Sri Lanka

Economic Overview:

Rconomic growth of Sri Lanka has been showing a steady rhythm during these last years (more than 6%), the global economic crisis combined with the impact of the latest conflicts between the government and the Tamil separatist forces, have caused an evident economic slowdown in 2009 (3.5%). In 2010, the growth rebounded attaining 7% thanks to the revival in exports, the regain of investors’ confidence and the dynamics of the agricultural and tourism services sectors.

The financial difficulties affronted by Sri Lanka due to the global economic slowdown, led the authorities to sign a stand-by agreement with the IMF in July 2009. The objectives of the program are to reinforce competitiveness in the export sectors and to improve the financial system. In regards of public finances, the objective for 2011 is to bring down the deficit to 6.8%. The control of the public debt, which makes the country very vulnerable to international shocks, is also a priority. The ten-year development program presented by the government emphasises the urgency of updating public infrastructures in order to reach a growth level higher than 10% by 2020.

A market-oriented banking system, a skilled labor force, a restored political stability and the remittances from the Sri Lankan diaspora (mainly from the Middle East) are positive factors to the country’s economic growth. However, high poverty levels, low agricultural productivity, poor infrastructure facilities and inefficient public companies are obstacles that the country has to confront.

Invest in Sri Lanka:

Positioned as the Gateway to Asia, the country’s open economy, attractive laws, tax rates and constitutional guarantees, resilient workforce, strategic access to Indian market and solid infrastructure, makes Sri Lanka a favourable destination for investment.

With the country to be developed as a major regional hub more opportunities for investment are presented. Sri Lanka is situated at the crossroads of major shipping routes between South Asia and the Far East, with the Colombo Port becoming a major trans-shipment hub in recent years.

The quality of life in Sri Lanka is the highest in the South Asian region, and comparisons have shown that the country offers one of the most liberal business environments in Asia. The country’s investment laws are transparent and automatic across a wide range of sectors. Under the terms of the Board of Investment law, the BOI has wide ranging authority to grant exemptions from various laws including Inland Revenue, Customs and Exchange Control.

The Board of Investment of Sri Lanka (BOI) is structured to function as a central facilitation point for investors. With a high powered Cabinet Sub Committee set up to strengthen the BOI, clear all bottlenecks and ensure speedy clearance of investment approvals, investors can implement projects in a hassle free atmosphere. Investment climate monitoring is also being improved to ensure the nation’s competency profile.

Key Sectors for Investment:

Tourism and Leisure:  Tourism sector has been experiencing an impressive growth both in terms of arrivals and the revenue to the country in foreign exchange.

Tourist arrivals in 2010 (654,000) recorded a growth of 46% over the previous year and the earnings for 2010 (US$ 501 mn) have increased by 42%. Projected arrivals for the current year (2011) is 800,000 and the sector targets an inflow of 2.5 million foreign visitors in 2016 with earnings to reach US$ 2.75 billion. The sector directly employs 52,000 persons and indirectly provides livelihood for over 100,000. As most of the tourism activities and establishments are dispersed evenly throughout the country, the sector has the unique potential to share the economic benefits with the community at large.

The leading sub-sector is accommodation – hotels / boutique hotels / guest houses / villas – which comprises 1215 establishments of which only 256 are classified as graded hotels. The total room capacity of 22,735 of which 15,529 rooms are available in the graded hotels & villas which is 68% of the total. It is estimated that an additional accommodation capacity of 35,000 is needed for the next 05 years to accommodate increasing arrivals. To achieve the required level of accommodation capacity and other services, the sector requires an investment of US$ 3 billion over next 05 years into the following segments / sub-sectors which provides diversified Key Sectors for Investment for investors.

Emerging Key Sectors For Investment have already attracted the attention of the international investors including-Shangri-La Group, CATIC (China) The Minor group (Thailand) and M-Far Hotels (Oman) who have committed substantial investments. Additionally Sixth Sense Hotels, Banyan Group, Accor Hotels, Dushit (Thailand), and ITC (India) are currently exploring the opportunities.

Investment laws permit 100% foreign ownership in this Sector. Foreign Investments over US$ 10 million are allowed to outright purchase land and properties pertaining to the project.

