-issued shares and debentures in Bangladeshi companies. A quota of 10 percent of primary shares has been fixed for non-resident Bangladeshis. Furthermore, 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 the GOB. Several companies have reported instances of infrastructure guarantees (ranging from electricity to gas connections) not being fully delivered or tax exemptions being delayed, either temporarily or indefinitely. These challenges are not specific to U.S. or foreign companies and reflect broader challenges in the business environment,

Foreign Trade Zones/Free Ports/Trade Facilitation

Under the Bangladesh Export Processing Zones Authority Act of 1980, the government established an 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.

Investments that are wholly foreign-owned, joint ventures, and wholly Bangladeshi-owned companies are all permitted to operate and enjoy equal treatment in the EPZs. Approximately one dozen U.S. firms – mostly textile producers – are currently operating in Bangladesh EPZs.

In 2010, Bangladesh enacted the Special Economic Zone Act that allows for the creation of privately owned SEZs that can 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.

Performance and Data Localization Requirements

Performance Requirements

BIDA has set restrictions for the employment of foreign nationals and the issuance of work permits as follows:

Nationals of countries recognized by Bangladesh are eligible for employment consideration;

Expatriate personnel will only be considered for employment in enterprises duly registered with the appropriate regulatory authority;

Employment of foreign nationals is generally limited to positions for which qualified local workers are unavailable;

Persons below 18 years of age are not eligible for employment;

The board of directors of the employing company must issue a resolution for each offer or extension of employment;

The percentage of foreign employees should not exceed 5% in industrial sectors and 20% in commercial sectors, including among senior management positions;

Initial employment of any foreign national is for a term of two years, which may be extended based on merit; and

The Ministry of Home Affairs will issue necessary security clearance certificates.

In response to the high number of expatriate workers in the ready-made garment industry, BIDA has issued informal guidance encouraging industrial units to refrain from hiring additional semi-skilled foreign experts and workers. Overall, the government looks favorably on investments that employ significant numbers of local workers and/or provide training and transfers of technical skills.

The GOB does not formally mandate that investors use domestic content in goods or technology. However, companies bidding on government procurement tenders are often informally encouraged to have a local partner and to produce or assemble a percentage of their products in country.

According to a legal overview by the Telenor Group, for reasons of national security or in times of emergency, several regulations and amendments, including the Bangladesh Telecommunication Regulatory Act, 2001 (the “BTRA”), Information and Communication Technology Act 2006 (the “ICT Act”), and the Telegraph Act 1885 (the “1885 Act”), grant law enforcement and intelligence agencies legal authority to lawfully seek disclosure of communications data and request censorship of communications. A draft Digital Security Act of 2016 (the “Digital Security Act”) was adopted by Parliament in October 2018.

On the grounds of national security and maintaining public order, the GOB can authorize relevant government authorities (intelligence agencies, national security agencies, investigation agencies, or any officer of any law enforcement agency) to suspend or prohibit the transmission of any data or any voice call and record or collect user information relating to any subscriber to a telecommunications service.

Under section 30 of the ICT Act, the GOB, through the ICT Controller, may access any computer system, any apparatus, data, or any other material connected with a computer system, for the purpose of searching for and obtaining any such information or data. The ICT Controller may, by order, direct any person in charge of, or otherwise concerned with the operation of a computer system, data apparatus, or material, to provide reasonable technical and other assistance as may be considered necessary. Under section 46 of the ICT Act, the ICT Controller can also direct any government agency to intercept any information transmitted through any computer resource, and may order any subscriber or any person in charge of computer resources to provide all necessary assistance to decrypt relevant information.

There is no direct reference in the BTRA to the storage of metadata. Under the broad powers granted to the BTRA, however, the GOB, on the grounds of national security and public order, may require telecommunications operators to keep records relating to the communications of a specific user. Telecommunications operators are also required to provide any metadata as evidence if ordered to do so by any civil court.

The ICT Controller enforces the ICT Act and the Bangladesh Telecommunication Regulatory Commission (BTRC) enforces the BTRA. The Ministry of Home Affairs grants approval for use of powers given under the BTRA. The ICT Act also established a Cyber Tribunal to adjudicate cases. The Digital Security Act of 2018 created a Digital Security Agency empowered to monitor and supervise digital content. Also under the Digital Security Act, for reasons of national security or maintenance of public order, the Director General (DG) of the DSA is authorized to block communications and to require that service providers facilitate the interception, monitoring, and decryption of a computer or other data source.

The Bangladesh Road Transport Authority’s (BRTA) Ride-sharing Service Guideline 2017 came into force on March 8, 2018. The new regulations included requirements that ride sharing companies keep data servers within Bangladesh.

5. Protection of Property Rights

Real Property

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 never be certain 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 study by a leading Bangladeshi think tank Policy Research Institute (PRI) revealed in 2015 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.

Property owners can obtain mortgages but 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 that regulate transfer of property in Bangladesh but these laws do not have any 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 The GOB has limited resources to devote to intellectual property rights (IPR) protection. Counterfeit goods are readily available in Bangladesh and industry estimates that 90 percent of business software is pirated. A number of U.S. firms, including film studios, manufacturers of consumer goods, and software firms, have reported violations of their IPR. Investors note police are willing to investigate counterfeit goods producers when informed, but are unlikely to initiate independent investigations.

