Executive Summary

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 a six-year term, later reduced to five years under the 19thAmendment to the Sri Lankan constitution. He campaigned on a platform of good governance and anti-corruption as well as ethnic reconciliation. Candidates running on a similar platform gained a majority of seats in parliamentary elections held in August 2015. Sirisena leads a coalition government comprising the pro-business 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 Sirisena-led Government of Sri Lanka’s (GSL) initial attempts to introduce economic reforms received mixed reactions. As a result, the GSL has reversed several reforms, creating uncertainty among investors. The GSL is working to improve its relations with other countries and to develop its economy to compete more effectively in the global marketplace. Specifically, Sri Lanka is working to position itself as a financial and trading hub in South Asia.

The GSL has identified the following key economic priorities: 1) integration of the economy into the global marketplace; 2) attracting increased foreign direct investment (FDI); 3) job creation; and 4) increased digitalization.

The GSL is eager to enter into trade pacts with Pakistan, China, and Singapore to boost trade and investment and seeks to expand the current Free Trade Agreement (FTA) with India to a broader Economic and Technology Agreement (ECTA). China is investing in strategic ports and port-related industries. The GSL faces considerable domestic opposition to these trade and investment deals and must work hard to win over opponents. The GSL is hopeful of regaining the European Union’s (EU) Generalized Scheme of Preferences (GSP+) privileges for Sri Lankan exports in 2017. The EU withdrew GSP+ status from Sri Lanka in 2010 due to alleged human rights abuses committed by the military and security forces during the 26 year long civil war that ended in 2009. Additionally, several GSL agencies are investigating suspected corruption by the previous administration. A special Presidential Commission is investigating alleged corruption related to GSL bond issuance.

The Sri Lankan economy grew by 4.4 percent in 2016 compared to 4.8 percent in 2015 and 5.0 percent in 2014. Gross domestic product (GDP) reached $81 billion in 2016, and the per capita GDP was $3,835. Sri Lanka experienced inclement weather during the year and the agriculture sector contracted 4.2 percent. Exports also declined in 2016. GDP growth is expected to be approximately 4.8 percent in 2017. Sri Lanka’s annual exports are approximately $10.3 billion, mostly tea and garments. Imports are approximately $19.4 billion creating an annual trade deficit of over $9 billion. The United States is the largest single market for Sri Lankan exports, capturing over $2.8 billion of the total per U.S. Census Bureau data. Remittances from migrant workers, approximately $7.2 billion per year, are Sri Lanka’s largest source of foreign exchange and help to partially offset the external deficits. Tourism is a $3.5 billion industry with two million tourist arrivals in 2016. Sri Lanka’s Foreign Direct Investment (FDI) has dropped 35 percent to about $450 million in 2016 from $700 million in 2015 primarily as a result of economic policy inconsistency.

Sri Lanka suffers from a large foreign debt burden. Foreign debt is comprised of concessional debt and commercial debt, including debt owed to China for infrastructure projects. While official reserves amounted to $5.6 billion in February 2017, external debt obligations payable are approximately $2.5 billion in 2017 increasing to $3.2 billion in 2018 and $3.7 billion in 2019. The GSL entered in to a three-year, $1.5 billion Extended Fund Facility (EFF) with the International Monetary Fund (IMF) in June 2016. Under the terms of the EFF, the GSL is committed to a program of fiscal consolidation, increasing GSL revenue, rebuilding foreign exchange reserves, state owned enterprise reform, a transition to flexible inflation targeting and reforms to the trade and investment regime. In March 2017, after reviewing the reform program, the IMF commended Sri Lanka for achieving all fiscal quantitative targets but raised concerns about low foreign reserves. The IMF also highlighted the importance of introducing new tax laws and structural reforms in public financial management and state owned enterprises. In February 2017, Fitch Ratings affirmed Sri Lanka’s sovereign debt rating at ‘B+’ and revised the outlook to stable from negative citing fiscal consolidation and steady progress made on the IMF program. As of April 2017, Standard & Poor’s credit rating for Sri Lanka was B+ with a negative outlook and Moody’s rated Sri Lanka B1 with a negative outlook.