Infrastructure:  The massive infrastructure development is expected to support the country to maintain a high and sustainable growth in the medium and long term. Timely development of economic infrastructure will help to increase economic efficiency while expanding the production capacity of the economy, facilitate productivity enhancement and reduction of regional disparity. In 2010, the economic infrastructure development programme of the government focused on all areas of infrastructure; development of roads, water supply and sanitation, ports and aviation, transport, housing and urban development, establishment of industrial zones, hospitals and warehousing and logistics centres etc.

The construction sector expanded significantly by 9.3% in value added terms in 2010 compared to 5.6% in 2009. Increased activity in construction was depicted by the growth in domestic production of building material by 12% during the year. Cement availability grew by 18.1 per cent in 2010 compared to a contraction of 11.1%in the previous year. The increased involvement in the private sector was reflected in the growth of private sector credit for construction purposes by 19.3% during the year.

The construction sector expanded with the acceleration of the ongoing road development projects such as expressways, inter-regional national highways and mega construction projects and urban development projects together with construction of houses and reconstruction work done in newly liberated areas boosted construction activities in the country.

Knowledge Services:  The Knowledge Services sector which encompasses IT software development, Knowledge Process Outsourcing / Business Process Outsourcing industry, IT and IT enabled services and IT Training sectors, has tremendous potential to emerge as a key growth sector in Sri Lanka. Given the quality of students, level of English and literacy, and the proximity to India, Sri Lanka is in an ideal position to develop into a high value added IT / KPO services provider. The Industry has set the target of Export revenues of US$ 1 Bn and Employment of 100,000 by 2015 and well on the way to achieving them.

IT Software Solution: There are over 100 software developments operations in Sri Lanka which caters to both independent and captive markets. Sri Lankan companies have been able to develop software products of their own which have earned them international recognition such as: Millennium Information Technology (Pvt) Ltd, Virtusa (Pvt) Ltd, Industrial and Financial Services R & D International (Pvt) Ltd, Metatechno Lanka Company Ltd., WSO2 Lanka (Pvt.) Ltd.

KPO / BPO industry is an emerging sector in Sri Lanka. A still nascent industry, within its short history since 2000, KPO / BPO sector has come a considerable distance while being able to attract some of the BPO / KPO giants in the world. Sri Lanka is growing in reputation for niche areas of Financial and other Professional Services, Transaction processing and Document management, and call center services thanks to high literacy rates (approximately 92%) and growing accounting graduates pool such as HSBC Data Processing Lanka (Pvt.) Ltd, WNS Global Services (Pvt.) Ltd, Office Tiger Lanka (Pvt.) Ltd ( RR Donnelly), Amba Research Lanka (Pvt.) Ltd. Hellocorp (Pvt.) Ltd.

IT enabled and IT related Services sector identify projects which require extensive use of information technology for the provision of services such as Server farms, Business Services etc. current there are close to 30 companies operating under the Board of Investment of Sri Lanka.  Dialog Business Services (Pvt.) Ltd, MphasiS Lanka (Pvt) Ltd, hSenid Mobile Solution (Pvt) Ltd, Heyleys Business Solutions (Pvt) Ltd.

IT Training Centres: In an effort to develop Sri Lanka to a Knowledge Services the education industry has been identified as one of the key areas of interest to the government of Sri Lanka. In order to ensure a consistent work force flow to meet the growing employee requirement of the knowledge services industry, IT Training has been identified individually and has been given priority. There are around 20 IT Training Centres under the BOI. Asia Pacific Institute of Information Technology Lanka (Pvt) Ltd (APIIT), I D M Computer Studies Islandwide (Pvt) Ltd

Utility sector: covers the BOI enterprises established for the development, improvement or enhancement of common facilities to the public.

Power & Energy Sector: The base demand for power in Sri Lanka was 2517 MW in 2010 and is forecasted to increase up to 5306 MW by the 2020.

In view of the growing demand for power, it has been planned to increase the power generation capacity to 3470MW in 2012 and to reach 6367 MW in 2020, respectively.

The Ceylon Electricity Board plans to generate 20% of the Power supply from renewable energy sources by 2020 from 6% at present. For the purpose of bridging this gap, sufficient investment opportunities will be envisaged on development of renewable energy sector through wind, dendro, solar and mini hydro power plants.