The GOB has limited resources to devote to intellectual property rights (IPR) protection. Counterfeit goods are readily available in Bangladesh and industry estimates that 90 percent of business software is pirated. A number of U.S. firms, including film studios, manufacturers of consumer goods, and software firms, have reported violations of their IPR. Investors note police are willing to investigate counterfeit goods producers when informed, but are unlikely to initiate independent investigations.

The Software Alliance, also known as BSA, is a trade group established by Microsoft Corporation in 1988. It opened a Bangladesh office in early 2014 as a platform to improve IPR protection in Bangladesh. Public awareness of IPR is growing, thanks in part to the efforts of the Intellectual Property Rights Association of Bangladesh: http://www.ipab.org.bd/ . Bangladesh is not currently listed in the U.S. Trade Representative’s Special 301 or Notorious Markets reports. 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 July 2000 (amended in 2005), a Trademarks Act in 2009, and a Geographical Indication of Goods (Registration and Protection) Act in 2013. The Department of Patents, Designs and Trademarks (DPDT) drafted a new Patent Act in 2014 prepared in compliance with the requirements of the TRIPS Agreement. The draft act remains under Ministry of Industries review, and has not made measurable progress during the past year.

A number of government agencies are empowered to take action against counterfeiting, including the NBR/Customs, Mobile Courts, the Rapid Action Battalion (RAB), and local Police. 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. Reports are not publicly available.

6. Financial Sector

Capital Markets and Portfolio Investment

Capital markets in Bangladesh are still developing and the financial sector remains highly dependent on bank lending. Current government policy inhibits the creation of reliable benchmarks for long-term bonds and prevents the development of a tradable bond market.

Bangladesh is home to the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE). The Bangladesh Securities and Exchange Commission (BSEC), a statutory body formed in 1993 and attached to the Ministry of Finance, regulates both. As of March 25, 2020, the DSE market capitalization stood at $36.7 billion, a 24.6 percent drop year-on-year caused by an acute shortage of liquidity and reduced investor confidence.

Although the Bangladeshi government has a positive attitude towards foreign portfolio investors, participation remains low due to limited liquidity 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 activate the bond market. To this end, BSEC introduced three rules in May 2019: 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 named Central Counterparty Bangladesh Limited (CCBL) and promoting private equity and venture capital firms under the 2015 Alternative Investment Rules. In December 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,” that provides 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 August 2012 but the overall quality of corporate governance remains substandard. Demutualization of both the DSE and CSE was completed in November 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 remains low.

The Demutualization Act 2013 also directed DSE to pursue a strategic investor who would acquire a 25 percent stake in the bourse. DSE opened bids for a strategic partner in February 2018 and, in September 2018, the Chinese consortium of the Shenzhen and Shanghai stock exchanges became DSE’s strategic partner after buying a 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.

Money and Banking System

The Bangladesh Bank (BB) acts as the central bank of Bangladesh. It was established on December 16, 1971 through the enactment of the Bangladesh Bank Order of1972. General supervision and strategic direction of BB has been entrusted to a nine–member Board of Directors, which is headed by the BB Governor. BB has 45 departments and 10 branch offices.

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 60 “scheduled” banks in Bangladesh operate under the full control and supervision of the central bank as per the Bangladesh Bank Order of 1972. The scheduled banks including six SOCBs, three specialized government banks established for specific objectives such as agricultural or industrial development or expatriates’ welfare, 42 PCBs, and nine FCBs as of March 2019. 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 that is 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 an SOCB, 15 are private domestic initiatives, and 15 are joint venture initiatives. Major sources of funds for these financial institutions are term deposits (at least three months’ tenure), credit facilities from banks and other financial institutions, call money, as well as bonds and securitization.

The major differences between banks and FIs are:

FIs cannot issue checks, pay-orders, or demand drafts;

FIs cannot receive demand deposits; and

FIs cannot be involved in foreign exchange financing.

Microfinance institutions (MFIs) remain the dominant players in rural financial markets. According to the Bangladesh Microcredit Regulatory Authority, as of June 2018, there were 705 licensed micro-finance institutions operating a network of 18,196 branches with 31.2 million members. Additionally, Grameen Bank had 830,000 million microfinance members as of June 2018. A 2014 Institute of Microfinance survey study showed that approximately 40 percent of the adult population and 75 percent of households had access to financial services in Bangladesh.

The banking sector has had a mixed record of performance over the past several years. Industry experts have reported shrinking liquidity and a rise in risky assets. Total domestic credit stood at 45.22 percent of gross domestic product at end of June 2019. With total assets of $15.4 billion, the state-owned Sonali Bank is the largest bank in the country while Islami Bank Bangladesh ($11.7 billion) and Standard Chartered Bangladesh ($4.5 billion) are the largest local private and foreign banks respectively as of December 2018, the latest data available. The gross non-performing loan (NPL) ratio was 9.3 percent at the end of December 2019 but was as high as 12.0 percent in the previous quarter. At 23.9 percent SCBs had the highest NPL ratio, followed by 15.1 percent of Specialized Banks, 5.8 percent of PCBs, and 5.7 percent of FCBs as of December 2019. Following the outbreak of COVID-19, the central bank directed all banks in March 2020 not to classify any new clients as non-performing until June 30. However, industry contacts predict NPLs will increase sharply after the exemption expires.

