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Sri Lanka: Market Profile

Picture: Sri Lanka factsheet
Picture:Sri Lanka factsheet

1. Overview

Sri Lanka is transitioning from a predominantly rural-based economy towards a more urbanised economy oriented around manufacturing and services. The economy is expected to accelerate in 2018, buttressed by a robust services sector and recoveries in the agricultural and industrial sectors. With the support of the 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 the country's Vision 2025 on September 4, 2017 was designed to strengthen democracy and reconciliation, inclusive and equitable growth and ensure good governance.

Sources: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

September 2013
Tamil National Alliance opposition party won in the first elections to semi-autonomous provincial council in the north, with 78% of the vote.

January 2015
Maithripala Sirisena became president.

July 2016
The government announced its aim for Sri Lanka to become completely demilitarised by 2018.

February 2017
Government implemented Right to Information Act meant to curb corruption and provide timely information to the public.

February 2018
Local elections held. Opposition party Sri Lanka Podujana Peramuna (SLPP) won the majority of councils.

Source: BBC country profile – Timeline

3. Major Economic Indicators

Graph: Sri Lanka real GDP and inflation
Graph: Sri Lanka real GDP and inflation
Graph: Sri Lanka GDP by sector (2017)
Graph: Sri Lanka GDP by sector (2017)
Graph: Sri Lanka unemployment rate
Graph: Sri Lanka unemployment rate
Graph: Sri Lanka current account balance
Graph: Sri Lanka current account balance

e = estimate, f = forecast
Sources: International Monetary Fund, World Bank, Fitch Solutions
Date last reviewed: October 5, 2018

4. External Trade

4.1 Merchandise Trade

Graph: Sri Lanka merchandise trade
Graph: Sri Lanka merchandise trade

e = estimate
Source: WTO
Date last reviewed: October 5, 2018

Graph: Sri Lanka major export commodities (2017)
Graph: Sri Lanka major export commodities (2017)
Graph: Sri Lanka major export markets (2017)
Graph: Sri Lanka major export markets (2017)
Graph: Sri Lanka major import commodities (2017)
Graph: Sri Lanka major import commodities (2017)
Graph: Sri Lanka major import markets (2017)
Graph: Sri Lanka major import markets (2017)

Sources: Trade Map, Fitch Solutions
Date last reviewed: October 25, 2018

4.2 Trade in Services

Graph: Sri Lanka major import markets (2017)
Graph: Sri Lanka major import markets (2017)

e = estimate
Note: All imports are estimates and only 2017 exports are estimates
Source: WTO
Date last reviewed: October 5, 2018

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%, 15% and 30%. Over 50% of the non-agricultural imports are deemed duty-free. Essential raw materials and inputs such as cotton and textiles are generally non-dutiable or subject to duties at lower rates.

  • Sri Lanka's average tariff rate stands at 5.3%.

  • Apart from tariffs, duties and taxes that any importer is liable to pay upon importation include Excise Duty, Nation Building Tax (NBT), Special Commodity Levy (SCL), and value-added tax (VAT). The VAT rate stands at 15%, with exemptions granted to some ICT equipment, construction equipment, pharmaceutical, real estate, water, electricity, health and education.

  • Sri Lanka also has Generalised System of Preferences (GSP) agreements with Japan, the United States, Canada, the European Union (EU), Norway, Turkey and New Zealand, as well as free trade agreements (FTAs) with India and Pakistan. GSP-plus was implemented again in May 2017 and the current regulations will be valid until 2023.

  • 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 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 January 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.

  • 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.

Sources: WTO - Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

Sri Lanka and China have entered into an FTA negotiations and these remain ongoing at the time of writing. The two sides agreed to speed up the FTA talks during the visit of Sri Lankan President Maithripala Sirisena to China in March 2015.

6.2 Multinational Trade Agreements

Active

  1. The SAFTA: An agreement between states was reached on January 6, 2004. SAFTA creates a free trade area of nearly two billion people in Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The seven foreign ministers of the region signed a framework agreement on SAFTA to reduce customs duties of all traded goods to zero by the year 2016. The SAFTA agreement came into force on January 1, 2006. 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% at staggered periods. The purpose of SAFTA is to encourage and elevate common contract among the countries, such as medium- and long-term contracts. Contracts involving trade operated by states, supply and import assurance in respect of specific products and it involves agreement on tariff concession, like national duties concession and non-tariff concession.

