by Our Correspondent in Washington DC
United States has thrown the traps, after making all internal interventions to rise the NPP/JVP government to ascend to power. The Investment Climate Statement for Sri Lanka by the U.S. Department of State, issued just days ago, is a revelation, though one cloaked in bureaucratic prose. It is a document that attempts balance but betrays itself through its own admissions. It exposes a grim reality: Sri Lanka remains, despite the chants of reform and recovery, a hostile, unpredictable and institutionally barren ground for serious investment. It is a mirage marketed as opportunity, a theatre of false promises where investors must play blindfolded against a state apparatus that thrives on opacity, caprice, and ideological doublespeak.
The Statement begins with a contradictory flourish. It lauds a surprising “5 percent GDP growth in 2024” but then immediately cautions that “the country’s investment climate remains challenging.” The contradiction is not accidental; it is a symptom of a country where numerical performance masks deeper institutional erosion. Growth may occur, but it is fragile, accidental, and often in sectors propped up by remittances and foreign bailouts rather than by coherent policy or open markets. This is not growth built upon stability or predictability but upon desperation, debt restructuring, and temporary external inflows.
Much is made of the NPP’s sweeping electoral victories. President Anura Kumara Dissanayake and his parliamentary bloc are now entrenched, boasting a two-thirds majority. But stability is not synonymous with friendliness to investment. The U.S. report itself concedes that “many remain wary given the NPP leadership’s historically anti-Western, Marxist-influenced ideology.” This is not a passing observation; it is a profound warning. Investors know ideology does not evaporate overnight. It lingers, shaping rhetoric and policy. When senior officials openly “castigate private sector-led economic growth” and instead glorify “state-owned collectivism as the country’s preferred investment model,” the supposed stability becomes a straightjacket, binding Sri Lanka in an outdated experiment with statist dogma.
The examples of contradictory behaviour are telling. The government brags about finalising a $3.7 billion Sinopec oil refinery project near Hambantota, but at the same time, Indian Adani Green Energy walked away from its $400 million renewable energy farm after the state sought to renegotiate previously settled terms. This is not mere clumsiness; it is calculated duplicity. Investors enter with one set of assurances and leave battered by the state’s unilateral redefinitions of partnership. The message is unmistakable: contracts in Sri Lanka are not covenants, they are disposable instruments subject to the mood swings of political expedience.
Institutional fragility deepens the distrust. The Board of Investment, ostensibly the gateway for foreign capital, is described as unable to act as a “one-stop shop,” paralysed by “fragmented authority across multiple government departments” and marked by “unnecessary regulations, legal uncertainty, and poor bureaucratic responsiveness.” These are not the adjectives of a state ready for modernisation but of one still wallowing in feudal inefficiency, where rent-seeking bureaucrats turn investment into supplication. The much-touted Economic Transformation Act, which was to abolish the BOI and replace it with new agencies, has stalled entirely after the NPP victory, leaving investors stranded between old structures and aborted reforms. The nation, as the Statement inadvertently concedes, offers nothing but “mixed messages” to those who dare bring capital.
Land acquisition remains another quagmire. Foreigners are generally prohibited from outright ownership, with only narrow exceptions carved out for politically favoured cases. Even long-term leases are laden with delays, fraudulent documentation, and insecure titles. Astonishingly, only “about 3 percent of land holdings are reported to have clear titles,” a statistic that in itself should terrify any investor contemplating property-based ventures. Worse still, Sri Lanka’s Prescription Ordinance allows squatters who occupy property for ten years without challenge to claim ownership. This is not a modern investment climate; it is a legal Wild West.
The regulatory sphere is equally malignant. Investors are confronted with what the Statement calls “unpredictability, outdated rules, and excessive bureaucratic discretion.” Ministries draft laws without consultation, and when consultation occurs, it is tokenistic, ad hoc, and perfunctory. Even the IMF’s calls for structural reform are swallowed by the state’s refusal to digitise, automate, or dismantle rent-extraction mechanisms. The report laments that despite industry pressure, “manual processes persist at key agencies” like the Ports Authority and Customs. Investors find themselves trapped in a Kafkaesque cycle of stamps, seals, and delays, all of which come at a high transaction cost.
The judicial system offers no salvation. While the Constitution guarantees independence, perceptions of “political influence and corruption within the court system” remain pervasive. Backlogs choke commercial dispute resolution, leaving investors to endure endless delays. Arbitration is theoretically available, yet enforcement of foreign judgments is rare, generally requiring reciprocal arrangements that Sri Lanka has neglected. Investors enter with protections promised on paper but are left stranded in practice, with their rights subordinated to sluggish, politicised courts.