On December 26, 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 that 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 in order 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 an NRTA account. In May 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).

Foreign Exchange and Remittances

Foreign Exchange

Free repatriation of profits is legally allowed for registered companies and profits are generally fully convertible. However, companies report the procedures for repatriating foreign currency are lengthy and cumbersome. The Foreign Investment Act guarantees the right of repatriation of invested capital, profits, capital gains, post-tax dividends, and approved royalties and fees for businesses. The central bank’s exchange control regulations and the U.S.-Bangladesh Bilateral Investment Treaty (in force since 1989) provide similar investment transfer guarantees. BIDA may need to approve repatriation of royalties and other fees.

Bangladesh maintains a de facto managed floating foreign exchange regime. Since 2013, Bangladesh has tried to manage its exchange rate vis-à-vis the U.S. dollar within a fairly narrow range. Until 2017, the Bangladesh taka traded between 76 and 78.8 taka to the dollar. The taka has depreciated relative to the dollar since October 2017 reaching 84.95 taka per dollar as of March 2020, despite interventions from the Bangladesh Bank from time to time. The Bangladesh currency, the taka, is approaching full convertibility for current account transactions, such as imports and travel, but not for financial and capital account transactions, such as investing, currency speculation, or e-commerce.

Remittance Policies

There are no set time limitations or waiting periods for remitting all types of investment returns. Remitting dividends, returns on investments, interest, and payments on private foreign debts do not require approval from the central bank and transfers are typically made within one to two weeks. For repatriating lease payments, royalties and management fees, some central bank approval is required, and this process can take between two and three weeks. If a company fails to submit all the proper documents for remitting, it may take up to 60 days. Foreign investors have reported difficulties transferring funds to overseas affiliates and making payments for certain technical fees without the government’s prior approval to do so. Additionally, some regulatory agencies have reportedly blocked the repatriation of profits due to sector-specific regulations. The U.S. Embassy also has received complaints from American citizens who were not able to transfer the proceeds of sales of their properties.

In September 2019, BB simplified the profit repatriation process for foreign firms. Foreign companies and their branches, liaison, or representative offices no longer require prior approval from the central bank to remit funds to their parent offices outside Bangladesh. However, banks need to submit applications for ex post facto approval within 30 days of profit remittance.

The Financial Action Task Force (FATF) notes that Bangladesh has established the legal and regulatory framework to meet its Anti-Money Laundering/Counterterrorism Finance (AML/CTF) commitments. The Asia/Pacific Group on Money Laundering (APG), an independent and collaborative international organization based in Bangkok, conducted its mutual evaluation of Bangladesh’s AML/CTF regime in September 2018 and found that Bangladesh had made significant progress since the last Mutual Evaluation Report (MER) in 2009, but still faces significant money laundering and terrorism financing risks. The APG reports are available online: http://www.fatf-gafi.org/countries/#Bangladesh 

http://www.fatf-gafi.org/countries/#Bangladesh 

Sovereign Wealth Funds

The Bangladesh Finance Ministry first announced in 2015 that it was exploring the possibility of establishing a sovereign wealth fund to invest a portion of Bangladesh’s foreign currency reserves. In February 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.

7. State-Owned Enterprises

Bangladesh’s 49 non-financial SOEs are spread among seven sectors – industrial; power, gas and water; transport and communication; trade; agriculture; construction; and services. The list of non-financial SOEs and relevant budget details are published in Bangla in the Ministry of Finance’s SOE Budget Summary 201-20: http://www.mof.gov.bd/site/page/5eed2680-c68c-4782-9070-13e129548aac/SOE-Budget 

The current government has taken steps to restructure several SOEs to improve their competitiveness. The GOB converted Biman Bangladesh Airline, the national airline, into a public limited company that initiated a rebranding and fleet renewal program, including the purchase of twelve aircraft from Boeing, all of which have been delivered. Five of six state-owned commercial banks (SCBs) – Sonali, Janata, Agrani, Rupali, and BASIC – were converted to public limited companies, of which only Rupali is publicly listed.

The contribution of SOEs to gross domestic product, value-added production, employment generation, and revenue earning is substantial. SOEs usually report to the ministries, though the government has allowed some enhanced autonomy for certain SOEs, such as Biman Bangladesh Airline. SOEs maintain control of rail transportation whereas private companies compete freely in air and road transportation. The corporate governance structure of SOEs in Bangladesh has been restructured as per the guidelines published by the Organization for Economic Cooperation and Development (OECD), but the country’s practices are not up to OECD standards.  There are no guidelines regarding ownership of SOEs, and while SOEs are required to prepare annual reports and make financial disclosures, disclosure documents are often unavailable to the public. Each SOE has an independent board of directors composed of both government and private sector nominees. The boards report to the relevant regulatory ministry.  Most SOEs have strong ties with the government, and the ruling party nominates most SOE leaders.  As the government controls most of the SOEs, domestic courts tend to favor the SOEs in investment disputes.

