Sri Lanka’s 2025 Investment Climate Statement from the U.S. State Department hails improved stability and 5% growth, yet flags serious red lights for investors: an anti-Western image around the new leadership, mixed messages on privatization, rule changes midstream, and a bureaucracy that still slows deals to a crawl.
Sri Lanka is back on the radar after a painful crisis, but the 2025 Sri Lanka Investment Climate Statement from the U.S. State Department makes one thing clear: confidence is fragile. The report credits the country with 5 percent GDP growth in 2024, improved foreign-exchange reserves, and political stability following President Anura Kumara Dissanayake and the National People’s Power (NPP) coalition’s sweeping wins. It also highlights the government’s commitment to the $3 billion IMF Extended Fund Facility through 2027. Yet investors, especially U.S. firms, still see policy unpredictability, regulatory opacity, and ideology-tinged rhetoric as risks that can derail big capital.
Anti-Western perception lingers
The report states that while the NPP publicly courts foreign direct investment (FDI), many investors remain cautious because of the leadership’s “historically anti-Western, Marxist-influenced ideology.” That perception matters when deals hinge on trust that rules will not change midstream. The signal to markets is mixed: reform talk on one hand, state-centric preferences on the other.
FDI is returning, but small and selective
FDI deals in 2024 clustered in the $3–5 million range, far from the government’s $5 billion FDI target for 2025. The strongest inflows were in tourism, ICT, renewable energy, manufacturing, and real estate. U.S. companies keep probing opportunities in ICT, energy, aviation, and defense, but “wait-and-see” is still the dominant mood. Experienced investors say policy stability, regulatory reform, and transparency must come before the big checks.
The BOI that is and the BOI that isn’t
Sri Lanka’s Board of Investment (BOI) remains the main gateway for foreign investors, yet the report notes it does not function as a true one-stop shop. Fragmented authority across ministries produces long approvals, inconsistent guidance, and opaque procurement. Parliament passed the Economic Transformation Act (ETA) in July 2024 to replace the BOI with five new agencies — Economic Commission, Zones SL, Office for International Trade, National Productivity Commission, and the Sri Lanka Institute of International Trade. After the NPP’s election victory, ETA implementation stalled, adding another layer of uncertainty as the BOI continues by default.
Big-ticket deals: one step forward, one step back
President Dissanayake pledged to finalize Sinopec’s $3.7 billion oil refinery near Hambantota International Port, which would be the largest FDI in Sri Lanka’s history. But in February 2025, Adani Green Energy walked away from a $400 million, 484 MW wind farm in the north, citing renegotiation of an already awarded contract. The government also paused large-scale privatizations of state-owned enterprises (SOEs), preferring turnarounds over divestment. Together, these events amplify the “mixed messages” investors dislike.
Where foreign ownership is welcome — and where it is not
On paper, Sri Lanka allows 100 percent foreign ownership in most sectors and guarantees repatriation of earnings and capital. There are bilateral investment treaties with 28 countries and double taxation agreements with 38. Yet land is complicated: sales to foreigners are generally prohibited, and leases are the norm. Full foreign ownership is barred or capped in several regulated or strategic sectors including banking, air transport, lotteries, alcohol, military hardware, dangerous materials, coastal shipping, gem mining, currency minting, and security documents. Foreign ownership is altogether prohibited in pawnbroking, small-scale retail (under $5 million), and coastal fishing. There is also a 40 percent cap in quota-subject export goods, agriculture (tea, rubber, coconut, cocoa, rice, sugar, spices), natural resources, timber industries, deep-sea fishing, mass communications, education, freight forwarding, travel, and shipping. In renewable energy, foreign producers often receive dollar-denominated tariffs, while locals are paid in rupees, a disparity domestic firms criticize.
The red tape that still bites
The report bluntly calls the regulatory climate unpredictable. Investors point to policy U-turns, slow decision-making, and project reversals. A February 2025 budget proposed removing tax exemptions for service exporters and foreign-source income, while Colombo Port City retained generous incentives — another policy contradiction. Labor law reform that would have modernized hiring and exits was shelved after the NPP took office, adding to uncertainty.
Digitization, a top business ask, lags across Customs, Ports, the BOI, and other agencies, keeping manual processes that add time and cost. Although Sri Lanka ratified the WTO Trade Facilitation Agreement and set up a National Trade Facilitation Committee, progress is slow.
Courts, contracts, and IP
Sri Lanka’s legal system blends Roman-Dutch civil law, English common law, and customary law. The constitution protects judicial independence, but businesses complain of backlogs, enforcement delays, and perceived political influence. The good news: Sri Lanka is party to ICSID and the New York Convention, and domestic law permits enforcement of arbitral awards. Intellectual property protection is on the books and improving, though counterfeits and piracy remain common due to weak enforcement.
Money, markets, and banks
The SEC Act of 2021 governs the Colombo Stock Exchange, which saw $66.5 million in net foreign inflows and $568 million in capital raised in 2024. Liquidity is still thin, so exit planning is crucial. The banking system, with 30 licensed institutions, stayed capital-adequate despite losses from domestic debt restructuring. A new Central Bank Act (2023) enhanced independence, flexible exchange rates, and inflation targeting. Reserves climbed to about $6.1 billion by end-2024 and the rupee stabilized, supported by record worker remittances of $6.58 billion.
SOEs and the privatization pause
The state controls 527 SOEs, including 55 strategic ones, which strain the budget through losses, overstaffing, and weak disclosure. A previously announced privatization push is on hold. The government prefers restructuring within state ownership. For foreign investors, SOE reform is a litmus test of governance, transparency, and market orientation.
Corruption risk is lower at the top, but not gone
The administration has pledged clean governance and strengthened anti-corruption law in July 2023, but the report says institutional corruption persists, particularly in procurement. Practices such as unsolicited proposals and tailored tenders still appear. The watchdogs exist, yet conflict-of-interest rules and enforcement remain weak points that deter infrastructure and energy giants.
Stability with street-level stress
Politically, Sri Lanka is more stable than in 2022. The NPP holds a two-thirds majority in Parliament. But tax increases under the IMF program have sparked limited protests, and living costs remain high. Labor markets face skills shortages after significant emigration, especially in tourism, apparel, IT, and engineering. Labor regulations offer strong protections but are seen as rigid, complicating restructuring and turnarounds.
Bottom line for investors
The State Department’s message is balanced but blunt. Opportunity exists in tourism, ICT, renewable energy, manufacturing, real estate, aviation, and defense. Macro indicators are turning up, reserves are healthier, and the government says it wants FDI. But investor caution persists due to:
- Perceived ideological hostility to private-sector leadership
- Contract renegotiations and policy reversals that spook lenders
- Slow, fragmented approvals and opaque procurement
- Land restrictions and sectoral caps on foreign ownership
- Stalled institutional reforms such as the ETA rollout and labor law modernization
For global funds and strategic corporates, Sri Lanka is not off-limits, but it remains a hands-on market where due diligence, airtight contracts, arbitration clauses, robust compliance, and local partnerships are essential. If Colombo can deliver predictable rules, faster approvals, real SOE reform, and clean procurement, the country’s growth story could finally attract large-scale FDI instead of a string of $3–5 million deals.
From 2028 , WE , Sri Lankan should pay back the Foreign debts amounting USD 3- 40 Billion which were restructured in 2024 by the Administration of Former H.E.President Ranil Wickremasinghe and IMF predicted to set-off this amount , Sri Lanka should have Growth of at least 5%on GDP , but till 2nd quarter achieved only less than 4%. Then wlll we ,
Sri Lankans will face the Economic disaster in 2022 again in 2028.
Please advice.