Sri Lanka is a lower middle-income country located in South Asia off the southern coast of India on the main east-west Indian Ocean shipping lanes. In January 2015, President Maithripala Sirisena was elected to power on a platform of good governance, anti-corruption and ethnic reconciliation. Sirisena leads a coalition government comprising of the United National Party (UNP), the reformist wing of the Sri Lanka Freedom Party (SLFP) and several smaller political parties. The coalition has made progress with regard to governance and political reforms including constitutional reforms aimed at reducing the powers of the executive president. The next general election is expected in 2020.
The United States is the largest single market for Sri Lankan exports, importing USD 2.9 billion of the total per U.S. Census Bureau data, while U.S. exports to Sri Lanka were USD 336 million in 2017. Total exports, mostly tea and garments, increased 10 percent to USD 11.3 billion in 2017 while imports are approximately USD 21 billion. The Sri Lankan economy grew by 3.1 percent in 2017, versus the 4.5 percent growth recorded in 2016, due to decreased agricultural output resulting from a drought in some areas and flooding in others. Gross domestic product (GDP) reached USD 87 billion and per capita GDP was USD 4,065 in 2017. Remittances from migrant workers, approximately USD 7.1 billion per year, are a significant source of foreign exchange. Tourism is a USD 3.9 billion industry with 2.1 million tourist arrivals in 2017. Foreign direct investment into Sri Lanka increased to approximately USD 1.4 billion in 2017 compared to USD 890 million in 2016.
A new foreign exchange law came into operation in November 2017 liberalizing foreign exchange transactions. The government broadened its tax base with a new tax law in 2018. In 2017, the government removed protectionist para-tariffs on over 1,200 items and has announced it will remove additional para-tariffs in 2018 and 2019. The government signed a free trade agreement with Singapore in January 2018, and is in the process of negotiating an Economic and Technology Cooperation Agreement with India (an expansion of the existing Indo-Sri Lanka free trade agreement) and a free trade agreement with China.
Corruption remains an issue. A presidential commission investigating irregularities in a Central Bank bond sale has recommended legal action against a former finance minister and a former central bank governor. Due to deficiencies in Sri Lankan anti-corruption practices, Sri Lanka was placed under the Financial Action Task Force (FATF) monitoring process in 2017.
The government’s Vision 2025 agenda aims to increase GDP per capita to USD 5,000, create one million jobs, raise foreign direct investment to USD 5 billion per year, and double exports to USD 20 billion by 2020. The government, under a three-year Extended Fund Facility (EFF) with the International Monetary Fund (IMF), is committed to a program of fiscal consolidation, increasing government revenue, rebuilding foreign exchange reserves, state owned enterprise reform, flexible inflation targeting and reforms to the trade and investment regime. The economy could also benefit from an increase in female labor force participation, which is approximately 35 percent currently.
|TI Corruption Perceptions Index||2017||91 of 175||http://www.transparency.org/
|World Bank’s Doing Business Report “Ease of Doing Business”||2017||111 of 190||www.doingbusiness.org/rankings|
|Global Innovation Index||2017||90 of 128||https://www.globalinnovationindex.org/
|U.S. FDI in partner country (M USD, stock positions)||2016||USD 117||http://www.bea.gov/
|World Bank GNI per capita||2016||USD 3,850||http://data.worldbank.org/
1. Openness To, and Restrictions Upon, Foreign Investment
Policies towards Foreign Direct Investment
Sri Lanka is a constitutional multiparty republic. In 1978, Sri Lanka shifted away from a strong socialist orientation and opened up to foreign investment; however, changes in government have often been accompanied by reversals in economic policy. The current coalition government led by President Sirisena and Prime Minister Wickremesinghe follows a pro-business stance. President Sirisena’s Sri Lanka Freedom Party has a socialist orientation. Prime Minister Ranil Wickremesinghe represents the United National Party.
The government’s economic policies contained in Vision 2025, published in September 2017, aim to position Sri Lanka as an export-oriented economic hub at the center of the Indian Ocean. The government has formulated a new Trade Policy and a National Export Strategy to create a more liberal and predictable trade regime. The government expects these policies to attract export-oriented FDI, improve trade logistics, and boost firms’ abilities to compete in global markets.
Former President Mahinda Rajapaksa (2005-2015) followed a statist economic policy, advocating for government control of strategic enterprises and expanding the role of the state. The Rajapaksa administration also introduced a substantial government infrastructure development program, largely financed with Chinese loans.
Sri Lanka will require high levels of FDI to meet its growth targets. Recent FDI concentrated on real estate, mixed development projects, and ports. Ports will be an important driver of growth. In 2017, the government sold a majority stake (on a 99-year lease) of the Chinese-funded and Chinese-built Hambantota Port to a Chinese company, also approving a Chinese logistics and industrial zone in Hambantota at the same time. Colombo Financial City (formerly called Colombo Port City) is a large–scale land reclamation and city development project being developed by a Chinese company. The tourism sector, with over two million tourists per year visiting Sri Lanka, will also require FDI. Investors are capitalizing on Sri Lanka’s environment, culture, religious history, and wildlife to attract high-end tourists and to tap into the growing markets of India and China. The business process outsourcing sector is growing and has strong involvement from U.S. firms. With a growing middle class, investors also see opportunities in franchising, retail and services, as well as light manufacturing.
Importers to Sri Lanka face high taxes. According to a World Bank study, Sri Lanka’s present import regime is one of the most complex and protectionist in the world. The 2018 government budget stressed the need to liberalize trade and shift away from being protectionist and inward oriented. As an initial step, the budget lifted para-tariffs on several items. Sri Lanka’s free trade agreements (FTA) with India and Pakistan offer preferential access to those markets, and Sri Lanka is currently negotiating an Economic and Technology Agreement (ETCA) with India and an FTA with China. The government expects the Sri Lanka-Singapore FTA, signed in January 2018, to increase private sector growth and integrate Sri Lanka into regional and global value chains. Colombo, the capital, has cleaner air and less congested roads than many South Asian cities, creating a potentially attractive environment for expatriates.
Sri Lanka is a challenging place to do business, with high transaction costs caused by an unpredictable economic policy environment. The government’s overall provision of services is impeded by inefficiency. While the administration has started to implement more transparent procurement practices, economic growth is stymied by lingering opaque government procurement practices. Investors cite the risks of contract repudiation, cronyism, damage to reputation, and de facto or de jure expropriation as concerns, although the government has said it will address these issues. From an investor viewpoint, the power and petroleum sectors are particularly challenging, as decision-making authority is highly fragmented and the capital investments required are substantial. Trade union opposition at both the Ceylon Petroleum Corporation and the Ceylon Electricity Board (CEB) make reform of these loss-generating state-owned enterprises very difficult. Investors report that starting a business in Sri Lanka is relatively simple and quick, especially when compared to other frontier markets. Scalability is a problem, however, as the lack of skilled labor and a relatively small talent pool limits growth. Investors claim employee retention is good in Sri Lanka, but numerous public holidays, reluctance of workers to work at night, the lack of labor mobility, and a difficulty in recruiting women can reduce efficiency and increase start-up times.