The Bangladesh Petroleum Act of 1974 grants authority for the government to award natural resources contracts and the Bangladesh Oil, Gas and Mineral Corporation Ordinance of 1984 gives Petrobangla, the state-owned oil and gas company, authority to assess and award natural resource contracts and licenses, to both SOEs and private companies. Currently, oil and gas firms can pursue exploration and production ventures only through production sharing agreements with Petrobangla.

Privatization Program

The Bangladeshi government has privatized 74 state-owned enterprises (SOEs) over the past 20 years, but SOEs still retain an important role in the economy, particularly in the financial and energy sectors. Of the 74 SOEs, 54 were privatized through outright sale and 20 through offloading of shares.

Since 2010, the government’s privatization drive has slowed. Previous privatization drives were plagued by allegations of corruption, undervaluation, political favoritism, and unfair competition. Nonetheless, the government has publicly stated its goal is to continue the privatization drive. SOEs can be privatized through a variety of methods including: sales through international tenders; sales of government shares in the capital market; transfers of some portion of the shares to the employees of the enterprises when shares are sold through the stock exchange; sales of government shares to a private equity company (restructuring); mixed sales methods; management contracts; leasing; and direct asset sales (liquidation). In 2010, 22 SOEs were included in the Privatization Commission’s (now the BIDA) program for privatization. However, a study on privatized industries in Bangladesh conducted by the Privatization Commission in 2010 found that only 59 percent of the entities were in operation after being privatized and 20 percent of them were permanently closed down – implying a lack of planning or business motivation of their private owners. In 2014, the government declared SOEs would not be handed over to private owners by direct selling. Offloading shares of SOEs in the stock market can be a viable way to ensure greater accountability of the management of the SOEs and minimize the government’s exposure to commercial activities. The offloading of shares in an SOE, unless it involves more than 50 percent of its shares, does not divest the government of the control over the enterprise. Both domestic and foreign companies can participate in privatization programs. Additional information is available on the BIDA website at: http://bida.gov.bd/?page_id=4771

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 Bangladesh, http://www.csrbangladesh.org/about.html 

CSR Centre Bangladesh, http://www.csrcentre-bd.org 

Along with the Bangladesh Enterprise Institute (BEI), the CSR Centre is the joint focal point for the United Nations Global Compact (UNGC) and its 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 (SANSAR). Currently, SANSAR has five member countries including Afghanistan, Bangladesh, India, Nepal, and Pakistan.

While several NGOs have proposed National Corporate Social Responsibility Guidelines, the GOB has yet to adopt any national standards for RBC. As a result, the GOB 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.

9. Corruption

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 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.
  • NBR – 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 anticorruption efforts and reaffirmed the need for a strong ACC, but opposition parties claim that the ACC is used by the government to harass political opponents. Efforts to ease public procurement rules and a recent constitutional amendment that reduced 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.

Resources to Report Corruption

Mr. Iqbal Mahmood
Chairman
Anti-Corruption Commission, Bangladesh
1, Segun Bagicha, Dhaka 1000
+88-02-8333350
chairman@acc.org.bd

Contact at “watchdog” organization:

Mr. Iftekharuzzaman
Executive Director
Transparency International Bangladesh (TIB)
MIDAS Centre (Level 4 & 5), House-5, Road-16 (New) 27 (Old),

Dhanmondi, Dhaka -1209
+880 2 912 4788 / 4789 / 4792
edtib@ti-bangladesh.org, info@ti-bangladesh.org, advocacy@ti-bangladesh.org

10. Political and Security Environment

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. Harassment, intimidation 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 of the country and crackdown on dissent. Many civil society groups have expressed concern about the apparent trend toward a one-party state and the marginalization of all political opposition groups.

Americans are advised to exercise increased caution due to crime and terrorism when traveling to Bangladesh. Some areas have increased risk. For further information, see the State Department’s travel website for the Worldwide Caution, Travel Advisories, and Bangladesh Country Specific Information.

11. Labor Policies and Practices

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 2010 Labor Force Survey, 87 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 in Bangladesh 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 has labor laws that specify 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, compliance and enforcement of labor laws are inconsistent, and companies frequently discourage or prevent the formation of worker-led labor unions, preferring pro-government unions. Export Processing Zones (EPZs) are a notable exception to the national labor law in that they do not allow trade unions, but do allow worker welfare associations, to which 74 percent of workers belong, according to GOB.

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 factory fire and structural safety remediation, thanks mostly to two brand-led initiatives, the Alliance for Bangladesh Worker Safety (Alliance), comprised of U.S. and Canadian brands, and the Accord on Fire and Building Safety in Bangladesh (Accord), which was formed by European brands. Monitoring and remediation of RMG factories outside the purview of the Alliance and the Accord were handled by the GOB, with assistance from the ILO, under the National Initiative. The Alliance and Accord were scheduled to close in 2018 and hand over all monitoring to Bangladesh. The Alliance successfully concluded its factory monitoring and remediation operations at the end of 2018, as scheduled, but U.S. brands established a local organization, Nirapon, to continue monitoring remediated factories to ensure there is no backsliding.