  2. The APTA: formerly the Bangkok Agreement signed in 1975, The APTA is one of the Asia's oldest regional preferential trading agreements with six participating states - Bangladesh, China, India, Laos, Republic of Korea and Sri Lanka. The APTA is a dynamic regional agreement which has been instrumental in producing a favourable outcome for Sri Lanka. It is particularly important for Sri Lanka as it is the only trade agreement Sri Lanka partakes with China and the Republic of Korea. At the Third Ministerial Council was held on December 15, 2009 in Seoul, Republic of Korea, two framework agreements on Trade Facilitation and Promotion, Protection and Liberalisation of Investment were signed to incorporate separate chapters in services and investments. The APTA aims to promote economic development and cooperation through the adoption of mutually beneficial trade liberalisation measures. Further concessions are envisaged at the next rounds of trade negotiations, which will target widening products coverage and deepening the tariff cuts and to adopt modalities for the extension of negotiations into other areas such as non-tariff measures, trade facilitation, framework agreement on services and investment.

  3. Indo-Sri Lanka FTA: The Indo-Sri Lanka FTA (ISFTA) entered into force on March 1, 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 Cooperation Agreement (ETCA) . While both the countries already have the benefits of an FTA in goods, recent bilateral talks have been aimed at widening the scope of this pact by including services and investments to make it comprehensive. To further strengthen economic cooperation between Sri Lanka and India, a Comprehensive Economic Partnership Agreement (CEPA) is also under negotiation.

  4. Sri Lanka-Pakistan FTA: The FTA between Sri Lanka and Pakistan provides duty-free entry into Pakistan for almost all of Sri Lanka's exports except for 541 items on Pakistan's negative list. The FTA was implemented on June 12, 2005 and aims for the complete elimination of tariffs by the end of its fifth year.

Under Negotiation

  1. China-Sri Lanka FTA: China is investing heavily in strategic ports and port-related industries in Sri Lanka. The FTA between China and Sri Lanka, currently 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. China is a vitally important trade partner for Sri Lanka, supplying almost 20% of Sri Lanka's total imports in 2017 and purchasing approximately 4% of Sri Lanka's exports.

  2. Sri Lanka–Singapore FTA: The FTA between Sri Lanka and Singapore is aimed at promoting the bilateral trade of goods and services and to 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% of total FDI inflows.

Sources: WTO Regional Trade Agreements database, Government websites, Fitch Solutions

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Sri Lanka FDI stock
Graph: Sri Lanka FDI stock
Graph: Sri Lanka FDI flow
Graph: Sri Lanka FDI flow

Source: UNCTAD
Date last reviewed: October 5, 2018

7.2 Foreign Direct Investment Policy

  1. 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.

  2. The BOI plays a key role in the implementation of Sri Lanka’s export-oriented industrialisation strategy. Textile and garments have become important industrial products after the development of export processing zones. 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 USD500 million will be designed. Exchange control reform is also proposed to ease foreign exchange remittance to facilitate foreign investment.

  3. 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.

  4. 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 USD1.12 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.

  5. The government has identified a wide range of targeted industrial sub-sectors to be promoted under the 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.

  6. 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.

  7. 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, VAT, economic service charge, debit tax, customs imports and export taxes, port and airport tax, and the nation building tax.

  8. 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 pre-approved 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.

  9. Sri Lanka also has 14 major free-trade zones (FTZs), also called EPZs, 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.

  10. 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 Underutilised Assets Act, which resulted in the seizure of 37 companies.

Sources: WTO - Trade Policy Review, ITA, Fitch Solutions

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
14 Free Trade Zones, called export processing zones administered by the BOIVarious 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.

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2018

NIL

9. Foreign Worker Requirements

9.1 Localisation Requirements

Local workers are given priority of employment and these permits are usually considered for work that locals are unable to do. 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 the 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 three 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.

Sources: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
B1 (negative)26/07/2018
Standard & Poor'sB+ (stable)14/09/2010
Fitch RatingsB+ (stable)06/02/2018

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
109/189
110/190
111/190
Ease of Paying Taxes Index
158/189
158/190158/190
Logistics Performance Index
N/A
N/A94/160
Corruption Perception Index
95/176
91/180N/A
IMD World CompetitivenessN/AN/AN/A

Sources: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices


World Ranking
201620172018
Economic Risk Index Rank81/202
Short-Term Economic Risk Score
49.654.454.6
Long-Term Economic Risk Score52.457.255.6
Political Risk Index Rank93/202
Short-Term Political Risk Score
71.57066
Long-Term Political Risk Score62.366.1
63.6
Operational Risk Index Rank98/201
Operational Risk Score5351.8
49.5

Source: Fitch Solutions
Date last reviewed: October 25, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
Agriculture is a significant economic activity in Sri Lanka. A substantial part of employment and export earnings originate from agriculture. Tourism also plays an increasingly significant role in the economy. In the last decade, the government in Sri Lanka has pursued policies of industrialisation as a means of achieving growth, creating employment, and diversifying an economy that was based on crop exports. 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.

