Investment opportunities in Sri Lanka

With a positive investment climate and a relatively open financial system, easy monetary policy and world-class local companies, Sri Lanka has great potential for significant economic progress in the coming years.

Sri Lanka Advantages

1. Easy Access to International Travel. Sri Lanka’s proximity to the Indian subcontinent makes the country a gateway to the 1.9 billion-strong South Asian market, while the country’s strategic location at the crossroads of major maritime trade routes connecting South Asia, the Far East, Europe and the Americas offers valuable opportunities for manufacturers looking to expand internationally.
2. A Vast Talent Pool. Sri Lanka has a diverse and versatile workforce that is ready to meet all your company’s requirements at a competitive cost. The country’s workforce is renowned worldwide for its expertise in precision manufacturing and its high trainability to handle complex processes and operations. The country prioritizes “workforce sustainability” by improving the national education system and access to it, and by introducing vocational training programmes to meet future demand in emerging industry sectors such as ICT, hospitality and tourism, light engineering and automotive, etc.
3. Rapidly Developing Infrastructure. Sri Lanka has made significant improvements in accessible infrastructure, which has been recognised as a national priority by successive governments. This includes an ambitious programme to develop and completely upgrade the seaports around the island, the international airports, the roads in the city of Colombo and the highways connecting it to other parts of the country, as well as energy and telecommunications facilities.
4. Access to Key Markets. Sri Lanka’s strategic location offers great opportunities for free trade agreements and partnerships with Asian countries.
5. Avoidance of Double Taxation. Sri Lanka has concluded double taxation agreements with 45 countries to eliminate or mitigate the effects of legal double taxation and avoid tax evasion in international trade (or transactions).
6. Investment Protection. Sri Lanka has concluded 26 bilateral investment promotion and protection agreements (BITs) to date, providing protection to foreign investments in the country. The government is developing its BIT model to meet the need to cover aspects of sustainable development principles while attracting foreign investment.

Sectors for Investment

Energy

The country plans to update 70 energy targets by 2030. The goal is to increase the country's power generation capacity from the current 4,043 megawatts (MW) to 6,900 MW by 2025, with a significant increase in renewable energy. Sri Lanka has already achieved a grid connection rate of 98%, which is relatively high by South Asian standards. However, the current economic crisis has affected all key segments of the economy, including the power sector. Electricity in Sri Lanka is generated from three main sources: thermal energy (including coal and fuel oil), hydropower, and other non-conventional renewables (solar and wind). However, weak energy policies, failures to expand renewable energy and upgrade the transmission network, and the lack of new power plants over the past decade have hampered the development of electricity supply in the country. Electricity sector reforms are currently underway. This will provide greater transparency and competitiveness, which is expected to attract more renewable energy investments to the country.

CEB’s baseline plan for 2023-2042 includes the development of a total capacity of 6,925 MW from renewable energy sources, including 4,705 MW from solar, 1,825 MW from wind, 195 MW from mini-hydro and 200 MW from biomass. The annual total electricity demand is about 14,150 gigawatt hours (GWh). Annual electricity demand is expected to increase by 4.9% over the next 20 years, constrained by high prices. CEB engineers currently estimate a baseload capacity shortfall of 300 MW. CEB has started purchasing emergency thermal power to maintain supply.

The 300 MW LNG combined cycle power plant at Kerewalapitiya, on the outskirts of the capital Colombo, is under construction and scheduled to be operational by the end of 2024. An ADB-sponsored study on the India-Sri Lanka grid connection is in its final stages and will provide a financial and economic assessment and possible business models. The existing refinery is over 45 years old and urgently needs to be upgraded to meet demand from the oil sector. The Electricity Act was amended in June 2022 to expedite renewable energy projects.

The Sri Lanka Sustainable Energy Authority (SLSEA) is actively promoting all forms of renewable energy. In September 2021, the government pledged not to build new coal-fired power plants, but may still look to expand or upgrade existing plants.