As of March 2020, only 32 percent of factories under the National Initiative have completed remediation. After several court cases attempted to force the Accord out of Bangladesh in 2018 before its factories completed remediation, it signed an MOU with the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) in May 2019 to hand over its operations to a new entity, the RMG Sustainability Council (RSC) on June 1, 2020. In addition to BGMEA, the RSC would have representation from Accord brands and trade union federations. BGMEA and the GOB envision all RMG factories will eventually come under one monitoring platform, but have not yet agreed on how to coordinate inspections through an Industrial Safety Unit.

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 USTR. 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 has been made in the intervening years, several key issues have not been adequately addressed. Despite revisions in 2018 intended to make Bangladesh more compliant with international labor standards, the 2019 Bangladesh Labor Act (BLA) and 2019 Export Processing Zone (EPZ) Labor Act (ELA, which replaces the EPZ Workers Welfare Association and Industrial Relation Act) still restrict the freedom of association and formation of unions, and maintain two administrative systems for workers inside and outside of zones. The GOB reported it will issue implementation rules for both laws in 2020, and further amend them starting in July 2021.

The U.S. government funds efforts to improve occupational safety and health alongside labor rights in the readymade garment (RMG) sector in partnership with other international partners, civil society, businesses, and the GOB. The United States is also working with the EU, Canada, and the International Labor Organization (ILO) to continuously improve working conditions in the RMG sector via the Sustainability Compact, a coordination platform launched in 2013 to promote continuous improvements under three pillars: 1) respect for labor rights; 2) structural integrity of buildings and occupational safety and health; and 3) responsible business conduct.

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. Labor leaders estimate there are no more than 80 or 90 trade unions in the country, and only 30 to 40 are able to negotiate with owners. The law provides criminal penalties for 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. A crackdown on mostly peaceful wage protests between December 2018 and February 2019 reportedly led to the termination or forced resignation of some 11,000 workers—many of whom were blacklisted and remained unable to find new employment a year later.

Labor laws differentiate 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 (DIFE) 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 entitled to half their basic wages, then 25 percent after that. Workers who were employed for less than one year are not eligible for any compensation in a lay off. In reality, trade unions and protesting workers report employers not only fail to pay workers their severance or benefits, but also their regular wages. No unemployment insurance or other social safety net programs exist.

The GOB does not consistently and effectively enforce applicable labor law. 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 strikes followed the cumbersome and time-consuming legal requirements for settlements, and strikes or walkouts often occur spontaneously. The GOB was partnering with the ILO to introduce a dispute settlement system with 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 owned by foreign investors or built with foreign investment funds. 12. U.S International Development Finance Corporation (DFC) and Other Investment Insurance Programs

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

The U.S. International Development Finance Corporation (DFC) is not currently authorized for operation in Bangladesh. Investors should check DFC’s website for updates: https://www.dfc.gov/what-we-offer/eligibility/where-we-work 

DFC’s predecessor, the Overseas Private Investment Corporation (OPIC), and the Government of Bangladesh signed an updated bilateral agreement in May 1998. More information on DFC services can be found at: https://www.dfc.gov/ 

Bangladesh is also a member of the Multilateral Investment Guarantee Agency (MIGA): http://www.miga.org 

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
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018-19 $298,374 2018 $274,025 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in Partner Country ($M USD, stock positions) 2018 $3449 2018 $513.0 https://apps.bea.gov/
international/factsheet/
 
Host Country’s FDI in the United States ($M USD, stock positions) N/A N/A 2018 $3 million https://apps.bea.gov/
international/factsheet/
 
Total Inbound Stock of FDI as % host GDP 2018-19 6.3% 2018 5.9% https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (December 2018)
From Top Five Sources/To Top Five Destinations (U.S. Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $16,032 100% Total Outward $3,075 100%
United States $3,391 21.15% Mainland China $667 21.69%
Mainland China $1,438 8.97% The Netherlands $649 21.11%
United Kingdom $1,423 8.88% South Korea $564 18.34%
The Netherlands $1,326 8.27% United States $513 16.68%
Singapore $1,156 7.21% Thailand $306 9.95%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets (June, 2019)
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries $4,579 100% All Countries $3,080 100% All Countries $1,499 100%
N/A United States $1,150 37.34% N/A
Luxemburg $479 15.55%
United Kingdom $478 15.52%
Singapore $184 5.97%
The Netherlands $167 5.4%

14. Contact for More Information

Economic/Commercial Section
Embassy of the United States of America
Madani Avenue, Baridhara,
Dhaka — 1212
Tel: +880 2 5566-2000
Email: USTC-Dhaka@state.gov

Sri Lanka

Executive Summary

Sri Lanka is a lower middle-income country with a Gross Domestic Product (GDP) per capita of $3,853 and a population of approximately 22 million.  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.