Future growth will require structural changes to the economy, including a shift away from agriculture, as well as greater diversification of exports, improvements in productivity levels across all sectors, deregulation of land and labor markets and the establishment of a more transparent regulatory and procurement framework. Sri Lanka needs to modernize education and improve government administration in order to build the foundation for long-term economic growth. The bloated civil service and losses at state-owned enterprises are significant challenges for the GSL.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2016 95 of 176 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2016 110 of 190 doingbusiness.org/rankings
Global Innovation Index 2016 91 of 128 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2015 $111 million http://www.bea.gov/
international/factsheet/
World Bank GNI per capita 2015 $3,800 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

Policies towards Foreign Direct Investment

Sri Lanka is a constitutional multiparty republic. In 1978, Sri Lanka shifted away from a socialist orientation and opened up to foreign investment, although 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 with an emphasis on expanding exports, upgrading industry, and boosting private investment and public-private partnerships. President Sirisena’s Sri Lanka Freedom Party has a socialist orientation. Prime Minister Ranil Wickremesinghe represents the pro-business United National Party.

Former President 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. The tourism sector is a promising source of FDI with two million tourists per year visiting Sri Lanka. International hotel franchises are expanding their presence. 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. Property development has also attracted substantial foreign investment. Ports are another important driver of growth. The Colombo Port is one of the most active in the region and is situated on a major global shipping lane. The GSL expects substantial strategic FDI from China into ports and port related industries. The GSL is debating selling a stake of the Chinese-funded and built Hambantota Port to a Chinese company and has approved a Chinese logistics and industrial zone in Hambantota. Colombo Financial City (formerly called Colombo Port City) is a large–scale land reclamation and city development project being developed by a Chinese company. FDI from the United States, Europe and elsewhere has not materialized.

The business process outsourcing sector is growing and has strong involvement by U.S. firms. With a growing middle class, investors see opportunities in franchising, retail and services as well as light manufacturing. However, 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 GSL is keen to improve education and skills development. 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. Many expatriates view Colombo, the capital, as offering a good quality of life relative to other major cities the region.

Sri Lanka is a challenging place to do business, with high transaction costs caused by an unpredictable economic policy environment. While some GSL departments and ministries boast competent staff, the GSL’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 GSL procurement practices.

Local investors cite the risks of contract repudiation, cronyism, damage to reputation, and de facto or de jure expropriation as concerns, although the GSL has started to 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.

The GSL 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.

Investors report that starting a business in Sri Lanka is relatively simple and quick – especially when compared to other frontier markets – and 20 percent cheaper than in neighboring countries. Scalability is a problem, however, as the lack of skilled labor and a smaller talent pool means companies can take years to double in size. Investors claim employee retention is good in Sri Lanka, but numerous public holidays, reluctance of workers to work at night (which is especially problematic in the information technology and business process outsourcing sectors), lack of labor mobility, and a difficulty in recruiting women (the labor force participation rate of women is approximately 36 percent or half of the male labor force participation rate) can reduce efficiency and increase start-up times. The garment industry has had more difficulty with employee retention, especially in the North and East, due to the largely female workforce which leaves the labor pool to raise families. 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.

Limits on Foreign Control and Right to Private Ownership and Establishment

Private entities are free to establish, acquire and dispose of interests in business enterprises. Private enterprises enjoy benefits similar to those granted to public enterprises, and there are no known limitations in accessing markets, credit, or licenses.

Foreign ownership is allowed in most sectors, although the land ownership law prohibits foreigners from owning land with some exceptions. 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 GSL 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 GSL 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 war and significant disputes remain over property ownership in the North and East. The GSL has started a program to hand back property taken by the GSL during the war to residents in the North and East.

Foreigners are prohibited from purchasing land and real estate except for apartments above the 3rd floor. Currently, the 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 budget 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 GSL also imposed a one-time 25 percent tax on companies making profits over LKR 2 billion ($15 million) in the 2013/14 financial year. Foreign investors enjoying tax holidays were exempted from the tax. The GSL has said that they would refrain from introducing such retroactive policies and taxes in the future.