Opportunities

• Investment opportunities in the energy sector include: wind, solar, LNG, conversion of diesel to dual-fuel (liquefied natural gas) power plants, mini hydro, solar home systems, wind power, electricity meters and switches, transmission and control systems, and power cables.
• The Sri Lanka Sustainable Energy Authority (SLSEA) is actively promoting renewable energy opportunities, and statistics show that the contribution of renewable energy is steadily increasing. Sri Lanka has vast solar and wind energy resources due to its location in the Indian Ocean. There are currently 11 wind farms connected to the national grid.

Telecommunications and Information Technology

Sri Lanka’s ICT sector and its sub-sectors including IT/ITeering services and Telecom for Sustainable Development Goals (SDGs) are projected to contribute US$15 billion to the digital economy by 2030.

The ICT industry says it is imperative for the government and policymakers to understand the importance of digitalization and facilitate its development by creating an enabling environment. The sector requires consistent and long-term policy interventions to improve the overall environment in which the industry operates. Improving the ease of starting and running a business, investing in education, training the workforce, responsive labour market regulation, improving access to finance, unlocking land supply and improving infrastructure will yield better results for the ICT sector and the overall investment climate. In 2018, the country initiated the process of adopting fifth-generation (5G) technology, and mobile companies have conducted 5G trials in the country, but 5G spectrum has not yet been officially sold to operators, limiting access to areas of Colombo. Sri Lanka is building a national fibre optic network linked to numerous international cables. This 45,000 km network, built and operated by Sri Lanka Telecom, will serve as the backbone for fixed broadband and mobile services, including 5G.

The ICT sector generated US$1.5 billion in foreign exchange in 2022 and employed around 175,000 skilled workers in the country. The ICT services sector is the country’s fourth largest export contributor, with over 300 companies currently serving multiple industry verticals. It is broadly segmented into information technology (IT) and information technology-enabled services (ITES).

The country aims to have widespread adoption of shared solutions and digital services by the end of 2024. Industry experts believe that the country will enter the third wave of technology during the digital transformation, with 750 tech companies, 1,000 IT and IT-enabled startups, and 500 other tech startups being established by the end of 2024. The state technology agency estimates that such expansion will enable the industry to achieve export revenue of US$3 billion.

Sri Lanka is also becoming a preferred destination for IT business process outsourcing in several key areas. The country’s software industry has grown significantly over the past decade. The software development services sector includes telecommunications, banking, financial services and insurance (BFSI), and software testing. The BPO sector includes financial and accounting services, investment research, engineering services, and legal services. According to the World Bank, Sri Lanka has relatively low labor costs compared to other BPO destinations. HSBC, RR Donnelley, Sysco LABS, Astron, 3SG, HelloCorp, Innodata, and WNS Global Services have set up call centers or BPO operations in Sri Lanka. Numerous foreign companies, many of which are small or medium-sized, develop software in Sri Lanka. The government aims to further develop the country as an information technology, call centre and outsourcing hub.

Sri Lanka’s telecommunications sector is one of the most dynamic sectors, contributing significantly, both directly and indirectly, to investment, employment, productivity, innovation and overall economic growth. Sri Lanka’s telecommunications market has 5 mobile operators serving a population of 22 million.

The country is connected to the Southeast Asia-Middle East-Western Europe 4 (SEA-ME-WE 4) and SEA-ME-WE 5 submarine cable systems linking Southeast Asia to Europe via the Indian subcontinent and the Middle East. The projects aim to position these regions at the forefront of global connectivity by significantly increasing capacity and global user connectivity along the route between Singapore and France. The SEA-ME-WE 4 fibre optic cables provide a capacity of 4.26 terabits per second with a 25-year guaranteed technology life. SEA-ME-WE 5 has an increased capacity of 24 terabits per second. This submarine cable system gives Sri Lanka a competitive regional advantage in bandwidth and the opportunity to become a globally competitive business hub. The proposed project is expected to Southeast Asia — Middle East — Western Europe 6 will provide an additional 12 terabits per second of bandwidth, expanding the capabilities of the Sri Lankan IT sector.

Opportunities

• Digitalization of government procurement.
• Supply of foreign software, hardware, telecommunications equipment.
• Software (application) development.

