Sri Lanka’s sluggish progress in privatising State-Owned Enterprises (SOEs), rigid labour market regulations, and restrictions on foreign participation continue to undermine investor confidence, the U.S. State Department warned in its 2025 Investment Climate Statement.
According to the report, 527 SOEs, including 55 classified as strategic, continue to strain public finances and crowd out private sector activity. The previous administration had launched a reform drive aimed at restructuring and partially privatising major loss-making enterprises.
However, the current government halted those privatisation efforts upon taking office, opting instead for internal restructuring measures focused on cost-cutting and improved governance within existing state ownership.
The report observed that the suspension of privatisation, particularly at the Ceylon Electricity Board (CEB), has slowed energy sector reform, keeping electricity prices high and discouraging industrial competitiveness.
“Foreign investors consistently face high transaction costs, unpredictable policy shifts, and opaque procurement procedures,” the statement said, noting that uncertainty continues to weigh heavily on Sri Lanka’s investment prospects.
Despite these setbacks, the report acknowledged several enduring strengths. Sri Lanka allows 100% foreign ownership in most sectors, offers constitutional guarantees for investment protection, and ensures full repatriation of profits and capital.
The Colombo Stock Exchange recorded $66.5 million in net foreign inflows in 2024, raising a total of $568 million in capital. Worker remittances surged to $6.58 billion, boosting foreign reserves to $6.1 billion by the end of the year.
Export Processing Zones continue to attract investors, while newer ventures such as the Hambantota pharmaceutical zone and Colombo Port City are expected to open fresh opportunities.
Yet, the Economic Transformation Act, which aimed to streamline approvals by replacing the Board of Investment with five specialised agencies, remains unimplemented leaving investment approvals fragmented and slow.
The report cited uneven tax treatment, corruption in procurement, and bureaucratic inefficiencies as persistent obstacles. It highlighted the government’s decision to impose new taxes on service exporters while offering exemptions to Port City firms, reinforcing perceptions of policy inconsistency.
Labour rigidity was flagged as a key constraint. Strict dismissal laws have made restructuring costly, while labour shortages have intensified due to emigration, particularly in the IT, apparel, tourism, and engineering sectors. The garment industry, the report noted, faces turnover rates as high as 40%, compounded by limited social protection for informal workers.
Although Sri Lanka recorded 5% GDP growth in 2024, surpassing expectations, foreign direct investment (FDI) remains weak. Most deals are small, ranging from $3–5 million, concentrated in tourism, ICT, renewable energy, and real estate.
The government’s pledge to finalise Sinopec’s $3.7 billion oil refinery in Hambantota could become the largest FDI in history, but investor confidence suffered when Adani Green Energy withdrew from a $400 million wind project after renegotiation attempts.
Land restrictions also limit foreign participation, with companies holding over 50% foreign equity barred from purchasing land. Sectoral caps of 40% apply to agriculture, shipping, and education, while areas such as small retail and coastal fishing remain off-limits.
The report concludes that Sri Lanka’s ability to attract investment hinges on converting recent macroeconomic stability into genuine reforms. Without progress in governance, regulatory simplification, and labour flexibility, the government’s ambitious $5 billion FDI target for 2025 is unlikely to be met.
