Sri Lanka: Market Profile
A complex political environment and the impact of natural disasters, such as floods in May and prolonged drought across the country, made 2017 a challenging year for Sri Lanka. As a result, Sri Lanka’s macroeconomic performance slowed down and the growth rate declined to a 16-year low of 3.1% in 2017 – the lowest it has been since 2001. With the support of World Bank, the government is carrying out fiscal reforms, improving public financial management, increasing public and private investments, addressing infrastructure constraints and improving competitiveness. The launch of its Vision 2025 on September 4, 2017 was designed to strengthen democracy and reconciliation, inclusive and equitable growth and ensure good governance.
Source: World Bank
2. Major Economic/Political Events and Upcoming Elections
Incumbent Mahinda Rajapaksa wins presidential election by a big margin but the outcome is rejected by his main rival Gen Sarath Fonseka.
Parliament approves a constitutional change allowing President Rajapaksa to seek unlimited number of terms.
Tamil National Alliance opposition party wins first elections to semi-autonomous provincial council in the north, with 78% of the vote.
Maithripala Sirisena becomes president.
The government announces its aim for Sri Lanka to become completely demilitarised by 2018, a significant development which would see the end of the army's involvement in civilian life after decades of ethnic war.
Government implements Right to Information Act meant to curb corruption and provide timely information to the public.
President Sirisena reinstates a controversial 60-year-old ban on the sale of alcohol to women, days after it was lifted by his own finance minister.
Source: BBC country profile – Timeline
3. Major Economic Indicators
Note: (e) estimate, (f) forecast
Source: IMF, World Bank
4. External Trade
4.1 Merchandise Trade
Note: (e) estimate
Source: WTO, World Bank WITS database
4.2 Trade in Services
5. Trade Policies
- Sri Lanka has been a World Trade Organisation (WTO) member since January 1995, adopting a liberal trade regime. Other than the strict controls over imported agricultural items that may be detrimental to certain local plants and live animals, companies are allowed to trade freely without special restrictions.
- Sri Lanka’s tariffs range from zero to 30% under a four-band tariff structure with rates being 0%, 7.5%, 15% and 30%. Over 50% of the non-agricultural imports were duty-free. Essential raw materials and inputs such as cotton and textiles are generally non-dutiable or subject to duties at lower rates.
- Apart from tariffs, duties and taxes that any importer is liable to pay upon importation include the Import Cess, Excise Duty, Nation Building Tax (NBT), Special Commodity Levy (SCL), PAL and VAT. The VAT rate was increased from 11% to 15% in November 2016, with exemptions granted to mobile phones, construction equipment, computers and accessories, pharmaceutical, real estate, water, electricity, health and education.
- In 2010, Sri Lanka lost its GSP-Plus status and thereby duty-free access to the EU due to non compliance with certain human rights conventions. In May 2017, the GSP-Plus status was reinstated on the conditions that the Sri Lankan government is committed to human rights, environmental protection and governance reforms. Sri Lanka also enjoys GSP benefits from Japan, the US, Canada, Norway and New Zealand.
- Exporters and importers may be subject to a range of additional tariffs and taxes intended to promote domestic industries and reduce the country's import bill. These may include a port and development levy of 5% on the value of cargo, in addition to other import and excise duties.
- Sri Lanka is a member of South Asian Association for Regional Cooperation (SAARC), which formed a South Asian Free Trade Area (SAFTA) in 2006 with an aim to reduce duties for imports from member countries to between zero and 5% within 10 years, though progress has not been satisfactory. Apart from SAFTA, the country also concluded bilateral free trade agreements (FTAs) with Pakistan and India and the Asia-Pacific Trade Agreement (APTA). To further strengthen economic cooperation between Sri Lanka and India, the Indo–Sri Lanka Economic and Technology Cooperation Agreement (ETCA) and Comprehensive Economic Partnership Agreement (CEPA) are under negotiations.
- There are various export restrictions applied to goods such as bulk tea and natural sand. There are also export licencing requirements for metal products (both raw and semi-processed materials) such as copper, zinc and other steel alloys.