Textiles

The Sri Lankan apparel and textile industry is the most significant and dynamic contributor to the country's economy. Entirely privately owned and managed, Sri Lankan apparel and textile manufacturers have successfully leveraged opportunities in the international marketplace to move beyond traditional garment exports and tailoring to provide sophisticated and creative solutions through fashion BPO services, research and development, and innovation centers. The sector's value reached US$5.92 billion in 2022 and is targeting US$8 billion in exports by 2025, driven by increased investment in local supply chains as the economic crisis has limited access to resources for the sector. The industry accounts for 46% of export earnings and employs 350,000 people directly.

Sri Lanka has built its competitive advantage on value addition rather than low cost production, focusing more on product quality and the ability to produce niche products.

Opportunities

• The garment industry is a key sector that requires continuous upgrading and the acquisition of new technology and equipment.
• There are prospects for the supply of grey fabric, denim, polyester yarn, and specialty fabrics used for underwear and sportswear.
• Many Sri Lankan garment companies produce garments for leading foreign brands.

Travel and Tourism

Tourism has traditionally been the country's third largest source of foreign exchange earnings. Sri Lanka offers a range of attractions including beaches, wildlife parks, tropical forests, tea plantations, ancient ruins, Buddhist cultural sites and festivals.

The government wants to attract global names to Sri Lanka. Several international and regional hotel chains are building or managing hotels in the country, including Hilton, Marriott, Shangri-La and Movenpick. Others, such as Sheraton and ITC Hotels, are in the process of completing projects. Several local conglomerates control most of the luxury resort hotels in Sri Lanka. In addition, the concept of boutique hotels is rapidly gaining popularity.

Tourism offers both investment and trade opportunities. The government is currently offering beach lands and islets for tourism development. Eastern Sri Lanka is an area that offers significant potential due to the quality of the beaches in the area. Places such as Pasikudah and Arugam Bay are prime destinations, especially for surfing enthusiasts. The country has several parks and forests that are home to a variety of wildlife and unique flora. However, the ban on the sale of land to foreigners may make it somewhat difficult to build new developments. Eco-friendly resorts are also gaining popularity, with many developers opting to create “green” hotels to appeal to the growing eco-tourism market segment. The growth in tourism has led to significant growth in the restaurant industry.

Of the international airlines flying to Sri Lanka, Sri Lankan Airlines, Qatar Airways and Emirates are the three most popular carriers, together handling 65.4% of all tourist arrivals to Sri Lanka. Apart from other airlines, low-cost carriers such as IndiGo and Fly Dubai are also gaining popularity among travellers. Sri Lankan Airlines is well received among major source markets, while IndiGo and SpiceJet are particularly popular with tourists from India. Aeroflot and Azur Air are popular with Russian travellers, while Qatar Airways and Emirates are often used by tourists from Europe.

The growth in arrivals was driven by factors such as ease of travel, easing of restrictions and rising consumer confidence. In addition, improved air connectivity to Sri Lanka and the resumption of cruise tourism have contributed to the growth in arrivals.

Opportunities

• The tourism sector offers significant long-term opportunities for foreign suppliers in areas such as infrastructure, technology and consultancy services, hotel equipment, furniture, water purification systems, electrical systems, energy efficiency equipment, restaurant and kitchen equipment, food and beverages, bathroom accessories, spa and fitness equipment, and water sports equipment. Sri Lanka has relaxed almost all tourism-related import restrictions.
• Expansion of the hotel sector, upgrading of existing facilities, and building international hotel chains that require high-quality resources and technology offer significant opportunities for foreign companies.
• The number of casual dining and fine dining restaurants in Sri Lanka has increased significantly in recent years. International and local restaurants are expanding their operations. Foreign suppliers interested in Sri Lanka have increasing opportunities to introduce their products into the growing culinary and hospitality sectors.

Construction

Sri Lanka’s construction industry, which is one of the largest contributors to GDP and employment generators in the country, faces significant challenges in 2022, with cement availability plummeting by 35% compared to the previous year. Rising commodity prices and fuel and energy shortages have resulted in significant job losses and a sharp drop in construction projects.

