US Report Flags Policy Uncertainty and Regulatory Barriers in Sri Lanka’s Investment Climate

October 01, Colombo (LNW): Sri Lanka’s investment environment continues to face significant obstacles despite the country’s recovery from the economic crisis, with policy uncertainty, regulatory delays and bureaucratic constraints remaining major concerns for foreign investors, according to the latest US Department of State assessment.

The department’s 2026 Investment Climate: Sri Lanka report acknowledges that the economy expanded by around five per cent last year, exceeding earlier expectations. It also notes that the decisive electoral victories secured by President Anura Kumara Dissanayake and the National People’s Power (NPP) coalition in late 2024 have contributed to greater political stability.

The report says the Government’s continued commitment to Sri Lanka’s US$3 billion, four-year Extended Fund Facility programme with the International Monetary Fund has helped reassure investors. Nevertheless, uncertainty remains over the Government’s long-term approach to private and foreign investment, with what the report describes as mixed messages from the NPP leadership contributing to investor caution.

The assessment, which was made available to the Sri Lankan media by the US Embassy in Colombo, puts foreign direct investment at US$1.06 billion in 2025, equivalent to roughly one per cent of gross domestic product. The report notes that this remains well below the three to four per cent of GDP often recorded by emerging economies.

Manufacturing, port development, tourism, information technology and business process outsourcing, along with real estate, were identified as the principal recipients of foreign investment during the year.

The State Department report says investment professionals believe Sri Lanka needs to address several structural weaknesses if it is to meet the Government’s foreign investment ambitions. These include improving policy consistency, reforming regulations, expanding the pool of skilled workers, making industrial land more accessible, upgrading logistics and simplifying trade procedures.

Access to preferential export markets through free trade agreements is also regarded by investors as an important consideration. According to the report, such agreements can strengthen Sri Lanka’s export competitiveness while lowering the cost of imported raw materials and intermediate goods.

US companies, meanwhile, continue to examine opportunities in areas including information and communications technology, energy, aviation and defence. However, the report says regulatory unpredictability, bureaucratic obstacles and concerns over transparency continue to restrict wider investor participation.

Although the Government has repeatedly expressed support for attracting foreign capital, the report questions whether existing institutions have sufficient capacity to translate that policy position into a consistently open and investor-friendly environment.

Investors have reportedly raised concerns over changes to projects and regulations, lengthy decision-making processes and limited institutional support once businesses are established. The IMF and local business chambers have also stressed the importance of deeper structural reforms, particularly in trade facilitation, digitalisation and governance.

The report identifies the Board of Investment (BOI) as a particular area requiring reform. While the BOI is the country’s principal agency for promoting investment, the report says it has struggled to operate effectively as a genuine ‘one-stop shop’ because decision-making powers remain spread across several government institutions. This fragmentation can result in lengthy approval procedures and discourage potential investors.

Foreign companies have also reported difficulties maintaining consistent engagement with the BOI. In May 2026, the agency introduced its Ready to Invest digital platform, offering investors access to sector-specific investment opportunities.

Despite these initiatives, the report points to unnecessary regulations, legal uncertainty and slow bureaucratic responses as continuing impediments. It also highlights shortcomings in the energy sector, arguing that inefficient state-owned enterprises, including the Ceylon Electricity Board, can restrict access to competitively priced and reliable energy required by industrial investors.

High transaction costs, shifting policies and concerns surrounding the transparency of public procurement have likewise been identified as recurring issues.

At the same time, the report notes that Sri Lanka formally maintains a relatively open framework for foreign investment. The Government permits full foreign ownership in most sectors, while constitutional provisions provide protections for investments and allow investors to repatriate earnings, fees and capital.

The report nevertheless points to several high-profile projects as illustrations of the uncertainty confronting investors.

Among them is a proposed US$3.7 billion Sinopec oil refinery project. President Dissanayake announced a commitment to finalise the project in January 2025, with the proposed refinery planned for an area adjoining the Chinese-operated Hambantota International Port. According to the State Department, however, the project remained unresolved as of June 2026 amid differences between the Government and Sinopec.

The report also refers to the decision by India’s Adani Green Energy to withdraw from a proposed US$400 million, 484-megawatt wind power project in northern Sri Lanka in February 2025. It says the company withdrew after the Government sought to renegotiate terms of the previously awarded project.

Another example cited is the Government’s decision in December 2025 to end negotiations with China Harbour Engineering Company over a proposed floating liquefied natural gas terminal shortly before the agreement was expected to be signed.

The report further notes that the NPP administration has moved away from plans to privatise a number of state-owned enterprises, opting instead for restructuring and turnaround measures.

While the Government continues to publicly promote Sri Lanka as an investment destination, the State Department says some investors remain concerned about contrasting messages from senior officials, particularly where calls for increased state participation in economic activity sit alongside efforts to attract greater foreign investment.

The assessment ultimately suggests that improving investor confidence will depend not only on policy announcements but also on the Government’s ability to provide greater consistency, transparency and efficiency in implementing those policies.

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