• US DOS warns that halting SOE privatisation, despite advancing large-scale projects like the $ 3.7 b Sinopec refinery, creates investor uncertainty
• Foreign investors continue to face key impediments, including policy inconsistency, excessive regulation, and poor bureaucratic responsiveness

Though Sri Lanka’s National People’s Power-led (NPP) government has advanced inward investment through large-scale projects, its halt on the privatisation of state-owned enterprises (SOE) has sent foreign investors mixed signals, the United States’ Department of State (DOS) has said in its 2025 country-specific Investment Climate Statement on Sri Lanka.

“The NPP government publicly promotes a desire for inward investment. In January 2025, President Dissanayake committed to finalising a $ 3.7 billion Sinopec oil refinery project, the largest FDI project in Sri Lankan history, to be located adjacent to Chinese-controlled Hambantota International Port,” the DOS said, in its country investment overview.

“The NPP government also ceased the planned privatisation of many SOEs, choosing to implement turnaround reforms instead. Many potential investors remain reluctant to invest given these ongoing mixed messages.”

According to the DOS, the yearly issued statements offer a comprehensive overview of the investment conditions in over 170, providing a crucial starting point for US companies.

Furthermore, the statement added: “Some senior government officials regularly castigate private sector-led economic growth and publicly promote state-owned collectivism as the country’s preferred investment model.”

According to figures disclosed by the Ministry of Finance in April in its quarterly debt bulletin, as at 31 December 2024, Sri Lanka’s SOE debt reached $ 4,896 million.

Furthermore, Sri Lanka’s total government debt stood at $ 101.251.

By March, Sri Lanka’s central government debt reached roughly $ 96.1 billion, which was 96.1% of the nation’s GDP, at the time.

It further added that other key impediments foreign investors face include unnecessary regulations, legal uncertainty, and poor bureaucratic responsiveness.

“The stalled privatisation of deficit-ridden state-owned enterprises, notably the Ceylon Electricity Board, hinders development of cost-effective energy supplies crucial for industrial operations. Foreign investors consistently report high transaction costs, unpredictable policies, and opaque procurement procedures.”

Sri Lanka’s ruling NPP government had campaigned on the promise of re-negotiating Sri Lanka’s agreement made with the International Monetary Fund (IMF), towards recognising the impacts of austerity measures as a result of the programme, addressing subsidy reductions which the programme had mandated, and the effects of privatisation.

However, such negotiations had not transpired since its election. President Anura Kumara Dissanayake reaffirmed the NPP government’s dedication to the macroeconomic stability programme in November of 2024, during his inauguration speech.

The government has since largely continued the agreed-upon reforms, furthering the programme’s mandate, however with the exception of the privatisation of SOEs being halted.

The government has repeatedly expressed plans of several prominent SOEs to continue operating under government ownership.

The DOS stated that beyond policy inconsistency, the Board of Investment of Sri Lanka (BOI), which oversees investment promotion, is ineffective due to its fragmented nature and lengthy bureaucratic processes involved in providing investment approval.

“Sri Lanka’s implementation of foreign investment policies is inconsistent. The Board of Investment is the principal investment promotion agency, but struggles to function as a “one-stop shop” due to fragmented authority across multiple government departments, creating lengthy approval processes that frustrate potential investors. Investors report challenges in having a consistent and open dialogue with the BOI,” the DOS statement continued.

It further added that Sri Lanka’s Economic Transformation Act (ETA), passed in July 2024, had set parameters to abolish the BOI in favour of five new agencies.

However, implementation of the ETA stalled following the NPP’s electoral victory in late 2024, resulting in the BOI’s continued operation.

Addressing the state of the local capital market, the DOS said: “The Colombo Stock Exchange has recently diversified its offerings beyond listed equity and debt to include stock borrowing and lending, regulated short selling, and various bond types. Foreign investors may acquire up to 100% equity in publicly listed Sri Lankan companies operating in permitted sectors.”

Recognising the market’s performance in 2024, the DOS however stated that the local capital market’s overall liquidity continues to remain limited, warranting planning of exit strategies for investors.

“The market recorded unprecedented performance in 2024, achieving positive net foreign inflows of $ 66.5 million and mobilising $ 568 million in capital. Corporate earnings in the fourth quarter of 2024 reached $ 775 million (a 25.3% year-on-year increase). Despite this growth, overall market liquidity remains limited, necessitating careful planning of exit strategies for investors.”

Highlighting the lack of a national sovereign wealth fund, the DOS raised that Sri Lanka’s previous administration had signalled the roll-out of such a mechanism, however to no avail.

“Sri Lanka does not currently operate a sovereign wealth fund. The previous administration had proposed establishing a national wealth fund utilising government assets to channel revenues toward public welfare programmes, but these plans did not materialise.”

It concluded: “The country’s large, government-controlled pension funds, the Employees’ Provident Fund and Employees’ Trust Fund, function as major domestic institutional investors, focusing primarily on the government debt market.”