By: Staff Writer
December 30, Colombo (LNW): The latest edition of LMD magazine highlights that corporate sentiment in Sri Lanka remains largely unchanged despite the conclusion of the presidential and parliamentary elections.
The optimism ignited by the September presidential outcome persists, as reflected in the monthly LMD-PEPPERCUBE Business Confidence Index (BCI). However, the economic sentiment under the caretaker government has not seen significant shifts.
According to the November BCI survey, 41% of respondents were optimistic about the economy improving over the next year—a figure consistent with October’s results.
Meanwhile, 56% believed the economy would “stay the same,” up by 6%, and only 3% anticipated a worsening, marking a 6% decrease from the previous month. Sales outlooks among executives were similarly stable, with 46% expecting sales growth and 51% forecasting steady sales volumes.
With the elections behind, Sri Lanka’s economic landscape shows signs of recovery. Growth indicators are turning positive, the Sri Lankan Rupee has appreciated, and external debt restructuring nears completion.
A staff-level agreement with the IMF following the third review has bolstered optimism. Yet, sustaining this momentum will depend on inclusive and sustainable development strategies, especially in addressing tax reforms and factor market constraints.
Tax Regime Challenges:
The government faces a delicate balancing act in meeting IMF targets without overburdening taxpayers. An additional 1.5% of GDP in tax revenue is needed to achieve a 14% tax-to-GDP ratio by 2025. Proposals to reinstate VAT exemptions and offer income tax relief could result in revenue shortfalls.
To compensate, the IMF has suggested lifting the vehicle import ban, potentially yielding 0.8% of GDP, and improving tax administration through digitization and customs reforms. Modernizing the customs law and digitizing processes will widen the tax net and enhance efficiency.
Factor Market Reforms:
Addressing land, labor, and capital market constraints is critical to attracting foreign direct investment (FDI). Historically, Sri Lanka has relied on tax holidays to offset regulatory hurdles, incurring fiscal losses.
Reforms like digitizing land records, streamlining approval processes, and enacting the Sri Lanka Electricity Act to enhance renewable energy production could significantly boost investor confidence.
These measures aim to position Sri Lanka as a competitive destination for investment beyond low-cost manufacturing.
Growth Strategy:
With limited fiscal and monetary policy leverage, economic growth hinges on unlocking private sector potential. Reforms in regulatory frameworks will empower businesses—ranging from conglomerates to SMEs—to invest, expand, and drive the nation’s economic revival.
While optimism exists under the new administration, the focus must remain on tangible reforms to sustain recovery and foster long-term growth.
Sri Lanka has on average received less than one percent of GDP annually from foreign direct investments (FDI). Investors maintain that there are issues with accessing land, receiving the various levels of licenses and permission to set up, costs and labour regulations.
So the country focused on providing tax holidays to compensate for this and endured substantial fiscal losses as a result. Furthermore, FDI hasn’t been visible in export oriented industries.
Though Sri Lanka isn’t going to be a low-cost niche manufacturing centre or service destination, the reform of regulations on labour, land and capital will convert investor interest into reality.