Even in the financial sector, superficial reforms hide deep dysfunctions. The Central Bank’s new framework proclaims independence and inflation targeting, yet the scars of debt restructuring and years of monetary financing of state-owned enterprises remain. Investor confidence is further eroded by the fact that Sri Lanka’s capital market, though “achieving positive net foreign inflows,” still suffers from “limited liquidity,” making entry relatively easy but exits perilous. Capital can be trapped, not through legal prohibition, but through illiquidity and systemic fragility.
The presence of state-owned enterprises is another structural blight. With 527 SOEs, including 55 deemed strategically important, the state squats like a colossus upon the economy. These entities are described as chronically mismanaged, burdened by “excessive staffing, inadequate financial disclosure, and weak budgetary controls.” They bleed the treasury, consume disproportionate labour costs, and distort the playing field against private competitors. While the previous administration at least entertained privatisation, the current regime has suspended those efforts, preferring “turnaround reforms” that history has shown will never materialise. For an investor, the conclusion is obvious: one does not compete in Sri Lanka against peers but against entrenched state monopolies subsidised by the public purse.
Corruption, the most insidious cancer of all, continues unabated. The Statement acknowledges “endemic corruption and a lack of transparency in public procurement” that “deter foreign direct investment.” Unsolicited proposals, rigged tender specifications, and favouritism remain normalised practices. Even though new anti-corruption legislation has been passed, it remains vague and weakly enforced, while conflicts of interest are conveniently overlooked. High-level bribery may have diminished in visibility, but institutionalised corruption at the level of ministries, SOEs, and provincial bureaucracies thrives unchecked. It is the silent tax on every investor, a levy extracted not by law but by connivance.
The political context is no less disquieting. Though the NPP may project order, their ascendancy was accompanied by the passage of the Online Safety Act, granting the state new power to censor internet content. Such authoritarian reflexes raise the spectre of sudden restrictions, not just on speech, but potentially on the operations of firms that rely on open digital infrastructure. The costs of living crisis, meanwhile, fuels simmering discontent. Tax increases under the IMF programme have already triggered protests. A society where “nearly two-thirds of Sri Lankans resort to borrowing money or depleting savings to meet basic nutritional needs” is not one where political calm can be taken for granted. The threat of unrest, always lurking, is one more risk to compound the investment calculus.
Labour, often touted as cheap and literate, is in fact another liability. The Statement reveals “skilled labour shortages” across tourism, apparel, IT, and engineering. Emigration drains talent, while rigid labour laws, particularly the Termination of Employment of Workmen Act, make downsizing prohibitively costly. Dismissing workers requires “substantial justification and compensation,” even in times of economic necessity. Informal employment dominates, unions are politicised, and young workers increasingly shun manual jobs. Investors must navigate not a flexible labour market but a minefield of rigidity, absenteeism, and political agitation.
The cumulative effect of these dysfunctions is that foreign direct investment remains anaemic. Transactions are typically in the “modest $3 to $5 million range,” a paltry scale compared to regional peers. Even with a $5 billion FDI target, seasoned investors remain unconvinced, insisting that only “policy stability, regulatory reform, and improved transparency” could alter the trajectory. Yet these reforms are precisely what the NPP resists. Instead, it cloaks itself in ideological suspicion, treats contracts as bargaining chips, shields SOEs from accountability, and permits bureaucratic inertia to suffocate enterprise.
What emerges, then, is a portrait not of an island poised for renaissance but of one still ensnared in its own contradictions. Sri Lanka wants capital but despises the capitalist. It courts investment but punishes the investor. It invokes the IMF when desperate but scorns the market when convenient. The U.S. Investment Climate Statement inadvertently issues the verdict: Sri Lanka is still unfriendly to investment. Its institutions are broken, its regulatory system arbitrary, its land regime insecure, its judiciary politicised, its labour inflexible, its SOEs parasitic, and its corruption endemic.
For those dazzled by Colombo’s rhetoric, the lesson is stark: behind the facade of growth lies the hard reality of institutional rot. The island may seduce with promises of opportunity, but these are lures in a carefully woven trap. The investor who enters must know that they are not walking into an open market but into a labyrinth where the rules are written in sand and the exit is never guaranteed. The U.S. Department of State has now said it plainly, if diplomatically. Read carefully between the lines, and it is not opportunity but warning that echoes loudest: Sri Lanka remains an unfriendly country for investment.