The Board of Investment (BOI) (www.investsrilanka.com ), an autonomous statutory agency, is the primary government authority responsible for investment, with a focus on foreign investment. The Board of Investment is intended to provide “one-stop” service for all foreign investors. The Board of Investment’s duties include the approval of projects, granting incentives and arranging utility services. It also assists in obtaining resident visas for expatriate personnel and facilitates import and export clearances. The Board of Investment’s Single Window Investment Facilitation Taskforce (SWIFT) acts as a facilitation arm of the investment approvals process and provides linkages to the relevant line agencies in order to expedite the project approval process.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign ownership is allowed in most sectors, although the land ownership law prohibits foreigners from owning land with some exceptions. Foreign investors are permitted to invest in company shares, debt securities, government securities, and unit trusts. Most investors cite acquiring land as the biggest challenge for any new business in Sri Lanka. Private land ownership is limited to fifty acres per person. The government owns approximately 80 percent of the land in Sri Lanka including land housing most tea, rubber, and coconut plantations, which are leased to the private sector on 50-year terms. Although state land for industrial use is usually allotted on a 50-year lease, the government may approve 99-year leases on a case-by-case basis depending on the nature of the project. Many land title records were lost during the Sri Lankan civil war and significant disputes remain over property ownership in the North and East. The government has started a program to hand back property taken by the government during the war to residents in the North and East.
Foreigners are prohibited from purchasing land and real estate except for apartments above the third floor. Currently, Cabinet can approve a land purchase for an investment in the national interest, provided there is a substantial foreign remittance for the purchase of the land. The 2017 and 2018 budgets promised to relax restrictions on apartment ownership. Other policies of concern include the November 2011 Underutilized Assets Act, which resulted in the seizure of 37 companies. The current government also imposed a one-time 25 percent tax on companies making profits over LKR 2 billion (USD 13 million) in the 2013/14 financial year. Foreign investors enjoying tax holidays were exempted from the tax.
The government allows 100 percent foreign investment in any commercial, trading, or industrial activity other than a few specified sectors: air transportation; coastal shipping; large scale mechanized mining of gems; lotteries; manufacture of military hardware, military vehicles, and aircraft; dangerous drugs; alcohol; toxic, hazardous, or carcinogenic materials; currency; and security documents. These sectors are regulated and subject to approval by various government agencies including the Board of Investment.
Foreign investments in the following areas are restricted to 40 percent ownership: the production for export of goods subject to international quotas; growing and primary processing of tea, rubber, coconut; cocoa, rice, sugar and spices; mining and primary processing of non-renewable national resources; timber based industries using local timber, deep-sea fishing; mass communications; education; freight forwarding; travel services; and businesses providing shipping services. Foreign ownership in excess of 40 percent must be preapproved on a case-by-case basis by the Board of Investment. Foreign investment is not permitted in the following businesses: pawn brokering; retail trade with a capital investment of less than USD 5 million; and coastal fishing. In areas where foreign investment is permitted, policy treats foreign investors equally with domestic investors.
The Board of Investment screens foreign investors applying for incentives offered under the Board of Investment law to ensure they meet environment compliances and economic factors. Some investments, especially in utilities, are screened by respective statutory agencies or line ministries.
Other Investment Policy Reviews
Sri Lanka has been a member of the World Trade Organization (WTO) since 1995. The most recent WTO Trade Policy Review for Sri Lanka was conducted in 2016. This is Sri Lanka’s fourth Trade Policy Review. Additional information may be found at: https://www.wto.org/english/tratop_e/tpr_e/tp447_e.htm .
The government has not conducted investment policy reviews through the Organization for Economic Cooperation and Development (OECD) or the U.N. Conference on Trade and Development (UNCTAD) within the last few years.
The Board of Investment is the central facilitation point for foreign investors.
The Department of Registrar of Companies (www.drc.gov.lk ) has the responsibility for business registration. The registration system is all done in-person except for the on-line submission of the name approval application for a business registration. Online registration was recently introduced, but, in practice, the system is not widely used. Registration at the Companies Registry takes on average seven to ten days. In addition to the Registrar of Companies, businesses must register with the Inland Revenue Department to obtain a taxpayer identification number for payment of taxes and the Department of Labor for payment of social security payments. According to the World Bank (http://iab.worldbank.org/ ), it takes six procedures and 65 days to establish a foreign-owned limited liability company (LLC) in Sri Lanka.
The government supports outward investment. New outward investment regulations came into effect November 20, 2017. Sri Lankan companies, partnerships and individuals are permitted to invest in shares, units, debt securities, and sovereign bonds overseas subject to limits specified by the new Foreign Exchange Regulations. Investments over the specified limit require the Central Bank Monetary Board’s approval. All investments must be made through outward investment accounts (OIA). All income from investments overseas must be routed through the same OIA within three months of payment.
2. Bilateral Investment Agreements and Taxation Treaties
Bilateral Investment Agreements and FTAs
The government has signed investment protection agreements with the United States (which came into force in May 1993), as well as with the following countries: Australia, Belgium-Luxembourg, China, Czech Republic, Denmark, Egypt, Finland, France, Germany, Indonesia, India, Iran (not in force), Italy, Japan, Korea, Kuwait (not in force), Malaysia, the Netherlands, Norway, Pakistan, Romania, Singapore, Sweden, Switzerland, Thailand, the United Kingdom and Vietnam (not in force.) Under Article 157 of the Sri Lankan Constitution, investment protection agreements enjoy the force of law and no legislative, executive, or administrative action can contravene them.
Sri Lanka has signed FTA’s with India, Pakistan and Singapore. The Sri Lanka-Singapore FTA was signed in 2018 and has not come into force yet.
Bilateral Taxation Treaties
Sri Lanka signed a bilateral taxation treaty with the United States in 1985, which was amended in 2002. Information about the treaty can be found at: http://www.irs.gov/Businesses/International-Businesses/Sri-Lanka—Tax-Treaty-Documents .
Sri Lanka has also signed bilateral agreements with Australia, Bangladesh, Bahrain, Belgium, Canada, China, Czech Republic, Denmark, France, Finland, Germany, Hong Kong, India, Indonesia, Iran, Italy, Japan, Korea, Kuwait, Malaysia, Mauritius, Nepal, Netherlands, Norway, Oman, Pakistan, Philippines, Poland, Qatar, Romania, Russia, Saudi Arabia, Singapore, Sweden, Switzerland, Thailand, UAE, U.K., Vietnam, Seychelles, Belarus, Palestine, and Luxembourg.
Sri Lanka passed a new Inland Revenue Act in 2017. The new law, which came into force on April 1, 2018 aims to provide a tax framework that gives more certainty to investors and taxpayers; modernize rules related to cross-border transactions to address tax avoidance; broaden the tax base and expand income tax sources. A three-tier corporate tax structure has also been introduced. The standard rate of tax is 28 percent while a 14 percent rate applies to certain identified industries. A 40 percent rate applies to businesses in the liquor, tobacco and betting and gaming industries. The law also contains a new investment incentive regime. It has introduced capital gains tax on capital gains and fines and/or imprisonment for tax evasion. The tax law imposes personal liability on company directors. Existing tax holidays are to be honored through transitional provisions. The U.S. Embassy encourages prospective U.S. investors to consult with auditing firm to assess relevant tax liability.