The GSL 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 GSL 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; 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. The GSL is considering opening higher education to foreign investment. Foreign investment is not permitted in the following businesses: non-bank money lending; pawn-brokering; retail trade with a capital investment of less than $ 1 million; and coastal fishing.

In areas where foreign investment is permitted, foreign investors are treated equally with domestic investors and may benefit from the incentives provided by the Board of Investment or from the Treasury.

The Board of Investment (www.investsrilanka.com ), an autonomous statutory agency, is the primary GSL authority responsible for investment, with a focus on foreign investment. Foreign investors applying for incentives offered under the Board of Investment law are screened by the Board of Investment. 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 GSL has not conducted investment policy reviews through the Organization for Economic Cooperation and Development (OECD) or the U.N Conference on Trade and Development (UNCTAD) within the last few years.

Business Facilitation

The Board of Investment (www.investsrilanka.com ), an autonomous statutory agency, is the primary GSL 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 with duties including 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 is not yet a one-stop shop. Although the Board of Investment is relatively effective in assisting investors who want to establish operations within its export processing zones, it is less effective in facilitating and servicing large investments outside these zones. Sri Lanka’s bureaucracy often works at cross-purposes with Board of Investment authorities. For example, the registration of foreign company branch offices in Sri Lanka can be expensive.

The GSL is working to establish an apex body named the Agency for Development to facilitate policy regarding investments, tourism and exports and supervise state institutions – such as the Board of Investment – in these sectors. The GSL has also promised to introduce a new investment law and an incentive regime.

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. Registration at the Companies Registry takes on average seven to 10 days. The business registration regime does not require a notary to sign the documents. 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. The 2016 budget proposed to increase liquidation fees and annual registration fees of companies. However, the GSL has not yet enforced this new fee structure.

According to the World Bank (http://iab.worldbank.org/ ) it takes six procedures and 65 days to establish a foreign-owned limited liability company (LLC) in Sri Lanka.

Outward Investment

The GSL supports outward investment subject to limits specified by the Exchange Control Department of the Central Bank of Sri Lanka. Investments over the specified limit require the Finance Minister’s approval. Domestic investors are allowed to invest in subsidiary companies, joint ventures and marketing/branch/liaison offices overseas.

The GSL has signed investment protection agreements with the United States (which came into force in May 1993) and with the following countries: Australia, Belgium-Luxembourg, China, Denmark, Egypt, Finland, France, Germany, Indonesia, India, Iran, Italy, Japan, Korea, Kuwait, Malaysia, the Netherlands, Norway, Pakistan, Romania, Singapore, Sweden, Switzerland, Thailand, the United Kingdom and Vietnam. 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 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 U.S. Embassy encourages prospective U.S. investors to contact an international auditing firm operating in Sri Lanka to assess their tax liability.

Transparency of the Regulatory System

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.

At pre-enactment stage, bills are drafted by respective ministries. Public consultation at this stage is limited in most instances. Every bill must be published in the government gazette 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 if 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.

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 GSL 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 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.

Legal System and Judicial Independence

Sri Lanka’s legal system reflects diverse cultural influences. Criminal law is fundamentally British. Basic civil law is Roman-Dutch. Laws pertaining to marriage, divorce, and inheritance are ethnic. 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 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). 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 $20,000) 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. Overall, Sri Lanka’s record in handling investment disputes is problematic. Disputes have become politicized and the stability of contracts in general could be improved.

Laws and Regulations on Foreign Direct Investment

The Board of Investment strives to inform potential investors about laws and regulations affecting operations in Sri Lanka and the GSL has stated a commitment to reform and reorganize relevant GSL agencies to improve services. 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. Foreign and domestic investors complain the regulatory system is 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. Lethargy and indifference on the part of mid- and lower-level public servants compound transparency problems. Lack of sufficient technical capacity within the GSL to review financial proposals for private infrastructure projects also creates problems during tendering. Under the former government, the Sri Lankan Cabinet had to approve strategic projects in order for private investors to receive incentives. It is unclear what the current government’s approval process is.

