Sri Lanka has achieved a notable milestone by surpassing USD 1 billion in foreign direct investment (FDI) inflows for 2025, including equity investments and foreign commercial borrowings by Board of Investment (BOI) enterprises. BOI Chairman Arjuna Herath highlighted this during a recent presentation to Parliament’s Committee on Public Finance (COPF), describing it as an early sign of recovering investor confidence and positive changes within the institution. While encouraging amid ongoing economic recovery, this figure falls short of the levels required for robust, sustained growth and must be viewed in historical and structural context.
Policymakers, investors, and stakeholders now face a critical juncture: without relying on large fiscal concessions which Sri Lanka lacks the space to offer the country must prioritize hard structural reforms to build competitiveness, attract higher-quality FDI, and target ambitious annual inflows of USD 2–2.3 billion initially, scaling toward USD 5 billion or more.
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Celebrating Progress Amid Recovery
The 2025 achievement reflects improved institutional processes at the BOI and renewed interest from international players. It includes a mix of equity and debt-like borrowings, with greenfield projects those creating new facilities and jobs representing only about 15% of inflows. This marks progress from recent challenging years but remains below peaks seen in earlier periods of policy stability.
Historical examples underscore what is possible: liberalization in the telecommunications sector during the 1990s catalyzed broader FDI surges. Mechanisms like the Strategic Development Project Act have supported recent investments, approving 14 projects, though applications have sometimes been arbitrary and inconsistent.
For investors monitoring Sri Lanka’s trajectory, this milestone signals stabilizing conditions and opportunities in emerging sectors. Stakeholders should recognize it as foundational momentum that requires reinforcement through decisive action.
Key Challenges Limiting FDI Potential
Sri Lanka faces structural barriers that hinder competition with regional peers offering generous incentives. High energy and construction costs remain among the region’s highest, with electricity tariffs at 13–14 cents per unit deterring manufacturing and export-oriented projects. Governance perceptions, policy unpredictability, infrastructure gaps, labor market constraints including skill mismatches and low female participation and regulatory delays continue to erode confidence.
Annual investment needs far exceed current inflows: USD 7–10 billion for sustainable development goals, USD 3–5 billion for infrastructure, USD 2–3 billion for climate finance, and a USD 695 million gap for women-led enterprises. Without addressing these, FDI will remain inadequate, limiting job creation, technology transfer, and export diversification.
Policymakers must acknowledge that past policy reversals have undermined trust, while investors should weigh these risks against the country’s strategic location, skilled workforce potential, and natural resources.
Essential Reforms for Competitiveness
Chairman Herath emphasized that Sri Lanka cannot compete on concessions alone and must focus on “hard reforms” to lower costs, ensure policy certainty, and enhance efficiency. Key priorities include:
- Reducing energy costs through renewable projects secured below 4 cents per unit, targeting overall tariffs of 7–8 cents.
- Advancing legal frameworks like the proposed Investment Protection Act and reviews of the Economic Transformation Act for greater predictability.
- Establishing a dedicated commission with legislative authority to expedite approvals and resolve investor grievances.
- Upgrading connectivity via highways, ports, airports, and logistics to support manufacturing-led growth.
- Maintaining macroeconomic stability to prevent reversals that scare capital.
The government is shifting toward proactive investment promotion, including structured opportunities in data centres, green hydrogen and green ammonia projects, mineral sands (with around USD 1 billion in proposals pending policy clarity), and pilot programs for technology startups.
These steps would unlock higher equity-based FDI, particularly greenfield investments, fostering long-term partnerships rather than short-term borrowings.
A Call to Action for Stakeholders
Policymakers: Accelerate structural reforms without delay. Prioritize energy cost reductions, legal certainty, and infrastructure upgrades to create an environment where FDI flows naturally. Avoid arbitrary incentives; build a credible, rules-based system that withstands political changes.
Investily, implement the proposed commission and proactive sector calls to signal commitment.
Investors: View 2025’s milestone as an entry point. Engage with emerging opportunities in renewables, minerals, technology, and manufacturing, where policy clarity could yield high returns. Partner with local enterprises to navigate reforms, focusing on sustainable, job-creating projects.
Stakeholders including business councils, SMEs, and international partners: Advocate for inclusive reforms addressing labor skills, governance, and women’s economic participation. Support public-private dialogues to align incentives with national goals, ensuring broad-based growth.
Sri Lanka stands at a pivotal moment. The 2025 FDI achievement demonstrates recovery potential, but sustaining and scaling it demands bold, concession-free reforms. By addressing core challenges head-on, the country can regain historical FDI peaks, drive export-led expansion, and achieve resilient prosperity. Collective action now will determine whether this milestone becomes a turning point or a fleeting gain.
(Disclaimer: This analysis is based on public statements by the BOI Chairman and is for informational purposes only. It does not constitute investment advice. Economic conditions and policies are subject to change; consult official sources and professionals for decisions.)
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