3. Legal Regime
Transparency of the Regulatory System
The Board of Investment strives to inform potential investors about laws and regulations affecting operations in Sri Lanka. However, existing laws remain hard to find, and proposed laws and regulations, while generally made available for public comment, are occasionally published without public discussion. Many foreign and domestic investors view the regulatory system as unpredictable due to outdated regulations, rigid administrative procedures and excessive leeway for bureaucratic discretion. Effective enforcement mechanisms are sometimes lacking and investors cite coordination problems between the Board of Investment and relevant line agencies. Lack of sufficient technical capacity within the government to review financial proposals for private infrastructure projects also creates problems during tendering.
Corporate financial reporting requirements in Sri Lanka are outlined in several laws, which include the Companies Act No. 7 of 2007, Securities and Exchange Commission Act No. 36 of 1987, Banking Act No. 30 of 1988, Finance Business Act of 2012, Regulation of Insurance Industry Act No. 27 of 2011, Inland Revenue Act 24 of 2017, Microfinance Act No. 6 of 2016, Finance Act No. 38 of 1971, and Accounting and Auditing Standards Act No. 15 of 1995.
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) respectively. 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 of such enterprises are required to be audited by professionally qualified auditors holding ICASL membership. ICASL has published accounting standards for small companies as well. The Accounting Standards Monitoring Board (ASMB) is responsible for monitoring compliance with Sri Lankan accounting and auditing standards. British professional accounting bodies are active in Sri Lanka. The Chartered Institute of Management Accountants (CIMA), a leading professional accounting body based in the United Kingdom covering the Commonwealth of Nations member countries, has its largest overseas presence in Sri Lanka.
Rule-making authority lies with Parliament. Laws are published in Acts of Parliament.
At the pre-enactment stage, bills are drafted by respective ministries. Public consultation at this stage is limited in many instances. Every bill must be published in the government gazette (http://documents.gov.lk/en/home.php ) at least seven days before it is placed on the Order Paper of the Parliament. This is the first occasion the public is officially informed of proposed laws. Until this time, the draft is treated as a confidential document. Any member of the public can challenge the bill in the Supreme Court, given they do so within one week of its placement on the Order Paper of the Parliament. If the Supreme Court orders amendments to the bill, these have to be incorporated before can be debated and passed. Regulations are made by administrative agencies and are published in the government gazette which is similar to a U.S. Federal Notice. In addition to regulations, some rules are made through internal circulars, which are hard to find. All public comments received by regulators are not made public, online or otherwise.
Entrenched corruption has made 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. While the government has started to implement its platform of good governance and transparency, the administration has yet to eliminate all elements of corruption in the bidding process.
International Regulatory Considerations
Sri Lanka is a member of the World Trade Organization (WTO) and has made many WTO notifications that pertained to 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. A National Trade Facilitation Committee is tasked with undertaking reforms needed to operationalize the TFA.
Legal System and Judicial Independence
The Sri Lankan legal system reflects diverse cultural influences. Criminal law is fundamentally British. Basic civil law is Roman-Dutch. Laws pertaining to marriage, divorce, and inheritance can vary based on religious affiliation. Sri Lankan commercial law is almost entirely statutory. The law reflects colonial British law but amendments have largely kept pace with subsequent legal changes in the United Kingdom. Several important legislative enactments regulate commercial matters: the Board of Investment 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. The Sri Lankan 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). The provincial high courts have original, appellate and reversionary criminal jurisdiction. The Court of Appeal is the 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.
All commercial matters including intellectual property claims exceeding the value of LKR 3 million (approximately USD 19,350) fall within the jurisdiction of the Commercial High Court of Colombo. A number of tribunals also exercise judicial functions such as the Labor Tribunals that hear cases brought by workers against their employers. Litigation can be slow. Monetary judgments are usually made in local currency but procedures exist for enforcing foreign judgments.
Laws and Regulations on Foreign Direct Investment
The principal law governing foreign investment is Law No. 4, created in 1978 (known as the BOI Act), as amended in 1980, 1983, 1992, 2002, 2009 and 2012 along with implementing regulations established under the Act. The BOI Act provides for two types of investment approvals, one allowing concessions and the other without concessions. Under Section 17 of the Act, the BOI is empowered to approve companies satisfying certain eligibility criteria on minimum investment. Such companies are eligible for concessions such as duty free imports. Investment approval under Section 16 of the BOI Act permits companies to operate under the “normal” laws of the country and applies to investments that do not satisfy eligibility criteria for BOI incentives. From April 1, 2017, Inland Revenue Act No. 24 of 2017 provides an investment incentive regime granting a concessionary tax rate (for specific sectors) and capital allowances (depreciation) based on capital investments made by investors. Commercial Hub Regulation No 1, of 2013 applies to transshipment trade, off-shore businesses and logistic services. Strategic Development Project Act of 2008 (SDPA) provides generous tax incentives for large projects that the Cabinet identifies as Strategic Development Projects. Other laws affecting foreign investment are the Securities and Exchange Commission Act of 1987 as amended in 1991, 2003 and 2009, the Takeovers and Mergers Code of 1995 (revised in 2003), Companies Act of 2007 (revised in 2014), and the Foreign Exchange Act of 2017. Various labor laws and regulations also affect investors. For more details, please visit: http://www.lawnet.lk/ .
Competition and Anti-Trust Laws
Sri Lanka does not have a specific competition law. Instead, the Board of Investment or the respective regulatory authority may review transactions for competition-related concerns.
In March 2017, the Sri Lankan Parliament approved an Anti-Dumping & Countervailing Act and a Safeguard Measures Act. These laws will provide a framework to guard against unfair trade practices and unforeseen surges of imports. The new laws will allow government trade agencies to initiate investigations relating to unfair business practices and impose additional duties and countervailing duties.
Expropriation and Compensation
Since economic liberalization policies began in 1978, the government has not expropriated a foreign investment. The last expropriation dispute was resolved in 1998. However, in 2011, the previous government approved the Revival of Underperforming Enterprises and Underutilized Assets Act allowing for the expropriation of assets belonging to 37 companies the government considered as underperforming. These companies had leased land from the government but the government claimed the companies were not meeting the conditions of the agreement. Although many of the companies were defunct, several others were viable businesses. The law increased investor uncertainty regarding property rights in Sri Lanka and is often cited as having a chilling effect on foreign direct investment. The Central Bank stated that the Act was to be considered a one-off measure and the 2018 government budget proposed to repeal it, but it has not been done to date.
Apart from the Underutilized Assets Act, the land acquisition law empowers the government to take over private land for public purposes. Compensation is paid based on government valuation which some local investors consider relatively fair. There are cases, however, of the military taking over businesses in the North and East – on claims they are on government land – with little or no compensation. Many land records were lost or destroyed during the war which complicates land tenure issues and delays resolution. Under the previous regime, there were reports of government taking over private lands throughout the country purportedly for public purposes. The current government has pledged to refrain from the takeover of private assets.
Sri Lanka is a member state to the International Centre for the Settlement of Investment Disputes (ICSID convention). It is also a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) without reservations.
Sri Lanka’s Arbitration Act of 1995 recognizes within its legal framework the terms of the New York Convention.
Investor-State Dispute Settlement
Sri Lanka has signed a Bilateral Investment Treaty (BIT) with the United States. Over the past ten years, according to the United Nations, two investment disputes 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 ongoing arbitration involving British and local investors with the Attorney General as respondent with regard to a tourism development project.