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.

Expropriation and Compensation

Since economic liberalization policies began in 1978, the GSL 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 GSL considered as underperforming. These companies had leased land from the GSL but the GSL claimed the companies were not meeting the conditions of the agreement. Although many of the companies were defunct, several others were viable businesses. The Central Bank stated that the Act was to be considered a one-off measure. The law increased investor uncertainty regarding property rights in Sri Lanka and is often cited as having a chilling effect on foreign direct investment.

Apart from the Underutilized Assets Act, the land acquisition law empowers the GSL to take over private land for public purposes. Compensation is paid based on GSL 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 GSL 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 GSL taking over private lands throughout the country purportedly for public purposes. The current government has pledged to refrain from the takeover of private assets.

In January 2015 the GSL imposed a one-time 25 percent tax entitled the “super gain tax” on companies or individuals who reported more than LKR 2 billion ($13 million) in profits (before income tax) in the tax year ending March 2014. Foreign investors enjoying tax holidays were exempted.

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). 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.

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 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 ($330.00). Lenders are also empowered to foreclose on loan collateral without court intervention. However, loans below LKR 5 million ($33,000) 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.

Investment Incentives

The GSL plans to introduce a new investment regime based on capital allowances and concessionary tax rates. According to the proposed incentive package announced in the 2017 GSL budget (announced November 2016), investments in the Northern, Eastern and Uva provinces will be eligible for 100 to 200 percent capital allowances (capital expenditure to be deducted from revenues of the company before tax is imposed). All other investments will qualify for concessionary tax rates for three to five years. These incentives will be available only to investors meeting certain criteria such as minimum capital levels and a minimum number of employees. The 2017 budget also proposed to design a special incentive package with specific tax concessions for landmark investments of over $100 million. In addition, international organizations that locate in Sri Lanka will be given tax exemptions. As of April 2017, Parliament had yet to approve these proposed investment 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.)

Foreign Trade Zones/Free Ports/Trade Facilitation

The Board of Investment is the central facilitation point for foreign investors. The Board of Investment provides assistance and advice throughout the investment process. 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 addition, a large private apparel company runs a fabric park. The company invites local and foreign companies to set up fabric and apparel factories in this eco-friendly park.

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 GSL overall now encourage export-oriented factories to locate in industrial zones farther from Colombo although Sri Lanka’s poor roads 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 GSL plans to allocate 1,000 acres of land for the zone. SLCIZ is expected to include the Hambantota Port which may be sold to a Chinese state-owned company.

Performance and Data Localization Requirements

There are no performance requirements. In most cases, firms enjoying preferential 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 $250,000 can qualify for a one-year resident visa, which can be renewed. 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 GSL to formulate data protection legislation. There is no ban on the sale of electronic data for marketing purposes.

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

Real Property

Secured interests in property in Sri Lanka are generally recognized and enforced but many investors claim protection can be flimsy. A fairly 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

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 GSL’s information technology (IT) policy requires GSL 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 ($33,300), 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 officioauthority 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 GSL 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 GSL has yet to make full use of this database.

U.S. Embassy Colombo, the United States Patent and Trademarks Office (USPTO), and the American Chamber of Commerce of Sri Lanka are working to pursue more aggressive enforcement and enhance public awareness. Sri Lanka is not listed in USTR’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
William Humnicky, Economic Officer
94-11-2498500
commercialcolombo@state.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 

Capital Markets and Portfolio Investment

The Securities and Exchange Commission (SEC) governs the Colombo Stock Exchange (CSE), unit trusts, stock brokers, listed public companies, margin traders, underwriters, investment managers, credit rating agencies and securities depositories. 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 Sri Lanka’s stock market. These funds make transactions through share investments in external rupee accounts maintained in commercial banks. Currently, 295 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. During the past two years, the Sri Lankan rupee has depreciated by approximately 15 percent.

