By: Staff Writer
January 06, Colombo (LNW): Sri Lanka’s marginal recovery in Foreign Direct Investment (FDI) inflows masks deeper institutional and policy failures that continue to undermine the country’s ability to compete for global capital. While inflows edged just above the US$1 billion mark in 2025estimated at around US$1.1 billion compared to US$614 million the previous year analysts argue this improvement owes more to post-crisis normalization than to any coherent investment strategy.
At the center of the problem lies the Board of Investment (BOI), the state agency mandated to attract and facilitate foreign investments. Designed decades ago as a “one-stop shop,” the BOI today is widely seen by investors as constrained by outdated administrative structures, slow decision-making, and a near-total lack of policy flexibility. These shortcomings were underscored by the recent announcement that BOI Chairman Arjuna Herath will step down at the end of this month, just 16 months after taking office under the new government.
Although no official reason has been cited, Herath’s exit comes amid mounting frustration within government ranks over the inability to offer competitive incentives to investors. Any tax concession beyond existing frameworks requires approval from the International Monetary Fund (IMF), whose current programme treats such incentives as potential “revenue leakage.” Multiple proposals put forward by Sri Lankan authorities have reportedly been rejected by the IMF, often without consideration of their broader economic impact.
A Deputy Minister involved in IMF discussions said the Fund’s approach focuses narrowly on meeting revenue targets, rather than evaluating how selective concessions could expand the tax base, boost employment, and generate long-term growth. “There is no holistic assessment of economy-wide benefits,” the official noted, adding that alternative paths to revenue enhancement through private-sector expansion—are largely ignored.
This rigidity was reflected in Budget 2026, which offered few incentives to stimulate investment. Instead, the government lowered the VAT registration threshold from Rs.60 million to Rs.36 million annually, effectively widening the tax net at a time when businesses were hoping for relief. Despite stable headline macroeconomic indicators, dissatisfaction is growing within business circles, many of whom feel policymaking has become excessively IMF-driven.
Sri Lanka’s tax regime, coupled with high operating costs and policy uncertainty, offers little motivation for multinational firms to relocate or expand operations locally. Plans to introduce a politically sensitive property tax by 2027 even as state revenues improve have further dampened investor sentiment.
With indications that Sri Lanka will remain aligned with the IMF even after the four-year programme ends next year, concerns are rising about the absence of a clear, independent economic vision. Observers warn that without meaningful reform of institutions like the BOI, modest FDI gains risk stalling, eroding confidence in the government’s ability to deliver sustainable growth.
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