International Commercial Arbitration and Foreign Courts
Many investors tend to prefer arbitration over litigation. Arbitral awards made abroad are now enforceable in Sri Lanka. Similarly, awards made in Sri Lanka are enforceable abroad. There is a considerable delay in enforcing arbitral awards and the respondents are often seen making objections based on technicalities or on public policy considerations.
The Institute for the Development of Commercial Law and Practice (ICLP) (www.iclparbitrationcentre.com ) and Sri Lanka National Arbitration Centre (www.slnarbcentre.com ) engage in private settlement of commercial disputes through arbitration.
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 unless the employee agrees to such termination.
In the absence of proper 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 it cannot meet a creditor’s demands for payment of money in excess of LKR 50,000 (USD 320.00). Lenders are also empowered to foreclose on loan collateral without court intervention. However, loans below LKR 5 million (USD 32,000) are exempt and lenders cannot foreclose on collateral provided by guarantors to a loan. Financial institutions also face other legal challenges as defaulters obtain restraining orders on frivolous grounds due to technical defects in the recovery laws.
The Companies Act of 2007 introduced a solvency test to determine the financial stability of a company. The solvency test is intended to prevent companies without sufficient assets from obtaining loans and to protect rights of creditors. The law sets forth the responsibilities of a company’s directors in cases of serious loss of capital. While the Companies Act does not provide for the revival of struggling companies, the courts generally take a liberal attitude towards any restructuring plans that would benefit a company.
4. Industrial Policies
The Inland Revenue Act of 2017, implemented April 1, 2018, includes concessionary corporate tax rates for investments in specific sectors and increased capital allowances (depreciation) on capital investments. The government will honor existing tax holidays through transitional provisions.
The standard rate of corporate tax is 28 percent. A concessionary rate of 14 percent applies for small and medium companies (with an annual income of less than LKR 500 million, USD 3.2 million); and companies exporting goods and services; and companies engaged in agricultural business; education services; promotion of tourism and information technology services. A 40 percent corporate tax rate applies to companies engaged in gaming, liquor and tobacco related businesses.
The following capital allowances (capital expenditure to be deducted from revenues of the company before tax is imposed) applies. The law contains carry forward provisions for set off ranging from 10 to 25 years.
- Investments up to USD 3 million (will expire three years from April 1, 2018):
- Investments in the Northern Province – depreciation at the rate of 200 percent;
- Investments in the rest of the country – depreciation at the rate of 100 percent.
- Investments exceeding USD 3 million:
- Northern Province – depreciation at the rate of 200 percent.
- Investments in other provinces:
- Investments from USD 3 million to USD 100 million – depreciation at the rate of 100 percent;
- Investments exceeding USD 100 million – depreciation at the rate of 150 percent.
Research and Development Expenditure
An amount equal to 200 percent of research and development expenditure can be deducted from income for three years.
Depreciation allowances for the following assets acquired after April 1, 2018 are as follows:
- Computers, vehicles, machinery and furniture – depreciation at the rate of 20 percent for five years;
- Buildings – deprecation at the rate of 5 percent for 20 years or the actual useful life.
In addition to the above incentives, BOI companies also qualify for customs duty exemptions on project related capital goods during the project implementation period. Export oriented companies are allowed to import raw materials free of customs import duty, value added tax, ports and airport levy and nations building tax. Large scale export-oriented manufacturing companies with an investment of over USD 200 million will be exempted from paying Ports and Airports Development levy (PAL) for importation of project related capital goods during the project implementation period. The Strategic Development Project Act also provides tax incentives.
For further information on investment incentives and other investment-related issues, potential investors should contact the Board of Investment directly (www.investsrilanka.com or info@Board of Investment.lk.) and refer the Inland Revenue Act 24 or 2017 (www.ird.gov.lk )
Foreign Trade Zones/Free Ports/Trade Facilitation
Sri Lanka has 12 free trade zones, also called export processing zones, administered by the Board of Investment. Foreign investors have the same investment opportunities as local entities in these zones. Export oriented companies located within and outside the zones are eligible to import project related material and inputs free of customs import duties. The imports may be subject to other taxes.
In the past, firms preferred to locate their factories near the Colombo harbor or airport to reduce transport time and cost. However, excessive concentration of industries around Colombo has caused heavy traffic, higher real estate prices, environmental pollution and a scarcity of labor. The Board of Investment and the government now encourage export-oriented factories to locate in industrial zones farther from Colombo although Sri Lanka’s limited road network make these outlying zones more challenging.
Sri Lanka plans to create a China Logistics and Industrial Zone (SLCLIZ) in Hambantota in the Southern Province which would be open for Chinese investors to establish factories. The government plans to allocate 1,000 acres of land for the zone. SLCIZ is expected to include the Hambantota Port.
Performance and Data Localization Requirements
There are no performance requirements. In most cases, firms enjoying preferential Board of Investment incentives in the manufacturing sector must export 80 percent of production while those in the service sector must earn at least 70 percent of their income in foreign exchange. Foreign investors are generally not expected to reduce their equity over time nor are they expected to transfer technology within a specified period of time except for build-own-transfer or other such projects in which the terms are specified within pertinent contracts.
Foreign investors who remit at least USD 250,000 can qualify for a five-year resident visa under the Resident Guest Scheme Visa Program (http://www.immigration.gov.lk/web/index.php?option=com_content&view=article&id=154&Itemid=200&lang=en ). Employment of foreign personnel is permitted when there is a demonstrated shortage of qualified local labor. Technical and managerial personnel are in short supply and this shortage is likely to continue in the near future. Foreign employees in the commercial sector do not experience significant problems in obtaining work or residence permits. Sri Lanka offers dual citizenship status to Sri Lankans who have obtained foreign citizenship in seven designated countries. Tourist and business visas are granted for one month with possible extensions.
Sri Lanka has no specific requirements for foreign information technology providers to turn over source code or provide access to surveillance. Provisions relating to interception of communications for cybercrime issues are subject to court supervision under the Computer Crimes Act of 2007. Sri Lanka became a party to the Budapest Cybercrime Convention in 2015. As a result, safeguards based on this convention are in force. Although there is no comprehensive legislative protection of electronic data, the Computer Crimes Act has a provision to protect data and information. Steps are being taken by the government to formulate data protection legislation. There is no ban on the sale of electronic data for marketing purposes.
Sri Lanka ratified the UN Electronic Commerce Convention in July 2015 and began implementing it on February 1, 2016 by taking steps to amend the Sri Lanka Electronic Transactions law to comply with the convention.
5. Protection of Property Rights
Secured interests in property in Sri Lanka are generally recognized and enforced, but many investors claim protection can be flimsy. A reliable registration system exists for recording private property including land, buildings and mortgages, although problems exist due to fraud and forged documents. Redress by courts is slow. A legal framework that enables the state to takeover private land relatively easily has also led to disputes and an erosion of investor confidence. In the World Bank’s 2017 “Doing Business Index” Sri Lanka ranked 155 out of 190 countries in the category of registering a property. Property registration required, on average, completion of nine procedures lasting 51 days. Foreigners are prohibited from the purchase of lands. A regulation imposing a 15 percent tax on leases to foreigners was removed in January 2016.