Telecommunication Sector: Sri Lanka’s telecom sector has shown a significant growth in recent times. The sector has been the No.1 contributor of Foreign Direct Investments (FDI) to the county totalling well over US$ 1.5 Billion.

The telecom sector is expected to expand the capability of users for quick adaptation to digital technology, create partnerships with the private sector to improve information and knowledge sharing, upgrade the telecommunications services to meet the expectations and requirements of government, business communities international community’s & general public and minimize the regional disparity of telecommunication facilities.

The expansion of the e-governance network, the improvement of access to telecommunication facilities, the establishment of dedicated Economic Zones and Telecommunication Parks and the encouragement of the private sector to set up ICT Institutions are among the future strategies to move forward this rapidly growing sector.

Ports Development Sector: The island’s port strategy will centre on six major port: Colombo, Hambantota, Galle, Trincomalee, Kankasanturai and Oluwil. The government has given the highest priority to the development of port infrastructure in recent years. Key port development projects are Colombo South Harbour expansion project, Hambantota Port Development Project, Kankasanturai port development and restoration, Oluvil Port Development Project, and Galle Tourist Port Development.

Colombo South Harbour Development which is considered to be one of the single largest FDI secured for an investment project with an investment of US$ 500Mn (with major investment coming from China) has finalized the BOT agreement with the Sri Lanka Ports Authority for the first terminal. The initial phase of this project is targeted to complete the work of a 600 meters quay length with a capacity handling of 1.2 million tons per annum.

The apparel industry: Sri Lanka had a modest beginning in the 1960s producing mainly textile and clothing for the local market under heavy protection.

The export oriented production of clothing (readymade garments) began in 1970s and expanded rapidly after the liberalization of the economy in 1977. When Sri Lanka liberalized its economy in 1977 the country’s garment industry took off immediately mainly as the quota hopping East Asian garment exporters who were attracted by the country’s liberal trade regime relocated their already well-established garment business to Sri Lanka due to low labour cost which ensured the production costs being low. This relocation encouraged local business community to commence its own garment enterprises to exploit markets guaranteed by quotas assisted by the liberal trade regime for importations and subsequently incentives granted by the Board of Investment of Sri Lanka (BOI) including tax holidays and other fiscal and non-fiscal concessions.

The apparel sector is the highest industrial employment generator and the highest foreign exchange earner. The total export income of the sector for the year 2010 was US$3.5Bn which is equivalent to 42.2% of the total exports of the country and 56.5% of industrial exports in 2010 reflecting a 7.0 percent growth during the year.

Apparel manufacturers comprise nearly 90% of the textile/apparel sector in Sri Lanka. They produce a wide range of international branded clothing such as Victoria’s Secret, Liz Claiborne, Pierre Cardin, Nike, Gap etc. BOI approved ventures account for almost 90% of Sri Lanka’s total garment export.

Garment exports to EU which constituted approximately 50.7% of total apparel export increased by 3.0% to US$. 1.678 Mn. in 2010 and exports to USA which is the 2nd largest market increased by 5.5% to US$ 1,678Mn in 2010. The industry target is to increase the export value to US$ 5Bn by 2016.

The employment generation exceeds 250,000. A large portion of Sri Lanka’s factory workers are women and as of 2010, 350,000 women are employed in the country which is 85% of the industries work force. Originally, the industry commenced as a sewing operator (contracted Manufacturer) and dependent on textile quota offered by USA and EU and currently it has transformed into a full apparel solution provider.

Export Manufacturing: Being one of the key sectors which generates over 25% of national industrial exports, 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 different segments.

A: Export oriented sector to manufacture and export non traditional goods to generate foreign exchange earnings, employment, local value addition and the enhancement of industrial base is to be promoted by giving corporate tax exemptions. Customs duty exemptions will be granted for capital items and all other required items during the operational period of the project.

Under this category, projects to manufacture and export of all non traditional products other than black tea in bulk, crepe rubber, sheet rubber, scrap rubber, coconut oil, desiccated coconut (other than desiccated coconut manufactured using continuous scale automated process technology and marketed with a quality guarantee) copra, fresh coconuts, coconut fibre will be promoted.