After 30 years of civil war, 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 services exports are a significant growth sector.  Prior to the April 21, 2019 Easter Sunday attacks, the tourism industry was rapidly expanding, with Lonely Planet naming Sri Lanka its top travel destination in 2019.  However, the attacks led to a significant decline in tourism that continued into 2020 due to COVID-19 and the government’s related decision to close the airport for commercial passenger arrivals in March 2020.  The global impact of COVID-19 on tourism and apparel exports is resulting in severe contractions to both sectors in Sri Lanka, with potential follow-on impacts in related sectors including services, construction, and agriculture.  Migrant labor remittances, another significant source of foreign exchange, were approximately $6.7 billion in 2019.

President Gotabaya Rajapaksa, who came to power in December 2019, has largely promoted pro-business positions, including announcing tax benefits for new investments to attract foreign direct investment (FDI).  The new government’s economic goals, outlined in an election  manifesto, 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.  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, retail, 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.  However, Sri Lanka’s import regime is one of the most complex and protectionist in the world.  Sri Lanka ranks very poorly on the World Bank’s Doing Business Indicators in a number of areas, including contract enforcement (164 out of 190); paying taxes (142/190); registering property (138/190) and obtaining credit (132/190).  Sri Lanka ranks well in protecting minority investors, coming in at 28/190.

GDP fell to $84 billion in 2019.  The Easter Sunday attacks, together with external shocks and political uncertainty, led to a growth of only 2.3 percent in 2019 with inflation hitting 6.2 percent.  FDI, including loans, into Sri Lanka fell to approximately $1.2 billion in 2019, significantly less than the $2.3 billion in 2018, and 2020 is expected to see even lower levels of investment due to concern over Sri Lanka’s worsening financial situation and increased reliance on the People’s Republic of China (PRC).

Table 1: Key Metrics and Rankings  
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 93 of 175 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 99 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 89 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2017 $168.0 million http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 $ 4,020 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Sri Lanka is a constitutional multiparty republic.  In 1978, Sri Lanka began moving away from socialist, protectionist policies and opening up to foreign investment, although changes in government are often accompanied by swings in economic policy.  President Gotabaya Rajapaksa, who came to power in December 2019, has largely promoted pro-business positions, including announcing tax benefits for new investments to attract FDI.

The new government’s economic goals, outlined in an election  manifesto, 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.

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.  There are plans to establish new regulatory authorities, including a separate investment authority.

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 that 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 the 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, importation of a number of “non-essential” items have been temporarily suspended to curtail foreign exchange outflow as the Sri Lankan Rupee (LKR) depreciated around 10 percent during 2020 and is expected to be under further pressure in the medium term.

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.  The government pledged to address these issues, but the COVID-19 response remains its primary concern.  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.

Limits on Foreign Control and Private Ownership 

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: 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.  Foreign ownership in excess of 40 percent can be preapproved on a case-by-case basis by the BOI.

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.

Business Facilitation

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

Outward Investment

The government supports outward investment, and the Export Development Board offers subsidies for companies seeking to establish overseas operations, including branch offices related to exports.  New outward investment regulations came into effect November 20, 2017.  Sri Lankan companies, partnerships, and individuals are permitted to invest in shares, units, debt securities, and sovereign bonds overseas subject to limits specified by the new Foreign Exchange Regulations.  Sri Lankan companies are also permitted to establish overseas companies.  Investments over the specified limit require the Central Bank Monetary Board’s approval.  All investments must be made through outward investment accounts (OIA).  All income from investments overseas must be routed through the same OIA within three months of payment.  Note: OIA transactions were suspended until January 21 in an attempt to ease pressure on the Sri Lankan rupee.

2. Bilateral Investment Agreements and Taxation Treaties

Sri Lanka has signed investment protection agreements with 26 countries, including the United States (which came into force in May 1993).  Pursuant to the Constitution, investment protection agreements enjoy the force of law and legislative, executive, or administrative actions cannot contravene them.

  • Sri Lanka has signed free trade agreements (FTAs) with India, Pakistan, and Singapore, and is negotiating an FTA with China.
  • The FTAs with India and Pakistan only cover trade in goods. They provide for duty-free entry and duty preferences for manufactured and agricultural goods.  A domestic value addition of 35 percent is required to qualify for concessions granted pursuant to the FTAs.
  • The Singapore-Sri Lanka FTA came into force on May 1, 2018, and covers: investment, goods, services, trade facilitation, government procurement, telecommunications, e-commerce, and dispute settlement.  Sri Lanka eliminated customs duties on 50 percent of tariff lines, which will progressively increase to 80 percent over 14 years.  Sri Lanka will not reduce or eliminate duties on the remaining 20 percent of tariff lines.
  • Sri Lanka is a member of the South Asian Free Trade Area (SAFTA) and the Asia-Pacific Trade Agreement (APTA).

Sri Lanka signed a bilateral taxation treaty with the United States in 1985, which was amended in 2002.  Information about the treaty can be found at: http://www.irs.gov/Businesses/International-Businesses/Sri-Lanka—Tax-Treaty-Documents 

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

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

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

3. Legal Regime

Transparency of the Regulatory System

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

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

While law making 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.

International Regulatory Considerations

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

Legal System and Judicial Independence

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.

Laws and Regulations on Foreign Direct Investment

The principal law governing foreign investment is Law No. 4 (known as the BOI Act), created in 1978 and amended in 1980, 1983, 1992, 2002, 2009 and 2012.  The BOI Act and implementing regulations provide for two types of investment approvals, one for concessions and one without concessions.  Under Section 17 of the Act, the BOI is empowered to approve companies satisfying minimum investment criteria with such companies eligible for duty-free import concessions.  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.”