Intellectual Property Rights
Intellectual property right (IPR) enforcement is improving in Sri Lanka although counterfeit goods continue to be widely available making it difficult for legitimate industries to protect their markets. Local agents of well-known U.S. and other international companies representing recording, software, movie, clothing, and consumer product industries continue to complain that lack of IPR protection damages their businesses. Sri Lanka has a comprehensive IPR law and several offenders have been charged or convicted. Overall, IPR protection is improving in the country. For instance, the government’s information technology (IT) policy requires government agencies to use licensed or open source software. Software companies have reported an increased interest by large companies in improving IPR regimes. Sri Lanka does not track and report on seizures of counterfeit goods.
Sri Lanka is a party to major intellectual property agreements. Sri Lanka adopted an intellectual property law in 2003 that was intended to meet both U.S.-Sri Lanka bilateral IPR agreements and, to a great extent, trade-related aspects of intellectual property rights (TRIPS) obligations. The law governs copyrights and related rights; industrial designs; patents, trademarks and service marks; trade names; layout designs of integrated circuits; geographical indications; unfair competition; databases; computer programs; and undisclosed information (e.g., trade secrets). All trademarks, designs, industrial designs, and patents must be registered with the Director General of Intellectual Property. No legal provisions exist for registration of copyrights and trade secrets.
The National Intellectual Property Office has stepped up efforts to improve the trademarks and patents administration regime. Infringement of intellectual property rights is a punishable offense under the IP law with criminal and civil penalties. Recourse available to owners includes injunctive relief; seizure and destruction of infringing goods and plates or implements used for the making of infringing copies; and prohibition of imports and exports. Penalties for the first offense include up to six months imprisonment or a fine of up to LKR 500,000 (USD 3,200), but smaller penalties are the norm. Aggrieved parties can seek redress for any IPR violations through the courts though this can be a frustrating and time-consuming process. In recent times warning letters have proved to be an effective alternative to litigation in cases of minor copyright and trademark infringements. Sri Lanka Customs’ regulatory code provides ex officio authority to seize suspected counterfeit shipments at the borders. However, police and customs authorities generally do not proactively initiate action against IPR violators unless the victims bring it to the authorities’ attention and work with them on enforcement actions. Judicial cooperation continues to improve. The government has established a special antipiracy and counterfeit unit in the Criminal Investigation Division (CID) of the police to specifically address IPR concerns. There is also an IPR unit in the Social Protection Unit of Sri Lankan Customs, and a trademark database to advance IPR protection. The government has yet to make full use of this database.
Sri Lanka is not listed in U.S. Trade Representative’s Special 301 report.
For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .
Resources for Rights Holders
Contact at U.S. Embassy Colombo:
Partha Mazumdar, Economic Section Chief
Local lawyers list: https://lk.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys-2/?_ga=2.122197826.833404297.1556637989-875676780.1556293227.
U.S. Patent and Trademark Office Intellectual Property Attache:
Shilpi Jha, IP Specialist for South Asia
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 Colombo Stock Exchange (CSE), unit trusts, stockbrokers, listed public companies, margin traders, underwriters, investment managers, credit rating agencies and securities depositories. Foreign portfolio investment is encouraged. Foreign investors can purchase up to 100 percent of equity in Sri Lankan companies in numerous permitted sectors. In order to facilitate portfolio investments, country and regional funds may obtain SEC approval to invest in the Sri Lankan stock market. These funds make transactions through share investments in Inward Investment Accounts maintained in commercial banks. Currently, 299 companies representing 20 business sectors are listed on the CSE. As stock market liquidity is limited, investors need to manage their exit strategy carefully. Investors will be affected by the exchange rate as well.
The SEC has intensified oversight of regulated entities and conducted investigations on insider trading and market manipulation prior to 2015. Previous attempts to investigate insider trading and fraud at the CSE during 2011-2014 had to be abandoned as the SEC came under pressure from powerful market players. Four senior SEC officials resigned over regulatory issues during this period citing pressures from high net-worth local investors. The SEC law is to be amended to align the regulatory framework with international standards. International Organization of Securities Commissions’ Country Review 2017 noted gaps in the regulatory framework, including limited cooperation between regulatory authorities and non-regulation of market players such as investment banks and financial planners.
In accordance with its IMF Article VIII obligations, the government and the Central Bank generally refrain from restrictions on current international transfers. When the government experiences balance of payments difficulties, it does tend to impose controls on foreign exchange transactions, but in recent years has exercised restraint in resorting to such measures.
The state consumes over 50 percent of the country’s domestic financial resources and has a virtual monopoly on the management and use of long-term savings in the country. This inhibits the free flow of financial resources to product and factor markets. High budget deficits have caused interest rates to rise and resulted in higher inflation. On a year-to-year basis inflation was approximately 4.2 percent in March 2018 and the average prime lending rate was 11 percent. Retained profits finance a significant portion of private investment in Sri Lanka. Commercial banks are the principal source of bank finance. Bank loans are the most widely used credit instrument for the private sector. Large companies raise funds through corporate debentures as well. Credit ratings are mandatory for all deposit-taking institutions and for all varieties of debt instruments. Local companies are allowed to borrow from foreign sources. Foreign direct investment finances about 2 percent of overall investment. Foreign investors are allowed to access credit on the local market and are free to raise foreign currency loans.
Money and Banking System
Sri Lanka has a diversified banking system. There are 26 commercial banks – 13 local and 13 foreign. In addition, there are seven local specialized banks. Citibank NA is the only U.S. bank operating in Sri Lanka. Several domestic private commercial banks have substantial government equity acquired through investment agencies controlled by the government. Banking sector penetration has increased. Banking has expanded to rural areas, and by 2016 there were over 5,800 commercial banking outlets and over 3,500 Automated Teller Machines spread throughout the country. Both resident and non-resident foreign nationals can open foreign currency banking accounts. However, non-resident foreign nationals are not eligible to open Sri Lanka rupee accounts.
The Central Bank is responsible for supervision of all banking institutions and has driven improvements in banking regulations, provisioning and public disclosure of banking sector performance. Credit ratings are mandatory for all banks operating in Sri Lanka. The Central Bank has introduced accounting standards corresponding to International Financial Reporting Standards for banks on January 1, 2018, and the application of the standard is estimated to substantially increase the impairment provisions on loans. In addition, the migration to the Basel III capital standards began in July 2017. Banks will need to increase capital to meet minimum capital ratios, which are set to rise to international standards by January 2019. The Central Bank is likely to allow staggered application of capital provisions to smaller banks unable to meet capital requirements immediately. New capital provisions and accounting standards may prompt banking sector consolidation.
Total assets of commercial banks stood at LKR 7,843 billion (USD 46.5 billion) as of December 31, 2016. The two fully state-owned commercial banks – Bank of Ceylon and People’s Bank – are significant players, accounting for about 38 percent of all banking assets. The two state banks have a large portfolio of non-performing loans. Both these banks have significant exposure to state-owned companies, which are treated as performing loans. However, as these banks are implicitly guaranteed by the state, their problems have not harmed the credibility of the rest of the banking system.