According to the latest Central Bank reports, sentiment among companies is positive for the short- to medium-term outlook due to an expected economic recovery, falling interest rates and material costs, and ongoing talks to resume stalled government-funded projects.

Opportunities

• There are significant opportunities for foreign companies to sell a wide range of equipment and technology, ranging from earthmoving equipment and construction machinery to HVAC systems.
• Sri Lankan developers also often partner with foreign engineering and design firms, especially when constructing high-end office buildings, luxury apartments or resorts.

Oil and Gas

Oil Exploration: Oil exploration in Sri Lanka began approximately 40 years ago with the later seismic surveys carried out in the Mannar Basin by a Norwegian seismic company. The current estimate of oil and gas resources in the Gulf of Mannar is approximately US$200 billion. The Petroleum Development Authority (PDA) with its partners SLB (formerly Schlumberger) and Bell Geospace have continued to acquire, process and process Sri Lanka’s hydrocarbon resource dataset.

Investors can bid on individual block groups, as is the practice in developed countries, providing operators with flexibility and added value, ranging from tabletop surveys to exploratory wells, to create an active secondary market for acreage. The government’s land waiver and transfer regulations are designed to enhance petroleum activity in all offshore basins in Sri Lanka and attract competent operators of all sizes. A new map of offshore hydrocarbon blocks updated in July 2022, small blocks offered under joint exploration licences and gas discoveries available for rapid development under multiple options are some of the new PDA initiatives.

Based on data obtained from seismic surveys, the government estimates that there are over 2 million barrels of oil resources in the 30,000 sq km area in the northern waters.

Refinery and Pipeline: Sri Lanka’s only oil refinery and the main pipeline from the port to the refinery are in urgent need of upgrading and expansion. State-owned Ceylon Petroleum Corporation (CPC) operates the Sapugaskanda Refinery and plans to upgrade the existing refinery and build a new one. CPC expects to increase refining capacity from the current 50,000 barrels per day to 100,000 barrels per day. Sri Lanka’s main 5.8-km crude oil pipeline is also in urgent need of replacement.

Opportunities

• The refurbishment of the Sapugaskanda Refinery is a priority for the Government of Sri Lanka. The output of the Sapugaskanda Refinery meets 40% of Sri Lanka’s demand for refined fuel, while the government imports 60% of the refined fuel consumed domestically. Requests for proposals have been issued.
• There will be opportunities to supply equipment and services required for oil and gas exploration projects. In June 2022, the government opened the fuel import and supply sector to oil producing countries.

Agricultural Sector

The agricultural sector contributes about 7% to the national GDP, of which the fisheries sector contributes about 1.3% and the livestock sector contributes 0.9%. More than 30% of the country's population is employed in the agricultural sector. Although Sri Lanka is a fertile tropical land with potential for growing and processing a variety of crops, challenges such as productivity and profitability are holding back the sector's growth.

The President has proposed an initiative that includes the creation of an Agricultural Modernization Task Force, which is expected to cover all crops and sectors in the industry. According to the Central Bank, the country's dry conditions will not affect the country's low inflation, and any supply gaps can be filled through imports. In Sri Lanka’s tightly controlled economy, rice imports are restricted through outright bans or taxes to ensure profits for farmers who, due to years of protectionist policies, do not produce rice at a competitive price or of inadequate quality for trade on the world market.

Opportunities

• Wheat Grain: Wheat and wheat flour account for the largest share of Sri Lanka’s cereal imports. Overall, Sri Lanka’s leading wheat suppliers are Canada, Russia, Australia, Pakistan, India and Romania. Prima Ceylon Ltd, a Singapore-based wheat milling company, is the country’s largest wheat flour producer. The flour produced by Prima is destined for domestic consumption as well as for export. The company operates one of the world’s largest flour mills in the eastern city of Trincomalee. A second mill, owned by a UAE-based company, operates in Colombo. The main competitors for wheat supply are Canada, India and Australia.
• Lentils: Sri Lanka is one of the largest importers of red lentils. India is the country's main exporter of lentils. There is significant opportunity for foreign suppliers in this market if a competitive pricing structure can be developed to secure long-term sales.
• Animal Feed: GMO restrictions do not apply to animal feed. The country currently imports about 150,000 metric tons of corn annually to supplement local production.
• Dairy Products: Sri Lanka is a net importer of dairy products.
• Cotton, Yarn and Fabrics: Cotton suppliers have significant scope to supply Sri Lanka's export-oriented apparel sector. China, India, Indonesia and South Korea are currently Sri Lanka's major cotton suppliers.