- There are various import bans in place that affect the autos sector, in addition to high import duties (for new vehicles). Vehicles older than two years are not permitted, and commercial vehicles older than four years are also not permitted under 2013 rules. Sri Lanka also implements special commodity levies on imported vegetable oil, onions (and various other vegetables) sugar, garlic, dhal, watana, wheat, rice and fish.
Source: WTO – Trade Policy Review
6. Trade Agreement
6.1 Trade Updates
- Sri Lanka and China have entered into FTA negotiations. In the China visit of Sri Lankan President Maithripala Sirisena in March 2015, the two sides agreed to speed up FTA talks.
- Businesses operating in Sri Lanka can benefit from two main regional trading agreements: the South Asia Free Trade Agreement (SAFTA) and the Asia Pacific Trade Agreement (APTA). These agreements provide Sri Lanka with preferential terms and tariffs, benefiting export industries such as the garment sector.
6.2 Multinational Trade Agreements
- The SAFTA requires the developing countries in South Asia (India, Pakistan and Sri Lanka) and least developing countries (Nepal, Bhutan, Bangladesh, Afghanistan and the Maldives) to bring their duties down to 0%.
- The APTA aims to promote economic development and cooperation through the adoption of mutually beneficial trade liberalisation measures. Member nations include Bangladesh, China, India, Korea, Lao, Sri Lanka, and Mongolia.
- Sri Lanka also has Generalised System of Preferences (GSP) agreements with Japan, the US, Canada, the EU, Norway, Turkey and New Zealand, as well as free trade agreements with India and Pakistan. The latter agreements give Sri Lanka access to more than 1.3 billion consumers from the island. GSP+ was implemented again in May 2017 and the current regulations will be valid until 2023.
- The Indo-Lanka Free Trade Agreement between Sri Lanka and India has been in effect since 2000. Under this agreement, most products manufactured in Sri Lanka with at least 35% domestic value addition (if raw materials are imported from India, domestic value addition required is only 25%) qualify for duty-free entry to the Indian market.This should benefit exporters to one of Sri Lanka's key markets. Sri Lanka exports manufactured products to India, duty-free. Sri Lanka is eager to expand the current FTA with India to a broader Economic and Technology Agreement (ECTA).
- The 2005 Sri Lanka-Pakistan FTA provides duty-free entry into Pakistan for almost all of Sri Lankan exports except for 541 items on Pakistan's negative list. These agreements could help to make Sri Lanka a gateway to South Asia for foreign investors.
- China is investing in strategic ports and port-related industries. The FTA between China and Sri Lanka, in negotiation, is set to boost the country's future development and promote trade with China in sectors such as industry, energy, technology, infrastructure and tourism.
- The Sri Lanka–Singapore FTA, aimed at promoting the bilateral trade of goods and services, to also aid the continued expansion of Sri Lanka’s manufacturing and services sectors. This partnership is likely to pave the way for higher quality sector expansion as this would facilitate the transfer of technology and best practices from Singapore, one of Sri Lanka’s top 10 foreign investors, accounting for almost 10.0% of total FDI inflows.
Source: WTO Regional Trade Agreements database
7. Investment Policy
7.1 Foreign Direct Investment
7.2 Foreign Direct Investment Policy
- In order to promote FDI, the Sri Lankan government has set up the Board of Investment (BOI), which currently manages 14 industrial parks and export processing zones (EPZs) in the country. Tax incentives and duty-free facilitation are given to qualified foreign investors. There are nine key investment sectors identified by the government with special incentives given to foreign-invested enterprises (FIEs) in these sectors, namely, tourism and leisure, infrastructure, knowledge service, utilities, apparel, export manufacturing, export services, agriculture and education.
- The BOI plans to introduce new methods including public-private partnerships for spurring investment. In the 2017 Budget, new incentive packages for landmark projects with investment between USD100-500 million and those more than USD 500 million will be designed. Exchange control reform is also proposed to ease foreign exchange remittance to facilitate foreign investment.
- Sri Lanka’s 2018 budget envisions on pursuing a 'Blue–Green Development Strategy' that entails plans to integrate the full economic potential of ocean-related activities in formulating the overall growth strategy, and build the economy on an environmentally sustainable development strategy. The Enterprise Sri Lanka initiative is expected to promote entrepreneurial skills and facilitate not only the established private sectors but also the small business enterprises.