Private commercial banks and foreign banks operating in Sri Lanka generally follow more prudent credit policies and as a group are in better financial shape. Foreign banks tend to follow international best practices as most foreign bank branches are subject to supervision in their own country in addition to that of the Sri Lankan Central Bank. Asset quality of the banking sector improved during the first half of 2017. The non-performing loans (NPLs) ratio was 2.7 percent in June 2017. In 2017, the IMF warned of high credit growth and excessive leverage associated with the real estate sector. In a March 2018 review, the IMF said the Central Bank has been effective in curbing credit growth and should remain vigilant and take action if needed to curb excessive credit growth in certain sectors.
According to an IMF study, Sri Lanka lost 2 percent of its correspondent banking relationships in 2012-2015, but the withdrawal of these relationships had no significant impact on the banking sector. Due to deficiencies in the AML/CFT regime, Sri Lanka was placed under the Financial Action Task Force (FATF) monitoring process in October 2017.
The Central Bank is exploring the adoption of blockchain technologies in its financial transactions and has appointed two committees to look into the possible adoption of Blockchain and cryptocurrencies.
Sri Lanka’s alternative financial services industry includes finance companies, leasing companies, and micro finance institutes. This sector has grown rapidly. The Central Bank has established an enforcement unit to strengthen the regulatory and supervisory framework of non-banking financial institutions. In order to regulate microfinance institutions, the Microfinance Act was enacted in 2016. Few finance companies are facing liquidity issues. Credit ratings will be mandatory for finance companies from October 1, 2018.
The government has directed banks to register with the U.S. Internal Revenue Service (IRS) to comply with the U.S. Foreign Accounts Tax Compliance Act (FATCA). Almost all commercial banks have registered with the IRS.
Foreign Exchange and Remittances
Foreign Exchange Policies
Sri Lanka generally has investor-friendly conversion and transfer policies. Companies note they can repatriate funds relatively easily. In accordance with its Article VIII obligations as a member of the IMF (http://www.imf.org/external/pubs/ft/aa/aa08.htm ), Sri Lanka liberalized exchange controls on current account transactions in 1994 and in 2010-2012 the government relaxed exchange controls on several categories of capital account transactions. A new Foreign Exchange Act, No 12 of 2017 came in to operation on November 20, 2017. The law has further liberalized capital account transactions and aims at simplifying the processes associated with current account transactions. Foreign investors are required to open Inward Investment Accounts (IIA) to transfer funds required for capital investments. There are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment through an IIA in any foreign currency designated by the Central Bank or Sri Lanka. The Central Bank recently established the Department of Foreign Exchange to implement the provisions of the new Foreign Exchange Law, in place of the Exchange Control Department.
Sri Lanka follows a flexible exchange rate regime with the Central Bank intervening to smoothen volatility and to build up reserves.
Foreigners are permitted to invest in Sri Lankan debt instruments, both government and corporate debt. The Central Bank’s rupee-denominated T-bill and T-bond issues in the local market are also open to foreign investors. Both foreign and local companies are permitted to borrow from foreign sources.
No barriers exist, legal or otherwise, to the expeditious remittance of corporate profits and dividends for foreign enterprises. Sri Lanka has recently relaxed investment remittance policies. Remittances are done through Inward Investment Accounts. There are no waiting periods for remitting investment returns, interest, and principal on private foreign debt, lease payments, royalties and management fees provided there is sufficient evidence to prove the originally invested funds were remitted into the country through legal channels. Exporters must repatriate export proceeds within 120 days.
Sovereign Wealth Funds
Sri Lanka does not have a sovereign wealth fund. Instead the government manages and controls large retirement funds from private sector employees and uses these funds for budgetary purposes (through investments in government securities), stock market investments and corporate debenture investments. Currently, the funds are invested only domestically. In the past, the government and the Central Bank have been accused of misusing the Employees’ Provident Fund (EPF), a large retirement fund of private sector workers managed by the Central Bank, for stock market investments and to help supporters of the governing party. When funds are invested in stock market listed companies, government representatives have played an active role in the management of such companies. Experts argue the fund must be segregated from politics and professionalized. The current government has vowed to improve the management of the pension funds. Government-managed pension funds must meet Sri Lankan accounting standards.
7. State-Owned Enterprises
State Owned Enterprises (SOEs) are active in transport (bus and railways, ports and airport management, airline operations); utilities such as electricity; petroleum imports and refining; water supply; retail; banking; telecommunications; television and radio broadcasting; newspaper publishing; and insurance. Since the end of the war, Sri Lankan armed forces have begun operating air services, tourist resorts, and farms for civilian purposes crowding out some private investment. In total, there are 400 SOEs of which 55 have been identified by the Sri Lanka Treasury as strategically important SOEs and 345 have been identified as non-commercial SOEs http://www.treasury.gov.lk/web/guest/publications/annual-report . SOEs employ over 240,000 people. There is widespread recognition that SOEs are poorly managed and in urgent need of reforms. Statements of Corporate Intent (SCIs) for five large SOEs were signed in April 2017 aimed at enhancing transparency and accountability. SOEs make purchases from private companies and foreign firms and have easy access to credit from state-owned-banks and to government-owned land. SOEs do not engage in research and development.
The government is seeking to improve the efficiency of SOEs through private sector style management practices. It also proposes to list SOEs on the Colombo Stock Exchange and partially privatize non-strategic SOEs. Initially, the government has selected two government owned hotels for privatization. The government is also seeking an investment partner to manage the heavily indebted national carrier Sri Lankan Airlines. Foreign investors are expected to be able to participate in these privatization programs. However, the government does not always follow an open bidding process when selling outside the stock exchange. For instance, in the case of the sale of the Hambantota Port in 2017, the government has allowed a Chinese company to secure the deal without an open bidding process. The government explained that the deal was driven by debt-for-equity swaps owing to debt owed to China, although media reporting in May 2018 indicated that the payment for the port was in cash rather than debt forgiveness.
The government is reviewing a plan to award large development projects utilizing a “Swiss Challenge” process where an unsolicited project proposal by a company to the government is put forward for public review and other interested parties are invited to submit counter proposals.
SOE labor unions and opposition political parties often oppose privatization and are particularly averse to foreign ownership. Privatization through the sale of shares in the stock market is likely to be less problematic.
The previous government (2005-2015) halted privatizations preferring to maintain SOEs and even reversed several privatizations it had granted in the past.
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 are actively promoting CSR and some small and medium enterprises have also started to promote CSR. Several organizations promote good business practices through programs and awards to recognize sustainability policies, good corporate governance and sound management practices. CSR Sri Lanka is an apex body initiated by 40 leading companies to foster CSR among businesses. The United Stated Agency for International Development (USAID) is working with CSR Sri Lanka to increase the impact of corporate social responsibility activities under the concept of transformative CSR by encouraging business corporations to work together to improve sustainability of businesses and create value to their shareholders, customers, employees, society and the environment. CSR Sri Lanka also seeks to build private sector / public sector partnerships. The Ceylon Chamber of Commerce, the largest business chamber in Sri Lanka, promotes CSR among its membership. The apparel industry, Sri Lanka’s largest export industry, has a specially designated CSR program for the industry under the title “Garments without Guilt” (www.garmentswithoutguilt.com ). The ethical sourcing and sustainable development practices under the program aim to empower women and their communities. Internationally, some of Sri Lanka’s leading companies have joined the UN Global Compact initiative. The majority of private sector CSR programs in Sri Lanka are professional and competent but the government does not regulate the programs.