Pharmaceutical Industry

The pharmaceutical industry in Sri Lanka is less developed compared to other South Asian countries such as India, Bangladesh and Pakistan. The sector is currently represented by 10-15 large private companies and the State Pharmaceutical Manufacturing Corporation (SPMC). The total investment by large companies in the last five years is estimated to be INR 15.5 billion. Local manufacturers work only with ready-made prescription products, producing categories such as antibiotics, antidiabetics, analgesics (painkillers), dermatological products (creams and ointments), multivitamins in syrups and capsules, etc. Currently, 2,525 Sri Lankans are employed in the pharmaceutical industry.

The leading pharmaceutical manufacturers in Sri Lanka are: State Pharmaceutical Manufacturing Corporation (SPMC), Astron Ltd, Smithkline Beecham (Pvt) Ltd, Gamma Pharmaceuticals (Pvt) Ltd., Morison Plc, Emergen Life Sciences (Pvt) Ltd., Navesta Pharmaceutical (Pvt) Ltd., Inter Pharm Lt., Lina manufacturing (Pvt) Ltd., Himata (Pvt) Ltd. and CIC Health and Personal Care. These companies manufacture quality pharmaceutical products for the local market in accordance with WHO requirements (based on preliminary analysis) and receive certification from the National Medicines Regulatory Authority (NMRA).

The Government of Sri Lanka is guided by the "Assured Purchase" program - a tool to support local manufacturers supplying local hospitals in order to minimize the import of pharmaceutical products and encourage Sri Lankan manufacturers to expand their production capacity. The development of the pharmaceutical industry in Sri Lanka will provide benefits such as reducing the outflow of foreign exchange, improving safety in the pharmaceutical sector, reducing the shortage of medical supplies and screening out low-quality drugs in the market, convenient control of the sector, increasing the cost and range of locally produced drugs, attracting new market participants, providing the local population with high-quality pharmaceutical products, guaranteeing timely delivery of vital drugs while eliminating unnecessary costs and loss of effectiveness due to long-term storage conditions, etc. Moreover, the growth of the pharmaceutical industry is a valuable opportunity for Sri Lanka to diversify this manufacturing sector towards exports. The pharmaceutical industry is known for its potential for import substitution as well as its eventual development as a full-fledged export vertical.

Local spending on pharmaceuticals is US$750 million with a projected five-year CAGR of 4.1%. Currently, 85% of pharmaceutical requirements are imported and local manufacturers meet 15% of the requirement.

Capacity

• Manufacturing facilities for manufacturing pharmaceuticals, medicinal chemicals and botanicals.
• Formulation of antibiotics.
• Manufacture of antibiotics.
• Formulation of other products (chemical/herbal extracts).
• Manufacture of other products (chemical/herbal extracts).
• Manufacture of three types of key radiopharmaceuticals commonly used in cancer treatment (I-131, TC-99, F-18).
• Manufacture of cosmetic products.
• Manufacture of Ayurvedic drugs.
• Manufacture or assembly of medical devices.
• Related auxiliaries facilities.
• Research and development activities, including biotechnology research and manufacturing.
• Laboratory testing facilities.
• Medical devices.

The global medical devices market, from common medical supplies such as latex gloves and syringes to advanced imaging equipment and implantable devices, is expected to reach an estimated US$409.5 billion by 2030, growing at a CAGR of 4.5%. This growth is primarily driven by global healthcare spending, technological advancements, and the rise in chronic diseases.

A growing population and a public healthcare sector that faces strong competition from a dynamic private sector make Sri Lanka an ideal location for manufacturers looking to supply the growing local market while establishing manufacturing in a country with favorable market conditions and logistical access to Asia and Europe.