Presently over 30% of the total exports under the BOI is contributed by the manufacturing sector other than apparel and over 60% of the national industrial export other than apparel is contributed by the export oriented manufacturing projects operating under the BOI.

B: Newly targeted local market oriented sector is to be promoted by granting the same tax exemptions given to export oriented manufacturers to encourage manufacturers which substitute the imported products. Customs duty exemptions will be granted for capital and construction items during the project implementation period.

The following products are to being promoted under this category and such products are permitted to be supplied for both local and export markets.

  • Boats
  • Pharmaceuticals
  • Tyres and tubes
  • Motor spare parts
  • Furniture
  • Ceramics, glassware of the mineral based products
  • Cosmetic products
  • Edible products manufactured out of the cultivated agricultural products
  • Construction materials

Projects under Strategic Development Project Act

A: Large Scale Projects which are in the national interest and which are likely to bring economic and social benefits to the country to change the landscape of the country preliminary through giving benefits to the general public, substantial inflow of foreign exchange, substantial employment which enhance the earning opportunities and envisaged transformation in terms of technology.

Tax exemptions up to a maximum of 25 years and other exemptions of other levies would be granted by the State depending upon the meeting the objectives referred above in the Act.

Export Services: It is a policy decision of the Sri Lanka government that the country’s further development should be based five major service-related hubs: naval, aviation, commercial, energy and knowledge.

The services sector contributed almost 60% to the country’s GDP in 2010. This sector grew by 8% in 2010 compared to 3% in 2009. In line with government policy, the BOI has given special emphasis on developing these hub areas by promoting investors in Export Service Sector where enormous opportunities are available for foreign investors. Adding further impetus to the development of this sector is the significance of the strategic geographical location of Sri Lanka.

With the large expansions currently taking place in the Ports sector, it is expected that foreign as well as local investors will have a major role to play in the marine related export services including the following:

  • Ship repairing and ship building
  • Marine support industries
  • Rigging & offshore engineering
  • Supply of spares, food, water and other goods
  • Medical evacuation and assistance
  • Bunkering
  • Maintenances Services

Apart from the above, other export services are promoted by the BOI on a case by case basis. (Eg. Services supporting export manufacturing, Aviation Services, other direct and indirect export services). Main criterion for export services sector is to earn a minimum of 70% income in convertible foreign currency.

Agriculture: There are significant opportunities for investors in the agriculture sector both for the domestic market and for value added exports. The agriculture sector plays a key role in the country’s economic development and its new role has been redefined in the light of the development goals of the nation.

The agriculture sector contributes 12% to the GDP of the country, 25% of total export earnings and 30% of national employment in the year 2010.

The three main traditional export crops from Sri Lanka are Tea, Rubber and Coconut. Since these industries are already well established, the main focus of BOI is in terms of developing other agricultural crops particularly by enhancing domestic value additions. The government looks to specialised investment to improve productivity, level of technology innovation, access to international markets, use of quality seeds and planting materials and improve overall value addition. Some of the opportunities include:

Horticulture: Sri Lanka aims to be recognized as one of the best horticulture produces in the world. In cut flower production there are opportunities for investors who can bring in new hybrid varieties imported from overseas which can be used as mother plants and modernised with tissue culture technology. Similarly opportunities are available to produce fruits and vegetables for the export market such as the Middle East, Japan including by the use of out grower system.

Enhancing of values addition: There are many areas in which value addition can be enhanced in the agro based sector for e.g. Sri Lanka has been one of the largest exporters of variety spices. However much of the exports has been in raw commodities form. The government encourages the induction of investors who can enhance the domestic value addition in Sri Lanka so that these items are exported in high value forms.

Fisheries: Sri Lanka has considerable fisheries potential in offshore/deep sea, inland fisheries and aquaculture. The fisheries sector contributes around 1.2 per cent to GDP and employs over 650,000 people directly and indirectly through related activities.

Livestock: The livestock sector consists mainly of the dairy and poultry sub-sectors, which are considered as priority areas for growth, employment generation and increasing income of rural farmers. The livestock sector accounted for about 1 per cent of GDP in 2009. About 670,000 smallholders are engaged in the sector. As of 2009, local milk production covers only 33 percent of the national consumption. Around 63,876 mt of milk and milk products valued at over US$ 296 have been imported in 2009 and it represented 2.1 percent of Sri Lanka’s food imports.