The Securities and Exchange Commission together with the Institute of Chartered Accountants of Sri Lanka published a Code of Best Practices on Corporate Governance in order to establish good corporate governance practices in the Sri Lankan capital markets. The Sri Lanka Institute of Directors, under the auspices of the Ceylon Chamber of Commerce, the largest business chamber of Sri Lanka, is another organization working to improve corporate governance and ethical business conduct among company directors.
The government has not launched an initiative to promote RBC principles such as the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights. Separate government agencies are tasked with protecting individuals from adverse business impacts in relation to labor rights, consumer protection and environmental protections, although the effectiveness of these agencies are questionable.
Sri Lanka has a number of mineral resources including graphite, mineral sands and gemstones. The government does not participate in the Extractive Industries Transparency Initiative (EITI).
While Sri Lanka has generally adequate laws and regulations to combat corruption, enforcement is considered weak and inconsistent. U.S. firms identify corruption as a constraint on foreign investment but generally not a major threat to operating in Sri Lanka once contracts have been established. The business community claims that corruption has the greatest effect on investors in large projects and on those pursuing government procurement contracts. Some claim that the level of corruption makes it difficult to compete with bidders not subject to the U.S. Foreign Corrupt Practices Act. Projects geared toward exports face fewer problems. Local investors cite weak internal enforcement of anti-corruption policies as a problem within the government. A new Right to Information Act came into effect from February 2017 and is expected to increase transparency.
The Commission to Investigate Allegations of Bribery or Corruption (CIABOC or Bribery Commission) is the main body responsible for investigating bribery allegations. The Bribery Commission institutes proceedings against responsible individuals in the appropriate court. The law states a public official’s offer or acceptance of a bribe constitutes a criminal offense and carries a maximum sentence of seven years imprisonment and a fine at the discretion of the courts. Bribery laws extend to family members of public officials but political parties are not covered. A bribe by a local company to a foreign official is also not covered by the Bribery Act.
Government procurement regulations contain provisions to counter conflict-of-interest in awarding contracts or government procurement. The government does not require private companies to establish internal codes of conduct that prohibit bribery of public officials.
The law does not cover the protection of NGOs involved in investigation of corruption.
In response to allegations of corruption during the Rajapaksa administration, the government has appointed a multitude of agencies and commissions to probe allegations.
Some of the newly created agencies are:
- A Presidential Commission of Inquiry to probe allegations of corruption and abuse of power;
- Police Financial Crimes Investigation Division (FCID);
- State Asset Recovery Task Force (START).
In addition, a special Presidential Commission investigated corruption related to Treasury bond issuance at the Central Bank in 2015-2016.
UN Anticorruption Convention, OECD Convention on Combatting Bribery
Sri Lanka signed and ratified the UN Convention against Corruption in March 2004. Sri Lanka has signed but not ratified the UN Convention against Transnational Organized Crime. Sri Lanka is a signatory to the OECD-ADB Anti-Corruption Regional Plan but has not joined the OECD Anti-Bribery Convention.
Resources to Report Corruption
Contact at government agency responsible for combating corruption:
Commission to Investigate Allegations of Bribery or Corruption
No 36, Malalasekara Mawatha, Colombo 7
Phone: 94-11- 2595039
Contact at “watchdog” organization:
Transparency International, Sri Lanka
5/1 Elibank Road Colombo 5
Phone: 94-11- 4369783
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 war, the LTTE had a history of attacks against civilians, although none of the attacks were directed against U.S. citizens. There have been no terrorist attacks since the end of the conflict. The government maintains authority throughout the country. Demonstrations take place in Sri Lanka from time to time in response to world events or local developments. Demonstrations near Western embassies are not uncommon but have been well-contained with support from the Sri Lankan police and military.
Business related violence is not common and has little impact on the investment environment. In March 2018, business, mainly in the Central Province, was affected due to curfews following rioting. No tourists or hotel properties were harmed due to the violence in which three local people died and nearly 500 shops and homes were destroyed. The government also declared a temporary state of emergency. In addition, the government imposed its first-ever social media ban from March 7 – 15, 2018, in the face of riots provoked in part by social media hate speech. The prohibition affected businesses dependent on social media. In December 2016, striking workers at the then government-operated Hambantota port prevented two foreign cargo ships from leaving the port. The Navy intervened to release the ships. In January 2017, hundreds of protesters refused to vacate their land and clashed with police at the opening of a Chinese industrial zone in Hambantota. There are on-going street protests over a private medical college in Sri Lanka. In August 2013, a large rubber glove manufacturing factory was forced to move to a new location due to protests. Residents near the factory protested, alleging it had polluted water in the area. An army crackdown on protesters resulted in three deaths. In March 2014, residents near another rubber factory protested against water pollution. In mid-2013, a leading international food company temporarily suspended operations in Sri Lanka citing precautionary measures to ensure the safety of its employees after it faced product bans, court cases and angry demonstrators over the sale of contaminated milk powder. In 2013, a group of local politicians were charged with killing a Sri Lankan tea estate manager.
11. Labor Policies and Practices
Sri Lanka is going through a demographic transition with a rapidly aging population. Businesses cite labor shortage as a major problem. In 2017, eight million Sri Lankans were employed with 47 percent in services, 29 percent in industry and 24 percent in agriculture. Approximately 60 percent of the employed are in the informal sector. Of the eight million employed, more than one million are self-employed as drivers of three-wheel taxis. An unknown percentage of three-wheel taxi drivers pursues other forms of employment as well. Another preferred choice for employment is the government sector with 1.4 million people engaged in government service.
Labor is available at relatively low cost, though it is higher than in other South Asian countries. Many of Sri Lanka’s top graduates seek employment outside the country. For those who remain, Sri Lankan labor laws afford many employee protections. Many investors consider this legal framework somewhat rigid making it difficult for companies to reduce their workforce even when market conditions warrant doing so. The cost of dismissing an employee in Sri Lanka is calculated based upon a percentage of wages over an average of 54 salary weeks, one of the highest in the world. There is no unemployment insurance or other social safety net for laid off workers.
The Sri Lankan labor force is literate (particularly in local languages) and trainable, although weak in certain technical skills and the English language. The average worker has eight years of schooling and two-thirds of the labor force is male.
The unemployment rate has declined in recent years to an estimated four percent, although low unemployment rates are due in part to a large outflow of Sri Lankan migrant labor. Female labor force participation is low – around 36 percent – implying that there is a large pool of untapped work force. Unemployment among high school/college graduates has been proportionally higher than the rate for less-educated workers due to an oversupply of liberal arts educated graduates.
The Sri Lankan labor market has a limited pool of skilled workers. Youth are increasingly uninterested in highly labor-intensive manual jobs, causing labor shortages in the industrial and construction sectors. A significant proportion of the unemployed seek “white collar” employment, often preferring stable government jobs. Most labor-seeking sectors offer manual or semi-skilled jobs, or they require technical or professional skills such as management, marketing, information technology, accountancy and finance, and English language proficiency. Many service sector companies can rely on Sri Lankan engineers, researchers, technicians, and analysts to deliver high-quality, high-precision products. Foreign and local companies report a strong worker commitment to excellence in Sri Lanka, with rapid adaptation to quality standards. Retention is fairly good in the information technology sector, but the garment industry reports up to a 40 percent staff turnover rate. Lack of labor mobility in the North and East is also a problem, as workers are reluctant to leave their families and villages for employment elsewhere. The construction, plantation, apparel and other manufacturing industries report a severe shortage of workers. Some investors have faced problems in finding sufficient employees with the requisite skills, a situation faced by the tourism industry with the opening of new hotels. The supply of engineers, computer programmers and other graduates with science and technology degrees does not meet demand.