Competition and Anti-Trust Laws

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

Expropriation and Compensation

Since economic liberalization policies began in 1978, the government has not expropriated a foreign investment with the last expropriation dispute resolved in 1998.  The land acquisition law (Land Acquisition Act of 1950) empowers the government to take private land for public purposes with compensation based on a government valuation.  Still, there have been reported cases of the military taking over businesses in the North and East part of the country, by claiming they were on government land, with little or no compensation.

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

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

Sri Lanka ranked 94 out of 190 countries in 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

Investment Incentives

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

Corporate Taxation:

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

Sri Lanka has 12 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.

Performance and Data Localization Requirements

Employment of foreign personnel is permitted when there is a demonstrated shortage of qualified local labor.  Technical and managerial personnel are in short supply, and this shortage is likely to continue in the near future.  Foreign laborers do not experience significant problems in obtaining work or residence permits.  Sri Lanka has seen a rise in foreign laborers, mainly in construction sites, with some reportedly working without proper work visas.  Foreign investors who remit at least $250,000 can qualify for a five-year resident visa under the Resident Guest Scheme Visa Program: (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.  As a result, safeguards based on this 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 working to formulate data protection legislation. There is no ban on the sale of electronic data for marketing purposes.

5. Protection of Property Rights

Real Property

Secured interests in real property in Sri Lanka are generally recognized and enforced, 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 the World Bank’s 2020 “Doing Business Index,” Sri Lanka ranked 138 out of 190 countries for registering a property.  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.

Intellectual Property Rights

While IPR enforcement is improving, 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.

Sri Lanka has a comprehensive IPR law, and several offenders have been charged or convicted.  The government points to the new information technology (IT) policy that requires government agencies to use licensed or open source software as proof of IPR improvements (although the government has yet to put systems in place to monitor compliance with the policy) and some sectors – including apparel, software, tobacco, and electronics v have reported success in combating trademark counterfeiting through the courts.  Still, judicial redress remains time-consuming and challenging.  Better coordination among enforcement authorities and government institutions – such as the National Intellectual Property Office (NIPO), Sri Lanka Customs, and Sri Lanka Police as well as 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 a party to major intellectual property agreements.  Sri Lanka 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) obligations.  The law governs copyrights and related rights; industrial designs; patents, trademarks, and service marks; trade names; layout designs of integrated circuits; geographical indications; unfair competition; databases; computer programs; and undisclosed information (e.g., trade secrets).  All trademarks, designs, industrial designs, and patents must be registered with the Director General of Intellectual Property.  No legal provisions exist for registration of copyrights and trade secrets.

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/ .

Resources for Rights Holders

Contact at U.S. Embassy Colombo:

John Cabeca, U.S. Intellectual Property Attaché for South Asia, American Center
+91 11 2347 2000
Email: john.cabeca@trade.gov
Local lawyers list: https://lk.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys-2/

Country/Economy Resources:

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

6. Financial Sector

Capital Markets and Portfolio Investment

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.  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 August 30, 2020, 289 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 economic crisis, Sri Lanka took several measures to restrict imports.  In March 2020, CBSL suspended importation of a wide list of non-essential goods and motor vehicles.  The import control department also imposed further regulations restricting certain imported food items and instituted a 3-month credit term for importation of certain essential imports.  The import restrictions are currently in effect until January 1, 2021.

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 5.2 percent in April of 2020, and the average prime lending rate was 9.49 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 are allowed to borrow from foreign sources.  FDI finances about 6 percent of overall investment.  Foreign investors are allowed to access credit on the local market and are free to raise foreign currency loans.

Money and Banking System

Sri Lanka has a diversified banking system.  There are 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 2019 there were over 2,900 commercial banking outlets and over 5,100 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.

CBSL is responsible for supervision of all banking institutions and has driven improvements in banking regulations, provisioning, and public disclosure of banking sector performance.  Credit ratings are mandatory for all banks.  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 although a staggered application of capital provisions for smaller banks unable to meet capital requirements immediately will likely be allowed

Total assets of commercial banks stood at LKR 10,944 billion ($59 billion) as of December 31, 2019.  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 5.35 percent (up from 4.79 percent in 2019).  The People’s Bank currently holds a NPL ratio of 4.79 percent (up from 3.68 percent in 2019).  Both banks have significant exposure to SOEs but, these banks are implicitly guaranteed by the state.

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 look into the possible adoption of blockchain and cryptocurrencies.

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

Foreign Exchange and Remittances

Foreign Exchange

Sri Lanka generally has investor-friendly conversion and transfer policies.  Companies say they can repatriate funds relatively easily.  In accordance with its Article VIII obligations as a member of the IMF, Sri Lanka liberalized exchange controls on current account transactions in 1994 and, in 2010-2012, the government relaxed exchange controls on several categories of capital account transactions.  A new Foreign Exchange Act, No. 12 of 2017, came into operation on November 20, 2017 and further liberalized capital account transactions to simplify current account transactions.  Foreign investors are required to open Inward Investment Accounts (IIA) to transfer funds required for capital investments but there are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment through an IIA in any foreign currency designated by CBSL.