Overall, Sri Lanka has much to offer both local and foreign investors in the Agriculture, Livestock and Fisheries sectors including diverse agro zones for agro based industry and access to a large fishing area.

Education: The role of especially Higher Education is a major driver of economic development in Sri Lanka. Higher Education in the country is now in a unique position, as Sri Lanka’s future in the global knowledge economy depends critically on the country’s human capital.

As the country is geared to take off and advance as a fast growing middle income country, it is critically important that Sri Lanka has the human capital needed to compete with the global knowledge economy. Thus Sri Lanka needs a higher education system which can produce skilled, hard working and enterprising graduates. Also the country needs a research an innovation capacity capable of promoting dynamic economic development.

The knowledge hub initiative will help to develop Sri Lanka as a destination for investments in Higher Education and position the nation as a centre of excellence and regional hub for learning and innovation.

The state university sector comprises 15 universities, 6 post graduate institutes and 9 other degree granting universities. The capacity of the state university system is limited and not more than 17% of the 120,000 students who qualify for university education can gain admissions to these Universities.

Sri Lanka has targeted achievement of excellence in higher education by 2020, becoming the most preferred country for higher education in the Asian subcontinent. It will be among the top countries for higher education in Asia. The government has already commenced the formulation of necessary legislation to regulate private sector higher education institutes.

While the state university systems perform as the main provider of the university systems, the establishment of private universities will be encouraging the government to attract approximately around 50,000 foreign students to Sri Lanka through proposed private universities. These universities are also expected to absorb, on average the 12,000 Sri Lankan students leaving the country for higher education and thereby protecting foreign exchange savings and earnings.

Incentives:

 

1. Corporate Tax Incentives for New Undertakings

1.1 Tax incentives with no minimum investment threshold

1.2 Small Scale Undertakings

1.3 Medium Scale Undertakings

1.4 Large Scale Undertakings

1.5 Strategic Import Replacement Undertakings

2. Project Expansions for Existing Undertakings

2.1 Small, Medium & Large Scale Undertakings

2.2 Strategic Import Replacement Undertakings

3. Strategic Development Projects

4. Import Duty Exemptions

5. Customs Duty , VAT and PAL – Exemptions on imports of capital goods

(for Large Scale Undertakings and Strategic Import Replacement Undertakings)

6. Tax on Dividend Exemptions

7. Exemption on Exchange Control

 

FDI in Figures

FDI inflows in Sri Lanka have been in a constant increase during the last recent years. After a slowdown provoked by the global recession, the flows have restarted to increase in 2010, stimulated by the end of the civil conflict and the economy revival.

For many years, the civil war had been a significant hindrance to the development of FDI. But, since the peace has been restored, the country offers many positive features that can attract FDI such as: the measures taken by the government (creation of free-zones, reduction of food subsidies and other consumption goods), the geographical strategic location of the country near two regions of high growth (India and Southeast Asia), and the tourism potential, which is yet to be fully exploited.

Electricity, textiles and telecommunications are the sectors that attract most of the foreign investments from countries like Japan, Australia and Germany, which are the main investor countries.

Foreign Trade Overview

Sri Lanka is open to foreign trade, which represented almost 60% of the country’s GDP in the 2007-2009 period. The country’s trade policy aims at moving towards a trade system based on exchanges, with the objective of strengthening and increasing international market access for Sri Lankan products. In view of this, the government has signed several bilateral and multilateral trade agreements, especially at a regional level.

Customs duties are not very high and the country is easily accessible. Nevertheless, there are some non-tariff trade barriers restricting speculative trading by commercial banks, a VAT on profits before taxes and salaries and the inadmissibility of electronic documents in courts.

After having been reduced under the effects of the global economic crisis, the trade deficit became larger again in 2010 and it is estimated that trade will remain unfavourable during the next coming years.

Sri Lanka exports textiles and clothes, tea, spices, precious stones, coconut derivatives, rubber products and fish to the United States, the United Kingdom, India, Germany, Belgium and Italy. It imports textiles, mining products, fuels, food, machinery and transport equipment from India, China, Iran, Singapore and South Korea.