The management of the SEC, appointed in 2015, is focusing their efforts to restore public confidence in the capital market. The SEC law is to be amended to align the regulatory framework with international standards. The SEC has intensified oversight of regulated entities and conducted investigations on insider trading and market manipulation. Several cases have been forward to the Attorney General for further action. 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.

In accordance with its IMF Article VIII obligations, the GSL and the Central Bank generally refrain from restrictions on current international transfers. When the GSL 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 8.2 percent in February 2017 and the Average Prime Lending rate was 11.6 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 now 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 six 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 fairly well-diversified banking system. There are 25 commercial banks – 13 local and 12 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 GSL equity acquired through investment agencies controlled by the GSL. In 2014, the Central Bank actively promoted consolidation in the banking and financial sector. The current GSL is reviewing consolidation plans.

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 accepted the Basel II standardized approach framework and has introduced accounting standards corresponding to International Financial Reporting Standards for banks. In addition, the Central Bank has issued Basel III capital requirements that banks are expected to comply with commencing July 2016. The liquidity coverage ratio under Basel III was implemented in Sri Lanka in 2015. Banking sector penetration has increased. Banking has expanded to rural areas and by 2015 there were over 6,500 banking outlets and 3,500 Automated Teller Machines spread throughout the country. However, the GSL believes rural areas need more banking and has encouraged banks to open branches in lagging areas. In February 2017, the Central Bank issued instructions on mandatory credit allocations to six priority sectors.

Total assets of commercial banks stood at LKR 6,974 billion ($46.5 billion) as of December 31, 2015. The two fully state-owned commercial banks – Bank of Ceylon and People’s Bank – are significant players, accounting for about 40 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 eight months of 2016. The non-performing loans (NPLs) ratio decreased to three percent in August 2016 from 3.2 percent in December 2015 due to the combined effect of loan recoveries and increased loan growth. However, in January 2017 Fitch revised its Sri Lanka banking sector outlook to negative from stable, citing challenging operating conditions. Rating agencies expect rising macroeconomic pressures to strains banks’ credit metrics and increase NPLs. Capitalization could be a significant issue with the proposed implementation of Basel III capital requirements. Fitch believes most banks will need to raise capital to meet the targets set for 2019 although there may be no immediate issues regarding compliance.

Foreign Exchange and Remittances

Foreign Exchange

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 GSL relaxed exchange controls on several categories of capital account transactions. When the GSL experiences balance of payments difficulties the GSL tends to impose controls on foreign exchange transactions.

Sri Lanka follows a flexible exchange rate regime with the Central Bank intervening to smoothen volatility. The rupee has depreciated sharply in the last two years. The rupee depreciated by over six percent in 2016 following nine percent depreciation in 2015. Capital outflows intensified in 2015-16, and foreign exchange reserves declined.

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

Remittance Policies

No barriers exist, legal or otherwise, to the expeditious remittance of corporate profits and dividends for foreign enterprises doing business in Sri Lanka provided required documents are in place. The average delay for remitting investment returns, interest, and principal on private foreign debt, lease payments, royalties and management fees through normal legal channels is one to four weeks. All stock market investments can be remitted without prior approval of the Central Bank through a special bank account. Investment returns can be remitted in any convertible currency at the legal market rate. Sales proceeds and gains from real estate can be transferred provided there is sufficient evidence to prove the funds used to originally purchase the property were remitted into the country to acquire the property. Exporters must repatriate export proceeds within 120 days to settle export credit facilities. Other export proceeds can be retained abroad provided such funds are not used for acquisition of property or other capital assets outside Sri Lanka. An informal money transfer/exchange system is available to facilitate Sri Lankans working overseas and sending money home, although with higher rates. In June 2013, the Financial Action Task Force (FATF) removed Sri Lanka from the list of countries that are subject to FATF’s monitoring process. A Financial Intelligence Unit (FIU) operates under the Central Bank.

Sovereign Wealth Funds

Sri Lanka does not have a sovereign wealth fund. Instead the GSL manages and controls large retirement funds from private sector employees and uses these funds for budgetary purposes (through investments in GSL securities), stock market investments and corporate debenture investments. In the past, the GSL 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 unwise stock market investments and to help supporters of the governing party. When funds are invested in stock market listed companies, GSL 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. GSL-managed pension funds must meet Sri Lankan accounting standards.