- Since the civil war ended in 2009, Sri Lanka has worked to rebuild and improve infrastructure, drawing in FDI to finance and undertake related infrastructure projects. China has been keen to participate in such projects, including the Sri Lankan port in Hambantota and the Colombo International Container Terminals. In July 2017, the Sri Lanka Ports Authority (SLPA) and China Merchants Port Holdings (CMP) signed an agreement under which the joint venture majority-owned by the CMP, which will invest up to USD 1.12 billion, will handle the commercial operations of the Chinese-built Hambantota Port on a 99 year lease, with the port expected to play a strategic role in the Belt and Road Initiative.
- The government has identified a wide range of targeted industrial sub-sectors to be promoted under the Board of Investment (BOI) to drive the economic development process of the country. In line with the new policy guidelines of the government, the manufacturing sector is to be promoted in three key segments: non-traditional products (which include all products other than black tea in bulk, crepe rubber, sheet rubber, scrap rubber, coconut oil, desiccated coconut, copra, fresh coconuts, and coconut fibre), local manufacturers of substituted goods (boats, pharmaceuticals, tyres and tubes, motor spare parts, furniture, ceramics, glassware, cosmetic products, edible products manufactured out of cultivated agricultural products, and construction materials), and large scale projects of national interest.
- Foreign ownership is permitted with the exception of some sectors designated as strategic in defence-related industries, forestry and farmland. The government allows 100% foreign investment in any commercial, trading, or industrial activity other than a few specified sectors including air transportation; coastal shipping; large scale mechanised mining of gems; lotteries; manufacture of military hardware, military vehicles, and aircraft; dangerous drugs; alcohol; toxic, hazardous, or carcinogenic materials; currency; and security documents. These sectors are regulated and subject to approval by various government agencies. Environmental concerns continue to dent prospects for investors in the primary sector.
- A number of investment incentives are open to investors in Sri Lanka. These are laid out in the Strategic Development Project Act 2008, which provides tax incentives for large projects that the Cabinet identifies as Strategic Development Projects (SDP). These are defined as investments that are believed to be in the national interest, and likely to bring economic and social benefits through the provision of goods and services, substantial inflow of foreign currency, generation of employment and income, and transfer of technology. Projects classified as SDPs are exempted from taxes for up to 25 years in areas such as corporate income tax, value added tax, economic service charge, debit tax, customs imports and export taxes, port and airport tax, and the nation building tax.
- Foreign investments in the following areas are restricted to 40% ownership: the production for export of goods subject to international quotas; growing and primary processing of tea, rubber, coconut; timber-based industries using local timber; deep-sea fishing; mass communications; education; freight forwarding; travel services; and businesses providing shipping services. Foreign ownership in excess of 40% must be preapproved on a case-by-case basis by the BOI. Foreign investment is not permitted in the following businesses: non-bank money lending; pawn-brokering. Foreign ownership is allowed in most sectors, although the land ownership law prohibits foreigners from owning land, with some exceptions.
- Sri Lanka also has 14 free-trade zones, also called export processing zones, administered by the BOI. In addition, a large private apparel company opened Sri-Lanka's first privately run fabric park in 2007, and thereafter invited local and foreign companies to set up fabric and apparel factories in the park. A number of companies have chosen to locate their factories in and around Colombo to reduce transport time and cost. However, excessive concentration of industries around Colombo has caused heavy traffic, higher real estate prices, and a scarcity of labour. As a result, the BOI now encourages export-oriented factories to be set up in industrial zones outside of the capital, such as Koggola, Seethawaka, Biyagama, Mirigama, Polgahawela, Mawathagma, Kandy, Malwatta, Wathupitiwela, Sooriyawewa, and Mitijjalwela.
- Foreign ownership is allowed in most sectors, although the land ownership law prohibits foreigners from owning land with some exceptions. Foreigners are prohibited from purchasing land and real estate except for apartments above the 3rd floor. Currently, the cabinet can approve a land purchase for an investment in the national interest, provided there is a substantial foreign remittance for the purchase of the land. The new budget promised to relax restrictions on apartment ownership. Other policies of concern include the November 2011 Underutilized Assets Act, which resulted in the seizure of 37 companies.