OPERATIONAL RISK
There exist some sector-specific restrictions to foreign investors. That said, there are certainly benefits to investing in Sri Lanka for businesses, particularly those in export-facing industries. Chief among the country’s benefits are good quality transport infrastructure and strong connections to international trade routes. In addition, a low-cost workforce with widespread basic skills lifts Sri Lanka above regional peers that are competing to attract investment into secondary and tertiary industries.

Source: Fitch Solutions
Date last reviewed: October 25, 2018

10.5 Fitch Solutions Political and Economic Risk Indices

Graph: Sri Lanka short term political risk index
Graph: Sri Lanka short term political risk index
Graph: Sri Lanka long term political risk index
Graph: Sri Lanka long term political risk index
Graph: Sri Lanka short term economic risk index
Graph: Sri Lanka short term economic risk index
Graph: Sri Lanka long term economic risk index
Graph: Sri Lanka long term economic risk index

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: October 8, 2018

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Sri Lanka Score49.4
45.0
46.3
58.2
48.4
South Asia Average41.643.738.943.440.5
South Asia Position (out of 8)33323
Asia Average48.750.647.746.350.1
Asia Position (out of 35)17
2218918
Global Average49.649.749.949.149.8
Global Position (out of 201)98
12911959101

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Sri Lanka vs global and regional averages
Graph: Sri Lanka vs global and regional averages
Country
Operational Risk Index
Labour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Security Risk Index
Bhutan51.6
44.5
48.550.9
62.5
India50.0
44.651.0
61.8
42.8
Sri Lanka
49.5
45.0
46.3
58.2
48.4
Maldives
48.2
50.3
43.439.4
59.9
Bangladesh
38.6
50.1
29.8
39.0
35.5
Nepal38.1
40.9
35.4
34.8
41.1
Pakistan
34.5
36.9
36.843.1
21.4
Afghanistan22.3
37.3
20.1
19.7
12.3
Regional Averages41.6
43.7
38.9
43.4
40.5
Emerging Markets Averages46.8
48.0
47.545.7
46.0
Global Markets Averages49.6
49.7
49.9
49.149.8

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: October 8, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Sri Lanka

Graph: Major export commodities to Sri Lanka (2017)
Graph: Major export commodities to Sri Lanka (2017)
Graph: Major import commodities from Sri Lanka (2017)
Graph: Major import commodities from Sri Lanka (2017)

Note: Graph shows main Hong Kong imports from/exports to Sri Lanka (by consignment)
Date last reviewed: October 25, 2018

Graph: Merchandise exports to Sri Lanka
Graph: Merchandise exports to Sri Lanka
Graph: Merchandise imports from Sri Lanka
Graph: Merchandise imports from Sri Lanka

Note: Graph shows Hong Kong imports from/exports to Sri Lanka (by consignment)
Exchange Rate HK$/US$, average
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: October 8, 2018


2017
Growth rate (%)
Number of Sri Lankan residents visiting Hong Kong6,883
-9.1
Number of Sri Lankans residing in Hong Kong794
1.5

Sources: Hong Kong Tourism Board, Fitch Solutions


2017
Growth rate (%)
Number of Asia Pacific residents visiting Hong Kong54,482,538
3.5
Number of South Asians residing in Hong Kong36,680
1.6

Note: Growth rate calculated between 2015 and 2017
Sources: Hong Kong Tourism Board, Fitch Solutions
Date last reviewed: August 21, 2018

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Sri Lanka companies in Hong KongN/AN/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. This agreement entered into force on March 30, 2005.

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

Consulate of the Democratic Socialist Republic of Sri Lanka
Address: 20/F, Harbour Commercial Building, 122-124 Connaught Road, Sheung Wan, Hong Kong
Email: bosco@jdbhk.com
Tel: (852) 2581 4111

Source: Ministry of Foreign Affairs – Sri Lanka

11.5 Visa Requirements for Hong Kong Residents

Hong Kong SAR passport holders need a visa to visit Sri Lanka for a maximum stay of 30 days. Sri Lanka tourist visas for a stay of up to 30 days for Hong Kong citizens are electronic. All holiday or business travelers visiting Sri Lanka must obtain Electronic Travel Authorisation (ETA) prior to arrival.

Source: Sri Lanka Immigration Services

Content provided by Picture: Fitch Solutions – BMI Research
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