State Owned Enterprises (SOEs) are active in transport (bus and railways, ports and airport management, airline operations); utilities such as electricity; petroleum imports and refining; water supply; retail; banking; telecommunications; television and radio broadcasting; newspaper publishing; and insurance. Since the end of the war, Sri Lankan armed forces have begun operating air services, tourist resorts, and farms for civilian purposes crowding out some private investment. In total, there are 245 SOEs of which 55 have been identified by the Sri Lanka Treasury as strategically important SOEs. SOEs employ over 219,500 people. There is widespread recognition that SOEs are poorly managed and in urgent need of reforms. SOEs make purchases from private companies and foreign firms and have easy access to credit from state-owned-banks and to GSL-owned land. SOEs do not engage in research and development.

Privatization Program

The GSL 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. Foreign investors are expected to be able to participate in these privatization programs. However, the GSL does not always follow an open bidding process when selling outside the stock exchange. For instance, in the case of the proposed privatization of the Hambantota Port, the GSL has allowed Chinese companies to secure projects without an open bidding process. The GSL claims that the deals have been driven by debt-for-equity swaps owing to debt owed to China.

The GSL is reviewing a plan to award large development projects utilizing a “Swiss Challenge” process where an unsolicited project proposal by a company to the GSL 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. There is severe opposition to the plan to sell the Hambantota Port to a Chinese company. Privatization through the sale of shares in the stock market is likely to be less problematic.

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

The concept of Corporate Social Responsibility (CSR) is more widely recognized among Sri Lankan companies than Responsible Business Conduct (RBC). Leading companies in Sri Lanka are actively promoting CSR and some small and medium enterprises have also started to promote CSR. Several organizations promote good business practices through programs and awards to recognize sustainability policies, good corporate governance and sound management practices. CSR Sri Lanka is an apex body initiated by 40 leading companies to foster CSR among businesses. The United Stated Agency for International Development (USAID) is working with CSRLanka to increase the impact of corporate social responsibility activities by creating a cluster of business corporations that work together to improve relationships between businesses and their employees, and improve both social and environmental impact.

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 GSL 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, Sri Lanka’s largest business chamber, is another organization working to improve corporate governance and ethical business conduct among company directors.

The GSL 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 endorsed by the UN Human Rights Council.

Sri Lanka has a number of mineral resources including graphite, mineral sands and gemstones. The GSL 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 GSL 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 site weak internal enforcement of anti-corruption policies as a problem within the GSL. 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. A bribe by a local company to a foreign official is not covered by the Bribery Act.

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

Some of the newly created agencies are:

  • Anti-Corruption Secretariat under the Prime Minister’s Office
  • 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)
  • National Executive Council’s Subcommittee on Corruption

In addition a special Presidential Commission is investigating apparent corruption related to Treasury bond issuance at the Central Bank.

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 GSL agency responsible for combating corruption:

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

Contact at “watchdog” organization:

Transparency International, Sri Lanka
183/5 High Level Road, Colombo 6
Phone: 94-11- 4369783
Email: tisl@tisrilanka.org

The GSL’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 GSL maintains authority throughout the country. Demonstrations take place in Sri Lanka from time to time in response to world events or local developments. Demonstrations near Western embassies are not uncommon but have been well-contained with support from the Sri Lankan police and military.

Business-related Violence

Business related violence is not common and has little impact on the investment environment. Businesses related violence over the last ten years includes the following examples. In December 2016, striking workers at Sri Lanka’s GSL-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 protests over a private medical college in Sri Lanka; the protests have not interfered with the college operations. In August 2013, a large rubber glove manufacturing factory was forced to move to a new location due to protests. Residents near the factory protested, alleging it had polluted water in the area. An army crackdown on protesters resulted in three deaths. In March 2014, residents near another rubber factory protested against water pollution. In mid-2013, a leading international food company temporarily suspended operations in Sri Lanka citing precautionary measures to ensure the safety of its employees after it faced product bans, court cases and angry demonstrators over the sale of contaminated milk powder. In 2013, a group of local politicians were charged with killing a Sri Lankan tea estate manager.