Sources: WTO - Trade Policy Review, The International Trade Administration (ITA), U.S. Department of Commerce
7.3 Free Trade Zones and Investment Incentives
|Free Trade Zone/Incentive Programme||Main Incentives Available|
|14 Free Trade Zones, called export processing zones administered by the BOI||Various corporate income tax and customs duty incentives; exchange control regulation exemptions are available. Sri Lanka and China have jointly established the Sri Lanka-China Logistics and Industrial Zone (SLCIZ) in Hambantota in the Southern Province which would be open for Chinese investors to establish factories. The GSL plans to allocate 1,000 acres of land for the zone. SLCIZ is expected to include the Hambantota Port which may be sold to a Chinese state-owned company.|
8. Taxation – 2017
- Goods and services tax: 10%
- Corporate income tax: 20%
Source: PwC Taxes at a Glance 2017
8.1 Important Updates to Taxation Information
- A new Inland Revenue Act entered into force in April 2018. The corporate income tax revised to a three tier structure comprising of a lower rate of 14%, a standard rate of 28% and a higher rate of 40%. A number of measures have been proposed to increase the tax revenue, chief amongst which motor vehicles excise duty and luxury tax revisions, duty revisions on Value Added Tax (VAT) and Nation Building Tax (NBT) and introduction of a Debt Repayment Levy (DRL). The government has also proposed several expenditure proposals mainly aimed at developing small- and medium-sized enterprises and reducing the budget deficit.
- Increases in VAT in Gulf States, where many Sri Lankan workers are based, could eat into remittance flows from these states to Sri Lanka in the short-to-medium term.
8.2 Business Taxes
|Type of Tax||Tax Rate and Base|
|Corporate Income Tax||The standard rate is 28% on profits. 12% for small and medium enterprises. 12% income tax rate for certain companies and priority sectors such as livestock, fisheries, tourism, animal feed and agriculture.|
|Exporters (goods and services)||14% on taxable earnings |
|Branch Tax Rate||28% on profits|
|Gains from realisation of investment assets||10% on taxable earnings|
|Educational services, and ICT services||10% on taxable earnings|
|Remittance Tax||14% on taxable earnings|
|Special Consumption Tax||10% to 70% on imports|
|Social insurance and contributions||18% on salaries|
|Foreign Contractor Tax||1% to 10%|
|Nation Building Tax||2% on turnover|
Source: General Department of Taxation, Minstry of Economy and Finance, PwC
9. Foreign Worker Requirements
9.1 Localisation Requirements
Local workers are given priority of employment and these permits are usually considered for work that local experts are unavailable or unable to do the work. Employment of foreign personnel is permitted when there is a demonstrated shortage of qualified local labour. Technical and managerial personnel are in short supply and this shortage is likely to continue in medium term.
9.2 Obtaining Foreign Worker Permits for Skilled Workers
All foreign nationals must obtain visas (on-arrival visas or visas obtained prior to arrival) to enter Sri Lanka. Foreign nationals intending to work in Sri Lanka should obtain residence visas and work permits. Foreign employees in the commercial sector do not experience significant problems in obtaining work or residence permits. Obtaining a visa in advance is now a requirement and can be completed online from the Electronic Travel Authority or at a Sri Lankan embassy. Applications should take two working days, though can take longer. Foreign investors who remit at least USD250,000 can qualify for a one-year resident visa, which can be renewed.
Investors and business people may obtain multiple-entry visas, which are valid for 3 or 12 months. To receive a multiple-entry visa, a foreign national must supply proof of his or her activities in Sri Lanka. Foreign residents in Sri Lanka are subject to a resident visa taxes.
9.3 Multiple-Entry Visas
Investors and business persons may obtain multiple-entry visas, which are valid for 3 or 12 months. To receive a multiple-entry visa, a foreign national must supply proof of his or her activities in Sri Lanka. These visas may be obtained from the Controller of Immigration and Emigration or from a Sri Lanka diplomatic mission abroad. For a three-month, multiple-entry visa, the fee is three times the fee for the single entry,three-month visit visa. For the 12-month, multiple-entry visa, the fee is the same as for a three-month, multiple-entry visa plus a tax of LKR10,000.
