Sri Lanka faced unsustainable debt and a severe balance of payments crisis in 2022. The country’s GDP contracted by an estimated 8.7 percent in 2022 and is expected to contract further by roughly 3 percent in 2023 before returning to positive growth in 2024, according to the IMF. The economic crisis in 2022 resulted in the country running out of forex to buy essential items such as food, fuel and medicine. Trade and commercial activities were significanlty curtailed due to lack of foreign exchange, restrictions by banks and lowering of country credit limits. Inconsistent and unpredictable policies, including taxation, customs procedures, and regulatory approvals, are common concerns for U.S. and foreign companies. The public procurment and tender process is deeply flawed and widespread corruption prevents U.S. and other reputable foreign companies from competing effectivley for large scale projects. Despite the ongoing economic downturn, corruption remains rampant in every sphere of government procurement. Urgent and substantial reforms are needed for macro economic stability in the medium term. The lack of an effective competition policy has protected some domestic industries at the expense of foreign investment. According to the IMF, the country is showing signs of economic recovery, however challenges remain. Reforms and increase in revenue are critical to a sutainable recovery.
The government generally supports import substitution as a polcy. Importers to Sri Lanka face high import duties and other taxes. The country has relaxed import restrictions and most products are permitted with the exception of vehicles and a few other items.
Agricultural and consumer goods imports face stiff health regulations that sometimes exceed global standards. For example, genetically-modified (GMO) regulations restrict imports of U.S. agriculture commodities.
Businesses cite a lack of sufficient labor supply as a major hindrance for operating in Sri Lanka. Qualified workers are in short supply as a result of the education system producing too few engineers, technicians, scientists, and English speakers. There is an influx of workers leaving for employment abroad due to the economic crisis and this will further agravatate labor and skilled worker availability in the country. Business representatives complain that the rigid labor laws, including exceptionally high severance pay regulations, make it difficult to adjust staff size and composition to market conditions. There are also numerous and overlapping labor regulations that are often difficult for investors to understand.
Piracy is a problem for U.S. rights-holders in music, film, software, and some consumer products. Sri Lanka also lacks anti-competition laws.
