In addition to Sri Lanka’s strategic geographic location in the IOR-ARC, the country is relatively an open market in South Asia with steady GDP growth and a political commitment to further economic liberalisation. Tariffs of the island country are relatively low and there are few non-tariff barriers despite some structural rigidity.

Sri Lankan government’s economic policy aims at the promotion of exports and control of import growth. The country has experienced strong export-led growth in the past few years that significantly increased the total value of its foreign trade.

The service sector accounts for the largest share of GDP (50%) and the economy is heavily dependent on trade. However, manufacturing sector is the pre-eminent growth sector in the economy with export-oriented factory industries leading this expansion. Foreign Investment has increased steadily over the years as the country has managed to record an overall surplus on balance of payments.

Economic Policy

Over the past three decades, structural adjustment and economic reforms have been the cornerstone of the country’s economic policy. Tax and trade reforms have made progress and the privatisation programme has been the most successful area of structural reform.

Sri Lanka has a three-band import tariff schedule based on the harmonised system of classification. The three bands are 5 percent, 10 percent, and 30 percent. Most consumer goods, agricultural products, chemicals and other intermediate goods manufactured locally are subject to a 35 percent tariff. Tobacco, cigarettes and liquor do not come under the three-band rate structure. Motor vehicle duties, previously between 50 percent and 100 percent are now levied at 30 percent. Imports for most export-oriented industries are either entered duty free or entitled to duty rebates.

Sri Lanka has made major strides since the early 1980s in creating a favourable climate for the private sector. The government has deregulated most sectors, eliminated most price controls and quotas, liberalised the issuance of import licenses, terminated export taxes, and privatised many state-owned companies. It actively promotes inward foreign investments in most of the sectors. Sri Lanka attained full current account convertibility in March 1994 when it accepted the obligations under Article VIII of the IMF Articles of Agreement.

Board of Investment

The Board of Investment (BOI) is the country’s primary government authority responsible for foreign investment. Total foreign ownership is permitted across virtually all areas of the economy.

The board is empowered to offer special incentives for firms involved in several key sectors including: (a) Manufacture and export of non-traditional products and services; (b) Manufacture and supply of fabric and other accessories for garment industry; and (c) Development and export of computer software. These incentives include:

• Full tax holidays for a period of up to 20 years;

• Concessionary tax at 15 percent per annum for a period of up to 20 years;

• Duty free imports of plant, machinery, raw material and other project related goods as approved by the BOI;

• Exemptions from turnover tax and excise duty for import of export companies;

• No restriction on repatriation of dividends, profits etc;

• Free transferability of shares;

• Import duty exemptions;

• Exchange control exemptions.

Protection for Investment

Bilateral investment agreements supported by a constitutional guarantee provide strong protection for foreign investment in Sri Lanka. The safety of foreign investment is guaranteed through the acceptance by two-thirds majority of Parliament of the Constitutional Guarantee of Investment Protection Agreements. Under article 157 of the country’s constitution, the agreement enjoys the force of law and no legislative, executive or administrative action can be taken to contravene it. Bilateral investment agreements are valid for 10 years and are extended automatically unless terminated by either party. If the agreement is terminated, investments already made are protected for another 10 years.

Liberalisation Process

Sri Lanka’s trade liberalisation, deregulation and privatisation have improved conditions for employment and growth. Efforts are being made to further streamline the tax and tariff system—through the introduction of a comprehensive goods and services tax—to inject competition into public sector domain.