The government has initiated educational reforms to better prepare students for the labor market. More computer, accounting, business skills and English language training programs are becoming available. The demand for these skills still outpaces supply.
Migrant Workers Abroad
There are an estimated 1.8 million Sri Lankan workers abroad. Remittances from migrant workers at about USD 7 billion per year make up Sri Lanka’s largest source of foreign exchange. The majority of this labor force is unskilled (housemaids and factory laborers) and located primarily in the Middle East. Sri Lanka is also losing many of its skilled workers to more lucrative jobs abroad. Approximately 60,000 Sri Lankans work as managers in Bangladeshi garment factories, for instance.
Approximately 9.5 percent of the workforce is unionized, and union membership is declining. There are more than 2,000 registered trade unions (many of which have 50 or fewer members), and several federations. About 18 percent of labor in the industry and service sector is unionized. Most of the major trade unions are affiliated with political parties creating a highly politicized labor environment. Several unions are affiliated with different political parties and work at state-owned enterprises. This is not the case for private companies which only have one union or perhaps a workers’ council to represent the employees. Some employers have alleged that the People’s Liberation Front of Sri Lanka (JVP), a Marxist political party opposed to private enterprise, can provoke strikes under the pretense of trade union activity. Due to the JVP’s violent past, employers generally are reluctant to deal with its trade union arm, the Inter-Company Trade Union. There are also some independent unions.
All workers, other than police, armed forces, prison service and those in essential services, have the right to strike. By law, workers may lodge complaints to protect their rights with the Commissioner of Labor, a labor tribunal, or the Supreme Court. The President retains the power to designate any industry as an essential service.
Unions represent workers in many large private firms, but workers in small-scale agriculture and small businesses usually do not belong to unions. The tea industry, however, is highly unionized, and public sector employees are unionized at very high rates as well. Labor in the export processing zone (EPZ) enterprises tend to be represented by non-union worker councils, although unions also exist in the EPZs. The Board of Investment has requested companies recognize trade unions, allow union access to export processing zones and accept the right to collective bargaining. The Board of Investment has issued guidelines for employee councils giving them the power to negotiate binding collective agreements. According to the Board of Investment, where both a recognized trade union with bargaining power and a non-union worker council exist in an enterprise, the trade union will have the power to represent the employees in collective bargaining. The International Labor Organization’s (ILO) Freedom of Association Committee has observed that Sri Lankan trade unions and worker councils can co-exist but advises that there should not be any discrimination against those employees choosing to join a union. The right of worker councils to engage in collective bargaining has been recognized by the ILO.
Unions have complained that some employers, especially in the export processing zones, prohibit union access and do not register unions on a timely basis.
Collective bargaining exists but is not universal. The Employers’ Federation of Ceylon, the main employers’ association in Sri Lanka, assists its member companies to negotiate with unions and sign collective bargaining agreements. While about a quarter of the 660 members of the Employers’ Federation of Ceylon are unionized, approximately 90 of these companies (including a number of foreign-owned firms) are bound by collective agreements. Several other companies have signed memorandums of understanding with trade unions. However, there were only a few collective bargaining agreements signed with companies located in EPZs.
Law prohibits all forms of forced and compulsory labor. In March 2016, the government introduced a national minimum wage for the first time. The national minimum wage is set at LKR 10,000 (USD 64) per month or LKR 400 (USD 2.56) per day. In addition, 44 “wage boards” established by the Ministry of Labor set minimum wages and working conditions by sector and industry in consultation with unions and employers. The minimum wages established by these sector-specific wage boards tend to be higher than the new national minimum wage.
Sri Lankan law does not require equal pay for equal work for women. The law prohibits most full-time workers from regularly working more than 45 hours per week without receiving overtime (premium pay). In addition, the law stipulates a rest period of one hour per day. Regulations limit the maximum overtime hours to 15 per week. The law provides for paid annual holidays, sick leave and maternity leave. Occupational health and safety regulations do not fully meet international standards.
Despite private sector condemnation, the government occasionally interferes in private sector wage setting. In 2016, the government announced a LKR 2,500 (USD 16) monthly wage increase to private sector workers earning a salary below LKR 40,000 (USD 256) per month. Child labor is prohibited and virtually nonexistent in the organized sectors although child labor occurs in informal sectors. The minimum legal age for employment is set at 14. The minimum age for employment in hazardous work is 18 years. The Hazardous Occupations Regulation contains a list of 51 occupations considered to be hazardous forms of child labor in Sri Lanka.
Previously confrontational labor-management relations have improved in the last few years as private sector employers have worked harder to motivate and care for employees. While labor-management relations vary from organization to organization, managers who emphasize communication with workers and offer training opportunities generally experience fewer difficulties. U.S. investors in Sri Lanka (including U.S. garment buyers) generally promote good labor management relations and labor conditions that exceed local standards. Strikes are common in the public sector.
Sri Lanka is a member of the ILO and has ratified 31 international labor conventions including all eight of the ILO’s core labor conventions. The labor laws of Sri Lanka are laid out in almost 50 different statutes and the Ministry of Labor and Trade Union Relations has consolidated these in a Labor Code. The ILO and the Employers’ Federation of Ceylon are working to improve awareness of core labor standards and the ILO also promotes its Decent Work Agenda program in Sri Lanka.
The United States-Sri Lanka Trade and Investment Framework Agreement (TIFA) is the primary forum for bilateral trade and investment discussions, including the protection of worker rights.
12. OPIC and Other Investment Insurance Programs
Sri Lanka and the Overseas Private Investment Corporation (OPIC) concluded an agreement in 1966 which was subsequently renewed in 1993. This agreement provides investment insurance guarantees for U.S. investors.
Sri Lanka is a founding member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank which also offers the opportunity for insurance against non-commercial risks.
Several countries provide bilateral project loans to the Government of Sri Lanka which assist firms in their countries to win projects. China has provided extensive loans enabling Chinese companies to engage in numerous projects in Sri Lanka ranging from road construction and port construction to supply of railway equipment.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
|Host Country Statistical Source||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|Host Country Gross Domestic Product (GDP) (M USD)||2016||USD 81,300||2016||USD 81,321||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)||2016||N/A||2016||USD 117||BEA data available at
|Host country’s FDI in the United States (M USD, stock positions)||2016||N/A||2016||USD 70||BEA data available at http://bea.gov/international/direct_
|Total inbound stock of FDI as percent host GDP||2016||N/A||2016||N/A||N/A|
Table 3: Sources and Destination of FDI
|Direct Investment from/in Counterpart Economy Data, 2016|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||9,745||100%||Total Outward||1,067||100%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Table 4: Sources of Portfolio Investment
Data not available.
14. Contact for More Information
Partha Mazumdar, Economic Section Chief