10.1 Sovereign Credit Ratings
|Rating (Outlook)||Rating Date|
|Standard & Poor's||B+||14/09/2010|
Source: Moody's, Standard & Poor's, Fitch Ratings
10.2 Competitiveness and Efficiency Indicators
|Ease of Doing Business Index ||107/189||110/190||111/190|
|Ease of Paying Taxes Index||110/189||110/190||158/190|
|Logistics Performance Index ||N/A||N/A||N/A|
|Corruption Perception Index||95/176||91/180||N/A|
|IMD World Competitiveness||N/A||N/A||N/A|
Source: World Bank, IMD, Transparency International
10.3 BMI Risk Indices
|Economic Risk Index Rank||75/202|
|Short-Term Economic Risk||49.6||54.4||56.5 |
|Long-Term Economic Risk Score||52.4||57.2||57.5|
|Political Risk Index Rank||94/202|
|Short-Term Economic Risk||71.5||70||66 |
|Long-Term Economic Risk Score||62.3||66.1 ||63.6|
|Operational Risk Index Rank||98/201|
|Operational Risk Index Score||53||51.8||50|
Source: BMI Research
10.4 BMI Risk Summary
The main challenges facing the island economy centre on the structural weaknesses of its fiscal and current accounts. In the event of external weaknesses, the country runs the risk of foreign direct investment drying up. That said, the country's overall economic growth prospects remain favourable, which provide a measure of support for the country's appeal.
The main barriers to trade and investment include sectoral restrictions to foreign investors. That said, there are certainly benefits to investing in Sri Lanka for businesses willing to overcome these risks. Chief among these are good quality transport infrastructure and strong connections to international trade routes. In addition, a cheap workforce with widespread basic skills lifts Sri Lanka above regional peers that are competing to attract investment into secondary and tertiary industries.
10.5 BMI Operational Risk Index
|Operational Risk||Labour Market Risk||Trade and Investment Risk||Logistics Risk||Crime and Security Risk|
|Sri Lanka Score||50.0||45.0||46.3||57.7||51.1|
|South Asia Average||41.6||43.7||38.9||44.0||39.7|
|South Asia Position (out of 18)||2||3||3||2||3|
|Asia Position (out of 35)||15||22||18||9||17|
|Global Position (out of 201)||98||129||119||61||92|
100 = Lowest risk; 0 = highest risk
Source: BMI Operational Risk Index.
|Country||Operational Risk Index||Labour Market Risk Index||Trade and Investment Risk Index||Logistics Risk Index||Crime and Secruity Risk Index|
|Emerging Markets Averages||46.8||48.0||47.5||45.8||46.1|
|Global Markets Averages||49.8||49.8||50.0||49.3||49.9|
Note: Higher Score = Lower Risk
Source: BMI Operational Risk Index
11. Hong Kong Connection
11.1 Hong Kong’s Trade with Sri Lanka
|Number of Sri Lankan residents visiting Hong Kong||7,569 (2016)||-6.5%|
|Number of Sri Lankans residents in Hong Kong||2,469 (2017)||N/A|
Source: Hong Kong Tourism Board, Hong Kong Immigration Department
|Number of Asia Pacific residents visiting Hong Kong||54.4 million||N/A|
|Number of South Asia residents residing in Hong Kong||36,680||N/A|
11.2 Commercial Presence in Hong Kong
|Number of Sri Lankans companies in Hong Kong||N/A||N/A|
|- Regional headquarters|
|- Regional offices|
|- Local offices|
11.3 Treaties and agreements between Hong Kong and Sri Lanka
At present Hong Kong has concluded airline and shipping income treaties with Sri Lanka.
11.4 Chamber of Commerce (or Related Organisations) in Hong Kong
Sri Lankan Honorary Consulate in Hong Kong
Address: 20/F., Harbour Commercial Building, 122-124 Connaught Road, Central, Hong Kong
Hours of Business: 10:00-12:00 and 14:00-16:00
Consul General: Dr Ngan Man-sham, Bosco, Honorary Consul
Tel: (852) 2581 4111
Fax: (852) 2587 777
11.5 Visa Requirements for Hong Kong Residents
People travelling on a Hong Kong passport need a visa to visit Sri Lanka.
Source: Visa on Demand