Sri Lanka’s economy grew by 5 per cent in 2025 as the country continued its recovery from the 2022 economic crisis, but its investment climate remains challenging, with foreign investors reporting policy reversals, regulatory uncertainty, bureaucratic delays and inadequate government support, according to the US Department of State’s 2026 Investment Climate Statement for Sri Lanka.
Foreign direct investment reached $1.06 billion in 2025, equivalent to about 1 per cent of GDP and significantly below the 3 to 4 per cent commonly seen in emerging economies. Manufacturing, port development, tourism, information technology and business process outsourcing, and real estate attracted the largest shares of foreign investment. The report says greater attention is needed to policy stability, regulatory reform, skilled labour, access to industrial land, logistics and trade procedures if Sri Lanka is to meet its investment targets.
The political change of late 2024 has provided greater stability, according to the report. President Anura Kumara Dissanayake won the September 2024 presidential election with 42.3 per cent of the vote, followed by the National People’s Power parliamentary coalition securing 159 of 225 seats in November. The government’s commitment to Sri Lanka’s $3 billion, four-year Extended Fund Facility programme with the International Monetary Fund has reassured investors. But the report says many remain wary because of what it describes as “mixed messages” from the NPP leadership about the openness of the market.
The gap between the government’s stated intention to attract foreign investment and the experience reported by investors is a recurring concern. Sri Lanka permits 100 per cent foreign ownership across most economic sectors and provides constitutional protection for investments, including unrestricted repatriation of earnings, fees and capital. Yet the Board of Investment, the principal investment promotion agency, struggles to operate as a genuine “one-stop shop” because authority remains fragmented among government departments. Investors report lengthy approval processes, inconsistent dialogue with the BOI, unnecessary regulations, legal uncertainty and poor bureaucratic responsiveness.
Several major investment projects illustrate the difficulties. President Dissanayake committed in January 2025 to finalising Sinopec’s proposed $3.7 billion oil refinery near the Chinese-controlled Hambantota International Port, the largest proposed FDI project in Sri Lankan history. By June 2026, however, the project remained pending because of disagreements between the government and Sinopec. In February 2025, India’s Adani Green Energy withdrew from a proposed $400 million, 484 MW wind farm in northern Sri Lanka, citing government efforts to renegotiate an already awarded contract. In December 2025, the government also ended negotiations with China Harbour Engineering Company over a floating LNG terminal only days before the planned contract signing.
The report identifies substantial restrictions affecting foreign ownership. Foreign investment is subject to approval and sector-specific limits in areas including air transport, banking, coastal shipping, alcohol production, military hardware manufacturing and security-document printing. Foreign investment is prohibited in coastal fishing, money lending, pawnbroking and retail businesses with capital investment below $5 million. Foreign ownership exceeding 40 per cent in several activities, including cultivation of tea, rubber, coconut, cocoa, rice, sugar and spices, deep-sea fishing, education, mining, natural-resource extraction, shipping agencies and travel agencies, has historically required government or BOI approval.
Land is another significant obstacle. Sri Lankan law generally prohibits land sales to foreigners and enterprises in which foreign equity exceeds 50 per cent, although limited exceptions exist. Foreign investors therefore commonly rely on long-term leases facilitated by the BOI. The report also cites International Federation of Surveyors data indicating that only about 3 per cent of land holdings have clear titles under a modern title-registration system. Most transactions depend on deed registration, which does not itself guarantee ownership. Property registration typically requires eight procedures and takes an average of 39 days.
Regulatory and judicial weaknesses add further costs. Businesses report outdated regulations, broad administrative discretion, complex taxation, restrictive labour rules, difficult contract enforcement and cumbersome land acquisition. There is no legally mandated consultation process for new laws, with stakeholder engagement varying between ministries. The report says weak contract enforcement significantly impedes business growth, while some stakeholders continue to express concerns about political influence and corruption within the judicial system. Court backlogs remain substantial.
Trade procedures also remain heavily dependent on manual processes despite demands for digitisation. Strict import licensing, high duties and para-tariffs, complex labour regulations and concerns about intellectual property protection are identified as impediments. Manual procedures persist at agencies including Sri Lanka Customs, the Sri Lanka Ports Authority and the BOI.
Corruption remains another major concern. The report says endemic corruption and a lack of transparency in public procurement have historically caused significant economic losses and deterred foreign investment, particularly in major infrastructure projects. It reports that unsolicited project proposals and tender specifications tailored to favour particular companies remain common despite legal prohibitions. Although the government has publicly committed to eradicating corruption and strengthened its anti-corruption framework in 2023, stakeholders continue to report risks and concerns about politically connected interests. The report also says conflict-of-interest provisions remain vague and enforcement mechanisms ineffective.
Sri Lanka’s labour market presents a separate constraint. Skilled-worker shortages have intensified following emigration from tourism, apparel, information technology and engineering. The report says younger workers are increasingly reluctant to take labour-intensive jobs, while regional mobility constraints make recruitment more difficult. Garment factories report annual staff turnover as high as 40 per cent. Labour protections, particularly restrictions on dismissing employees, are viewed by investors as rigid and costly, while the country lacks formal unemployment insurance and strong social safety nets for displaced workers.
The report also records economic improvements. The Colombo Stock Exchange’s All Share Price Index rose 42 per cent in 2025 and the S&P SL20 increased 27 per cent, while banking profits after tax rose 19 per cent to about $1.2 billion. Gross official reserves reached $6.8 billion, the highest level since the 2022 crisis, after the Central Bank purchased $2 billion in foreign exchange. Workers’ remittances reached a record $8.1 billion in 2025. Yet the report notes that tax increases under the IMF programme have triggered limited protests, while substantially higher living costs continue to affect households; a 2023 World Food Programme assessment found that nearly two-thirds of Sri Lankans were borrowing money or using savings to meet basic nutritional needs.
