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FDI inflows to Sri Lanka have increased steadily in recent years driven by the end of the civil conflict and economic recovery. However, according to UNCTAD’s 2021 World Investment Report, inflows to Sri Lanka declined by 43% from USD 758 billion in 2019 to USD 434 million in 2020, mainly due to the global economic and health crisis triggered by the Covid-19 pandemic but also the terrorist attacks carried out during Easter 2019, which hampered foreign investor confidence and the tourism sector. In the same year, the stock of FDI stood at USD 12.8 billion. In Sri Lanka, FDI inflows will take time to recover as investment commitments have remained weak. For example, greenfield investment projects announced in 2020, an indication of FDI trends in the coming years, have contracted significantly by -96% in Sri Lanka. This contraction is due to weak investment interest in garment production, one of the main export industries and recipients of FDI. Investment and garment production suffered severely in 2020 and 2021.

The island’s strategic location off the southern coast of India along the main east-west Indian Ocean shipping lanes gives Sri Lanka a regional logistical advantage. FDI in Sri Lanka has largely been concentrated in tourism, real estate, mixed development projects, ports, and telecommunications in recent years. Traditionally, infrastructure, particularly postal and communications, absorbs a significant portion of inflows into the country. Manufacturing, IT, tourism and infrastructure show the highest growth rates. Growing competition between China (in the energy sector) and India (in telecommunications) is taking shape and currently benefiting the Sri Lankan economy. The country's largest investors are China (16%), the Netherlands (13%), India (13%), Singapore (8%) and Malaysia (7% - data Central Bank of Sri Lanka). China has invested ever-increasing sums into the country, notably through the Exim Bank of China. Current projects will reach USD 6 billion and include creating a free zone, a project for a ship handling centre and the construction of an airport. Moreover, in 2019 the Board of Investment of Sri Lanka announced that an overseas joint venture had committed USD 3.85 billion to a new oil refinery, marking the single largest foreign investment in the country's history. The refinery is expected to produce 200,000 barrels a day and to be operational within four years. In early 2021, India's biggest private port operator Adani Ports obtained a letter of intent from Sri Lankan authorities to build and operate the West Container Terminal of Colombo Port for 35 years, with the project cost being estimated at around USD 750 million.

In 2021, the Colombo Port City Special Economic Zone (SEZ) and the Colombo Port City Economic Commission (CPCEC) were established. CPCEC is the one-stop-shop (Single Window Investment Facilitator) that registers and issues licences, authorisations and approvals to engage in business within, and invest in, the SEZ. CPCEC is encouraging and promoting global and regional investments in international trade, shipping, logistics operations, offshore banking and finance, IT and business process outsourcing, establishment of corporate headquarters, regional distribution operations and tourism (Lexicology, 2022).

Among the reasons to invest in Sri Lanka there are the measures taken by the government to attract FDI (the creation of free zones, reduction of food subsidies and other consumer goods), the country’s geographically strategic location near two high-growth regions (India and Southeast Asia), and its tourist potential (which is yet to be fully developed). However, Sri Lanka needs to address transportation shortfalls, which have seen inequitable development in some regions, increasing issues of congestion, and safety for women. Different areas face transportation gaps in roads, air travel, and marine transportation infrastructure while rail infrastructure is outdated and limited, especially for the transport of goods. Moreover, investment in several sectors of the economy remains restricted, and state-owned enterprises distort the economy. Additionally, political uncertainty may undermine investment and overall investor confidence. Sri Lanka was ranked 99th out of 190 countries in the World Bank's last 2020 Doing Business report, gaining one spot compared to the previous year.

For additionnal information on FDI in Sri Lanka access this guide and this page from FDI Intelligence.

 
 
Foreign Direct Investment 201820192020
FDI Inward Flow (million USD) 1,614758434
FDI Stock (million USD) 12,57513,05812,778
Number of Greenfield Investments* 412015
Value of Greenfield Investments (million USD) 2,45924,9151,102

Source: UNCTAD - Latest available data.

Note: * Greenfield Investments are a form of Foreign Direct Investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up.

Country Comparison For the Protection of Investors Sri Lanka South Asia United States Germany
Index of Transaction Transparency* 8.0 5.8 7.0 5.0
Index of Manager’s Responsibility** 5.0 5.0 9.0 5.0
Index of Shareholders’ Power*** 7.0 7.4 9.0 5.0

Source: Doing Business - Latest available data.

Note: *The Greater the Index, the More Transparent the Conditions of Transactions. **The Greater the Index, the More the Manager is Personally Responsible. *** The Greater the Index, the Easier it Will Be For Shareholders to Take Legal Action.

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