Sri Lanka’s labor market is relatively small with a limited pool of skilled workers. Engineering, accounting, legal and architectural professions follow high standards although local design talent is still underdeveloped. Labor is available at relatively low cost though higher than in other South Asian countries. Many of Sri Lanka’s top graduates seek employment outside the country. For those who remain, 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 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. Sri Lanka’s 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. Retention is fairly good in the IT/BPO 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 with workers reluctant to leave their families and villages for employment elsewhere.

In 2016, eight million Sri Lankans were employed with 46 percent in services, 27 percent in industry and 27 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 pursue other forms of employment as well.

The unemployment rate has declined in recent years to an estimated 4.5 percent although low unemployment rates are due in part to a large outflow of Sri Lankan migrant labor. Unemployment among women and 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 supply of engineers, computer programmers and other graduates with science and technology degrees does not meet demand. Youth and entry-level unemployment and underemployment remain a problem. Youth are increasingly uninterested in high labor intensive jobs causing labor shortages in the industrial sector. 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. The construction, plantation and apparel industries also report a shortage of workers. Some investors have faced problems in finding sufficient employees with the requisite skills, a situation the tourism industry is likely to face as more hotels open in the near future. The GSL 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 $ 7 billion per year, make up Sri Lanka’s largest source of foreign exchange. The majority of this labor force is unskilled (housemaids and factory laborers) and located primarily in the Middle East. Sri Lanka is also losing many of its skilled workers to more lucrative jobs abroad. Approximately 60,000 Sri Lankans work as managers in Bangladeshi garment factories, for instance.

Trade Unions

Approximately 20 percent of the workforce is unionized but union membership is declining. There are more than 1,900 registered trade unions (many of which have 50 or fewer members), and 19 federations. About 15 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. 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 the Board of Investment and 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 592 members of the Employers’ Federation of Ceylon are unionized, approximately 100 of these companies (including a number of foreign-owned firms) are bound by collective agreements. A further 30 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, Parliament approved a law to introduce a national minimum wage for the first time. The national minimum wage is set at Rs 10,000 ($66) per month or Rs 400 ($2.60) per day. Previously, 44 “wage boards” were established by the Ministry of Labor to 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. The minimum wages established by these wage boards are limited to their respective sector.

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 GSL occasionally interferes in private sector wage setting. In 2016, the GSL announced an Rs 2,500 ($17) monthly wage increase to private sector workers earning a salary below Rs 40,000 ($266) 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.

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 offers the opportunity for insurance against non-commercial risks.

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) 2016 $81 2015 $82.3bn www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2015 N/A 2015 $111 BEA data available at http://bea.gov/international/direct_investment_
multinational_companies_comprehensive_data.htm
 
Host country’s FDI in the United States ($M USD, stock positions) 2015 N/A 2015 $57 BEA data available at http://bea.gov/international/direct_investment_
multinational_companies_comprehensive_data.htm
 
Total inbound stock of FDI as % host GDP 2015 N/A 2015 N/A N/A

*Source: Department of Census and Statistics, GDP estimates for 2016

Table 3: Sources and Destination of FDI

Direct Investment from/in Sri Lanka (Stock Positions – 2015)
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 9,927 100% Total Outward 660 100%
Netherlands 1,768 18% Singapore 289 44%
India 1,193 12% Malaysia 130 20%
Malaysia 1,128 11% Maldives 54 8%
China 789 8% Mauritius 38 6%
Switzerland 757 8% India 30 4%

Table 4: Sources of Portfolio Investment

Note: Portfolio investment data are not available in Sri Lanka.

William Humnicky
Economic Officer
U.S. Embassy Colombo
Tel: 94-11-2498500
E-mail: commercialcolombo@state.gov

2017 Investment Climate Statements: Sri Lanka
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