Foreign Direct Investment in Sri Lanka : Background Note

Overview & Synopsis

This report examines the role of foreign direct investment (FDI) in supporting Sri Lanka’s economic recovery amid its severe economic and financial crisis. Despite its strategic location and market access, Sri Lanka has attracted relatively low levels of FDI, averaging 1.1 percent of GDP between 2011 and 2021, with significant declines following political instability and the COVID-19 pandemic. The analysis identifies weaknesses in the investment climate, including regulatory complexity, policy uncertainty, restrictive entry requirements, inadequate investor protections, and extensive reliance on discretionary incentives. It highlights opportunities to leverage reinvestment from existing investors while emphasizing the need for macroeconomic stability, stronger institutions, improved investment facilitation, and a more coherent legal framework. The report recommends reforms to enhance transparency, policy predictability, investor confidence, and competitiveness, enabling Sri Lanka to attract higher-quality, export-oriented, and value-adding FDI that can contribute to sustainable growth and economic transformation.