Investment climate: U.S. flags urgent reforms for growth

Frequent regulatory shifts and project reversals deter large investors

Board of Investment fails to act as a true “one-stop shop”; fragmented approvals

The implementation of the 2024 Economic Transformation Act and the restructuring of the BOI have stalled

Privatization halted; government promotes state-owned collectivism, unsettling investors

Unnecessary regulations, opaque procurement, and poor bureaucratic responsiveness

Institutional corruption and non-transparent tenders persist despite the anti-corruption law

IMF and business chambers urge trade facilitation, digitization, and stronger governance mechanisms

Sri Lanka’s projected economic growth for this year is only 3.5 per cent   

FDI remains constrained, with most transactions in the modest $3 to $5Mn range  

By Kelum Bandara   

The U.S. State Department recently released its 2025 Investment Climate Statements for each country. The statement on Sri Lanka is, once again, an eye-opener. It lays bare a stark reality: mere political will or rhetoric cannot deliver the desired economic growth. What is needed is a genuine improvement in the investment climate—strengthening regulatory mechanisms, removing bureaucratic hurdles, and making the country a truly competitive investment destination.   

Sri Lanka’s projected economic growth for this year is only 3.5 per cent. Instead, it should be sustained at well over five per cent for the country to become prosperous and to ensure a better quality of life for its people. The attraction of Foreign Direct Investment (FDI) is absolutely essential in this case.   

Nevertheless, FDI remains constrained, with most transactions in the modest $3 to $5 million range, according to the statement. This comes at a time when the country is in dire need of FDIs worth billions of dollars.   

The sectors that attracted the most foreign investment in 2024 were tourism, information and communications technology (ICT), renewable energy, manufacturing, and real estate. The government has actually set a US$5 billion target for this year.   

Despite this ambitious FDI target for 2025, experienced investors emphasise that policy stability, regulatory reform, and improved transparency must precede any significant uptick in large-scale investments, the report notes.   

The government has now completed one year in office, yet its performance has not fully lived up to the expectations set by its own rhetoric. Sri Lanka remains a much-sought-after country for investments. Its geo-strategic location in the Indian Ocean, astride major transnational trade arteries, serves as a unique selling proposition in attracting investments.   

The State Department notes that U.S. firms continue to explore opportunities in sectors such as ICT, energy, aviation, and defence, but regulatory unpredictability, bureaucratic hurdles, and selective transparency continue to limit broader participation.   

The government’s institutional capacity to encourage an open investment environment remains limited despite positive rhetoric. Overall, investors report that doing business remains difficult, frequently citing concerns about project reversals, regulatory shifts, slow decision-making, and inadequate support for established businesses. The IMF and local business chambers stress the need for comprehensive structural reforms, including trade facilitation, digitisation, and stronger governance mechanisms, the report says.   

What lies ahead for the government is no easy task. It has to double down on action in these areas. Seeds must be sown now to harvest later. One year on, the government has yet to undertake much of the legislative work required.   

The U.S. State Department finds that Sri Lanka’s implementation of foreign investment policies is inconsistent. The Board of Investment (BOI), the principal investment promotion agency, struggles to function as a “one-stop shop” due to fragmented authority across multiple government departments, creating lengthy approval processes that frustrate potential investors. Investors report challenges in maintaining a consistent and open dialogue with the BOI.   

The report notes that Sri Lanka’s Economic Transformation Act (ETA), passed in July 2024, sets parameters to abolish the BOI in favour of five new agencies: the Economic Commission, Zones SL, the Office for International Trade, the National Productivity Commission, and the Sri Lanka Institute of International Trade.   

However, the U.S. has observed that implementation of the ETA stalled following the National People’s Power’s electoral victory in late 2024, resulting in the BOI’s continued operation.   

It has also taken note of the proposed US$3.7 billion Sinopec oil refinery project, the largest FDI project in Sri Lankan history, and of Indian firm Adani Green Energy’s withdrawal from a proposed $400 million, 484 MW renewable energy wind farm project in northern Sri Lanka, citing government efforts to renegotiate a previously awarded contract.   

The NPP government also ceased the planned privatisation of many state-owned enterprises (SOEs), choosing instead to implement turnaround reforms. Many potential investors remain reluctant to invest given these ongoing mixed messages. Some senior government officials regularly criticise private sector-led economic growth and publicly promote state-owned collectivism as the country’s preferred investment model, the report says.   

Other key impediments include unnecessary regulations, legal uncertainty, and poor bureaucratic responsiveness. The stalled privatisation of deficit-ridden SOEs, notably the Ceylon Electricity Board, hinders the development of cost-effective energy supplies crucial for industrial operations. Foreign investors consistently report high transaction costs, unpredictable policies, and opaque procurement procedures.   

An anti-corruption drive is a key campaign pledge of the current government. However, the U.S. report notes that endemic corruption and a lack of transparency in public procurement have historically inflicted significant economic losses on Sri Lanka, deterring foreign direct investment—particularly in large infrastructure sectors where top global companies often remain absent.   

The statement says that despite legal prohibitions, practices such as accepting unsolicited project proposals and tailoring tender specifications to favour specific companies reportedly remain common.   

The U.S. State Department further observes that although high-level political bribery solicitation appears to have diminished under the new administration, institutional corruption persists, particularly within sectors protected by entrenched vested interests.   

The government strengthened its anti-corruption framework by passing comprehensive legislation in July 2023 aimed at enhancing enforcement capabilities. The President has publicly committed to eradicating corruption and enhancing governmental transparency. Yet, provisions addressing conflicts of interest remain vague, and enforcement mechanisms are weak.   

Listed companies generally have codes of conduct to prohibit bribery of public officials. However, privately owned companies—especially those involved in infrastructure projects and imports—do not generally adhere to these guidelines. Sri Lanka is a party to the United Nations Convention Against Corruption (UNCAC), according to the report.   

The country is at a decisive moment. The U.S. State Department’s findings underscore what local business leaders and the IMF have long cautioned. Only rhetoric cannot attract foreign investments needed to sustain growth above five per cent. Policy consistency, transparent governance, and institutional reforms must move from promise to practice.