Remittance Policies

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

Sovereign Wealth Funds

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

7. State-Owned Enterprises

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

Privatization Program

The government is currently selling non-strategic 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 and is looking to list SOEs on the Colombo Stock Exchange and partially privatize non-strategic SOEs.  However, the government does not always follow an open bidding process when selling outside the stock exchange.  For instance, in the case of the sale of the Hambantota Port in 2017, the government allowed a PRC company to secure the deal without an open bidding process.  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.

9. Corruption

While Sri Lanka has adequate laws and regulations to combat corruption, enforcement is reportedly 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 disproportionate to the conduct (i.e. overly strict or 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.  Sri Lanka signed and ratified the UN Convention against Transnational Organized Crime in 2006.  Sri Lanka is a signatory to the OECD-ADB Anti-Corruption Regional Plan but has not joined the OECD Anti-Bribery Convention.

Resources to Report Corruption 

Contact at government agency responsible for combating corruption:

Commission to Investigate Allegations of Bribery or Corruption
No 36, Malalasekara Mawatha, Colombo 7
T+94 112 596360 / 2595039
M+94 767011954
Email: ciaboc@eureka.lk or dgbribery@gmail.com

Contact at “watchdog” organization:

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

10. Political and Security Environment

The government’s military campaign against the Liberation Tigers of Tamil Eelam (LTTE) ended in May 2009 with the defeat of the LTTE.  During the civil war, the LTTE had a history of attacks against civilians, although none of the attacks were 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.  In the aftermath of the attacks, the government imposed nationwide curfews and a temporary ban on some social media outlets.

Following his election in November 2019, President Gotabaya Rajapaksa announced major tax cuts as part of a pro-growth strategy.  The outbreak of COVID-19 shortly after the dissolution of Parliament in March delayed Parliamentary elections until August of 2020.  During the August elections, President Rajapaksa’s party secured a commanding two thirds majority in parliament.

Demonstrations occasionally take place in response to world events or local developments.  Demonstrations near Western embassies are not uncommon but have been well-contained with support from the Sri Lankan police and military.

Business-related Violence

Business related violence is not common and has little impact on the investment environment.

11. Labor Policies and Practices

Both local and international businesses have cited labor shortages as a major problem in Sri Lanka.  In 2019, 8.5 million Sri Lankans were employed:  47 percent in services, 27 percent in industry and 25 percent in agriculture.  Approximately 60 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 fairly 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.

Migrant Workers Abroad

There were an estimated 1.8 million Sri Lankan workers abroad in 2009/10, the last year the government published the figure.  Remittances from migrant workers, averaged about $6.7 billion in 2019, making up Sri Lanka’s largest source of foreign exchange. The majority of this labor force is unskilled (i.e., housemaids and factory laborers) and located primarily in the Middle East.  Sri Lanka is also losing many of its skilled workers to more lucrative jobs abroad.  Approximately 6,000 Sri Lankans work in Bangladeshi garment factories.

Foreign Workers in Sri Lanka

Sri Lanka has seen a gradual rise in foreign workers.  The majority of foreign workers are from India, Bangladesh, and the PRC, many reportedly without proper work visas.

Trade Unions

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

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

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

All forms of forced and compulsory labor are prohibited.  In March of 2016, the government introduced a national minimum wage set at LKR 10,000 ($54) per month or LKR 400 ($2.16) 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 14, although the government is seeking to raise the legal minimum age to 16.  The minimum age for employment in hazardous work is 18 years.

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.

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

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

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

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
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $84 Billion 2019 $84 Billion www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $262 Million 2019 $169Million BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-enterprises-comprehensive-data
 
Host country’s FDI in the United States ($M USD, stock positions) 2019 N/A 2018 $66 Million BEA data available at:
https://www.bea.gov/international/
direct-investment-and-multinational-enterprises-comprehensive-data  
 
Total inbound stock of FDI as % host GDP 2019 15.5% 2018 14.5% UNCTAD data available at:

https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 

* Source for Host Country Data: Central Bank of Sri Lanka

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
Total Inward Amount 100% Total Outward Amount 100%
China,P.R.: 2,128 16% Singapore 300 20%
Netherlands 1,774 13% India 205 14%
India 1,737 13% Bangladesh 139 9%
Singapore 1,023 8% Malaysia 134 9%
Malaysia 967 7% Maldives 100 7%
“0” reflects amounts rounded to +/- $500,000.

According to CBSL, the United States is the 13th largest foreign investor in Sri Lanka in terms of stock of foreign direct investment (FDI). The United States stock of FDI in 2019 was $262 million.  FDI inflows from the United States were $20 million 2019.  United States FDI in Sri Lanka has remained steady over the past five years.

Table 4: Sources of Portfolio Investment
Data Not Available.

14. Contact for More Information

Jacob Dietrich
Economic Officer
U.S. Embassy Colombo, Sri Lanka
Phone: +94-11-249-8500
Email: commercialcolombo@state.gov

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The Lessons of 1989: Freedom and Our Future