Sri Lanka’s investment environment is hobbled by unpredictable rules and continues to suffer from regulatory unpredictability and excessive bureaucratic discretion, according to the US Department of State’s newly released 2025 Investment Climate Statement. Despite 5 percent GDP growth in 2024 and renewed political stability following last year’s elections in Sri Lanka, the report notes that foreign direct investment remains constrained.
Most deals fall in the $3–5 million range, far short of the government’s ambitious $5 billion FDI target for 2025. The State Department’s analysis, which finds that regulatory uncertainty is deterring investors, points to deep-rooted structural weaknesses: cumbersome tax rules, rigid labour laws, slow-moving approvals and inadequate consultation with the private sector.
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The Board of Investment, intended as a one-stop shop for investors, remains hamstrung by fragmented authority and overlapping ministries, creating “lengthy approval processes that frustrate potential investors.” The report highlights that Sri Lanka’s “excessive bureaucratic discretion” combined with sudden policy shifts often undermine investor confidence. Citing the Indian conglomerate Adani’s withdrawal from Sri Lanka’s energy sector as a cautionary tale, the US report underscores how policy reversals have tangible costs. In February 2025, Adani Green Energy pulled out of a proposed $400 million wind power project in northern Sri Lanka.
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The company cited government efforts to renegotiate a previously awarded contract as the key reason for its withdrawal. Analysts say the Adani exit serves as a warning for other multinationals: despite official rhetoric encouraging investment, the risk of reversals remains high. In another example cited, the Sri Lankan government shelved a proposed investor-friendly labour law reform after taking office in November 2024, increasing uncertainty for companies evaluating long-term commitments.
While President Anura Kumara Dissanayake’s administration has pledged to finalize largescale foreign projects including a $3.7 billion Sinopec refinery adjacent to the Chinese controlled Hambantota Port its broader approach sends mixed signals. The government has halted privatization plans for major state-owned enterprises, opting instead for state-led “turnaround” reforms. Some senior officials have openly criticized private-sector growth and promoted collectivist models as a preferred path.
The IMF and local business chambers have repeatedly urged Colombo to undertake comprehensive structural reforms, including digitization of key agencies, improved governance and clearer trade facilitation measures. But for now, the US report suggests that unless Sri Lanka modernizes its regulatory framework and reins in bureaucratic discretion, large-scale foreign investors will remain cautious.