For all its outward appearances of recovery – a stabilised currency, moderated inflation, and a steady stream of optimistic rhetoric from the Government – Sri Lanka’s economic revival remains fragile at best. At least that is the opinion of the United States’ Department of State, whose country analysis serves as a key reference for global investors. Its Country Report on Sri Lanka, released late last month, delivers the sobering verdict that the country’s investment climate is plagued by uncertainty, inconsistency, and an alarming lack of institutional capacity. And to add to that, rapid politicisation of the State – a definite ‘no-no’ for the global investor community, which is now privy to the state of the nation with uncomfortable clarity.
The report’s message, though diplomatically couched, is unmistakable. While the Government speaks of reform and openness, its actions tell another story of bureaucratic paralysis, regulatory volatility, selective transparency, and a host of other concerns. These, the report notes, have made Sri Lanka one of the region’s most difficult places to do business. It points out that investors complain not only about the unpredictability of rules and regulations but also about slow decision-making, arbitrary reversals of approved projects, and an overall sense that the system remains tilted in favour of political expediency over economic rationality.
Take for instance the ha-ho over the LGBTQIA+ tourism promotion issue. One day the Chairman of Sri Lanka Tourism officially writes encouraging such tourism, while a week later his own Tourism Minister – and later the President himself – throws him under the bus, stating that the Government has no intention of promoting LGBTQIA+ tourism.
The State Department report is damning not merely because it comes from Washington but because it reflects what local business chambers and the IMF have long been saying: that without genuine structural reform, particularly in trade facilitation, digitalisation, and governance, Sri Lanka’s economy will remain trapped in a cycle of short-term stabilisation followed by long-term stagnation.
For all intents and purposes, the NPP Government appears both deaf and blind to the gravity of the situation. It continues to bask in its own ideological glow, unaware that its Marxist-tinged political identity, which once fuelled its populist rise, now serves as a red flag to global capital. Investors, especially those in the West and Asia’s major financial hubs, remain wary of engaging with a government they perceive as ambivalent towards market economics.
Foreign investment, more than any other inflow, determines Sri Lanka’s capacity to rebuild foreign reserves and sustain its IMF-backed recovery. Yet, for over a year, the country’s foreign exchange reserves have stagnated at just over $ 6 billion – a figure that includes $ 1.5 billion in unusable Chinese swap funds tied to stringent criteria. This stagnation, coupled with growing outflows and weak export diversification, underscores the dangerous reality that the Government is running out of both time and options.
There is also the problem of competence, or in other words, the absence of capable leadership within key ministries spearheading economic revival. The Ministry of Industry provides a painful case in point. At a time when expanding the manufacturing base is crucial for boosting exports and generating foreign currency, this ministry has become emblematic of the Government’s glaring ignorance.
During a recent public exhibition in Colombo, the Minister of Industry proudly proclaimed that Sri Lanka had “won the Nobel Prize for tea,” a hilarious claim that instantly went viral. What the Minister was referring to was a charity auction where a Guinness Record price had been paid for a kilo of tea. His subsequent ‘clarification’ that it was a “slip of the tongue” only deepened public embarrassment. For a Government that prides itself on meritocracy and expertise, such ignorance from a key Cabinet member is not merely amusing but dangerous. It signals to the world that Sri Lanka’s industrial policy is in the hands of clueless amateurs.
Predictably, the ministry’s performance mirrors its leadership’s mediocrity. More factories have closed than opened in the past year while industrial output remains stagnant. No credible strategy has emerged to attract export-oriented manufacturing or to integrate local industries into global supply chains. These failures are not isolated missteps but part of a broader pattern of incapacity eroding investor confidence.
If incompetence were the only problem, Sri Lanka might still have hope. But it is compounded by the far more corrosive tendency to politicise State institutions. Since coming to power, the NPP has systematically appointed party loyalists to critical positions in the State apparatus, often disregarding merit, independence, or even legal eligibility. This creeping partisanship has now reached the very heart of the anti-corruption apparatus.
The controversy surrounding the appointment of Ranga Dissanayake as the new Director General of the Commission to Investigate Allegations of Bribery or Corruption (CIABOC) exemplifies this danger. Allegations surfaced that Dissanayake had previously been affiliated with the NPP’s Legal Committee, a claim he vehemently denies. But the circumstantial evidence is troubling. The selection process, overseen by the Constitutional Council (CC), initially ranked another candidate, a senior officer of the Attorney General’s Department, with higher qualifications, above Dissanayake. Yet, through an opaque second round of voting at the CC and what appears to have been an ‘accidental’ change of vote by an independent CC member, Dissanayake was able to secure the post.
Even if all procedures were technically followed, the optics are not that great. The Director General’s listed referees allegedly include two provincial governors appointed by the NPP, both known associates of the party’s political machinery. Moreover, questions remain about whether Dissanayake met the legal requirement of 15 years of prosecutorial experience. The growing perception that Sri Lanka’s chief anti-corruption watchdog is politically compromised is a blow from which the country’s credibility may not easily recover.
The law is clear: anyone with a political background is barred from holding this office. Yet, instead of taking the allegations seriously, Dissanayake has challenged his accuser, Nandana Gunathilaka, now a private citizen but formerly the JVP’s presidential candidate, to prove the claim. This inversion of accountability is telling. In a functioning democracy, it is the accused who must demonstrate impartiality, not the citizen raising concerns.
When the institution tasked with fighting corruption is itself mired in questions of political bias, the signal sent to investors and citizens alike is one of negativity. It reinforces the perception that justice in Sri Lanka is selective – wielded against opponents, shielded for allies. No international investor will willingly enter a marketplace where the rule of law is negotiable.
If the Government’s political choices were not enough to unsettle the business community, its fiscal policy has added fuel to the fire. The recent decision by the Inland Revenue Department (IRD) to abolish the Simplified Value-Added Tax (SVAT) scheme for exporters without first establishing a credible refund mechanism has sparked an unprecedented revolt among exporters.
Already struggling with high production costs, they now face the additional burden of paying VAT upfront, with no assurance of timely refunds. The IRD’s promise to reimburse within 45 days rings hollow when some VAT refunds have remained pending since 2010. Thus far three major business chambers have filed petitions in court, arguing that the move is unlawful and violates constitutional protections for fair and predictable taxation.
The Government had earlier justified the abolition of SVAT on the assurance that an automated, risk-based refund system would be operational by October 2025. Yet, as of today, no such system exists, nor has the Government published criteria for determining which exporters qualify for priority refunds. This not only erodes business confidence but also reveals a deeper dysfunction within the State – an incapacity to plan, coordinate, and execute fiscal reforms.
According to the US report, the Government’s ideological ambivalence and erratic policy implementation have made it one of the least predictable investment destinations in Asia. The withdrawal of India’s Adani Group from a $ 400 million renewable energy project in the Northern Province following the Government’s attempt to renegotiate an already approved contract has been illustrated as a case in point.
By 2028, Sri Lanka must repay $ 5 billion in foreign debt repayments, a figure that could trigger another debt crisis if existing reserves are not strengthened soon. The temporary relief provided by ongoing debt restructuring has masked the urgency of the situation, but it cannot last forever. Unless the Government attracts significant foreign inflows and boosts exports in the next two years, it will once again find itself at the mercy of the IMF – this time under conditions far harsher than those currently in place.