A US report says Sri Lanka foreign investment needs stronger policy stability, transparency and institutional efficiency to accelerate growth.
COLOMBO — Sri Lanka’s improving macroeconomic position has yet to translate into the level of foreign investment needed to drive sustained growth, with a US report highlighting policy stability, transparency and institutional efficiency as critical factors in rebuilding investor confidence.
The latest Investment Climate Statement of the United States Department of State notes that Sri Lanka has made gradual progress following its severe economic crisis. However, foreign direct investment remains below the levels achieved by several competing emerging economies in the region.
Its central message is that economic stability alone will not be sufficient. Greater predictability in policymaking, efficient administration and transparency will be needed if Sri Lanka is to attract larger and more consistent investment flows.
Economic Recovery and the Investment Gap
Sri Lanka’s economic recovery has been supported by the programme with the International Monetary Fund, alongside improvements in several major economic indicators.
Inflation has been brought under control, while foreign reserves have risen to USD 6.8 billion. Foreign remittances have also increased to more than USD 8.1 billion, while the economy is moving towards growth of around 5 per cent.
Despite those gains, the report states that foreign direct investment remains at approximately 1 per cent of Gross Domestic Product.
By comparison, competing emerging economies in the region generally attract foreign investment equivalent to between 3 and 4 per cent of GDP.
The disparity underlines the challenge facing Sri Lanka as it attempts to convert its broader economic recovery into sustained international investment.
Delays Affecting Major Investment Projects
Swift implementation of projects that have already been agreed upon is identified as an important element in maintaining investor confidence, rather than focusing solely on attracting new investment proposals.
Several major projects illustrate the challenges.
- Sinopec refinery: Agreements relating to the planned USD 3.7 billion petroleum refinery project in Hambantota have not yet reached the final stage.
- Wind power project: Delays arose over the proposed 484-megawatt wind power project in the Northern Province following reconsideration of preliminary agreement conditions and the pricing formula.
- LNG terminal: The process of signing an agreement for the Floating LNG terminal has also not proceeded as planned.
Economic analysts have warned that delays surrounding major agreements can lead international investors to question the predictability and legal stability of arrangements entered into with the government.
Institutional and Structural Reforms
Institutional efficiency remains another important part of the investment environment.
The report points to the need for the Board of Investment’s One Stop Shop mechanism to operate more effectively, allowing investors to obtain necessary approvals and services through a streamlined process.
Incomplete digitalisation across key state institutions, including Customs and the Port, continues to lengthen approval procedures.
Restrictions affecting the transfer of land ownership to foreigners also remain a consideration for international investors.
At the same time, the loss of skilled professionals through outward migration has contributed to shortages of trained workers in fields including information technology and engineering, creating additional difficulties for industries seeking to expand.
Policy Continuity Key to Long-Term Growth
Financial stability, while essential, will need to be accompanied by deeper structural reforms if Sri Lanka is to achieve sustainable long-term economic growth and improve its competitiveness as an investment destination.
Among the priorities identified are:
- Ensuring continuity and transparency in policymaking.
- Making government procurement more competitive and open.
- Expanding access to new markets by accelerating international trade agreements.
Sri Lanka’s improving economic indicators provide a stronger foundation than during the height of the economic crisis. Turning that recovery into substantially higher foreign investment, however, will depend on whether the country can combine financial stability with predictable policies, an investment-friendly legal framework and more efficient public administration.
