C OUNTRY P RIVATE SECTOR DIAGNOSTIC
CREATING MARKETS
IN SRI LANKA
Private Sector-Led Inclusive Growth from
Islands of Excellence
Executive Summary
July 2022
About IFC
IFC—a member of the World Bank and member of the World Bank Group—is the largest global development institution focused on the
private sector in emerging markets. We work in more than 100 countries, using our capital, expertise, and influence to create markets
and opportunities in developing countries. In fiscal year 2021, IFC committed a record $31.5 billion to private companies and financial
institutions in developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity as
economies grapple with the impacts of the COVID-19 pandemic. For more information, visit www.ifc.org.
© International Finance Corporation 2021. All rights reserved.
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433
www.ifc.org
The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of
applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions
or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation,
typographical errors and technical errors) in the content whatsoever or for reliance thereon. The findings, interpretations, views, and
conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Executive Directors of the International
Finance Corporation or of the International Bank for Reconstruction and Development (the World Bank) or the governments they represent.
Cover Photo: Rakitha Wickramaratne/Shutterstock.com
EXECUTIVE SUMMARY AND
MATRIX OF ACTIONS
Sri Lanka is a country of paradoxes. With the lowest poverty rates, best social
indicators, and highest per capita income in South Asia, Sri Lanka’s economic
performance since independence had generally been hailed as a success before the
current debt crisis. However, past performance occurred amidst many distortions
and an economy less open than its peers, largely reflecting the strong involvement
of the state in the economy. Even if this interventionist model of economic policy
and the presence of many state-owned enterprises (SOEs) served the country well
through the years of conflict and their aftermath, it is no longer sustainable. Indeed,
after the rapid growth of the peace dividend in the years post-2009, the economy has
faltered and progress on social indicators has stagnated. Many of market distortions
remain and have been exacerbated by COVID-19. Understanding how, despite these
handicaps, Sri Lanka achieved positive economic and social outcomes in the past
provides the building blocks of a realistic, forward-looking growth strategy—one of
the objectives of this Country Private Sector Diagnostic (CPSD). The research for this
report was conducted prior to the current crisis, but the recommendations remain
relevant to implement public policies that will support private sector led inclusive and
sustainable growth.
ES.1 STATUS OF THE ECONOMY
In 2019, Sri Lanka became one of two upper-middle-income countries in South Asia,
before falling back to lower-middle-income status in 2020. While in the immediate
postwar period (2009–2013) gross domestic product (GDP) growth averaged a healthy
6.5 percent, it slowed from 2014–2018 to 4.3 percent and reached an 18-year low
of 2.3 percent in 2019. This was before the COVID-19 outbreak, which has further
weakened immediate growth prospects substantially and exacerbates an already
challenging environment of low growth and pressures on fiscal and external accounts.
The World Bank projects that the economy will contract by 3.6 percent in 2020 and
the recovery in 2021 will be tepid at 3.3 percent. Fiscal sustainability is a concern
with public debt reaching approximately 100 percent of GDP in 2020, not including
large SOE debt estimated at 12 percent of GDP. In April 2022, as this report went to
publication, Sri Lanka has indicated that it would no longer service its foreign debt and
might negotiate with investors for restructuring the debt. The authorities also indicated
that they were engaging the IMF.
1
SRI LANKA COUNTRY PRIVATE SECTOR DIAGNOSTIC
The key drivers of growth in the last decade have been the favorable export
performance of the apparel sector and tourism sectors; the boost to consumption,
partly on account of remittances; and the government’s infrastructure investments
following the end of the war. From 2009–13, about half of the growth performance
was the result of higher productivity, possibly reflecting the impact of the
reconstruction effort, the industrial upgrading in the apparel and garment sectors, and
the performance of the information technology (IT) and light manufacturing sectors,
which compete in some of the most competitive destination markets.
Notwithstanding the generally good growth performance, the extent of integration
into the global economy has declined considerably since the new millennium, and
private investment has been structurally much lower than in peer countries. This
is symptomatic of the changes in economic policy direction that Sri Lanka has
experienced in the past 50 years. The positive growth that Sri Lanka experienced over
the past two decades was preceded by a period beginning in 1977 where the state
began to gradually disengage from the management of the economy, through trade
liberalization and privatization or commercialization of SOEs. However, this push
for change stopped rapidly and was even reversed in the late 1980s. A second wave
of reforms and the boom of the textile and clothing sectors generated growth in the
1990s. Since the 2000s, despite its strategic location on trade routes and proximity
to large markets, the country has become significantly less open: trade accounted for
only 52.9 percent of GDP in 2017, down from 88.6 percent in 2000, a low number
for a midsize economy. The share of private investment in total gross fixed capital
formation fell from 89.8 percent in 2000 to 81.8 percent in 2017, reflecting both the
impact of the last stages of the civil war and strong public sector and debt financed
investments. Moreover, from 2015 to 2017, private investment at 16.5 percent of GDP
was significantly below the levels in China and India of 29.5 percent and 20.1 percent
of GDP, respectively. This weakening investment performance reflects not only the
difficult business environment and the presence of the state, but also—more recently—
the lack of macroeconomic stability. It is also correlated with a decline in the World
Bank’s Logistic Performance Index from 2.75 in 2012 to 2.6 in 2018, in contrast to the
performance in Vietnam where it increased to 3.27 over the same period.
The deceleration of growth starting in 2013 reflected lower public investment and a
subsequent contraction in construction, as well as a slowdown in manufacturing. It
highlights the weakness of the foundations of Sri Lanka’s growth performance and
the inability of the state—despite its central presence in the economy—to provide an
environment conducive to such growth. This all the more so because the state’s public
investments suffer from a considerable efficiency gap, estimated at 30 percent (World
Bank 2019g) and have not generated the return on investment needed to finance the
corresponding loans. This has been associated with the build-up of unsustainable
macroeconomic imbalances and large external financing requirements, resulting from a
high fiscal deficit. Considerable increases in external debt, weak revenue mobilization,
and large losses suffered by SOEs have constrained fiscal space and created an
acute balance of payments crisis. Since April 2020, Sri Lanka has lost access to the
international capital markets, and in April 2022, authorities announced a suspension
of repayment of certain Fx-denominated loans.1
2
EXECUTIVE SUMMARY AND MATRIX OF ACTIONS
Growth has failed to deliver the qualitative results expected by Sri Lanka’s population:
• The employment intensity of growth has declined, and there is a lack of high-quality
jobs, especially outside Colombo. While the official unemployment rate is low, the
share of informal employment in low-quality jobs is large. At the same time, many
skilled workers choose not to work in the private sector, as they prefer prestigious
civil service or SOE positions, the latter employing around 250,000 people.
Moreover, high-quality job opportunities for workers have not always materialized,
leading to outward migration.
• Structural transformation has been slow. The export product mix of Sri Lanka
has not changed much and remains much less complex than in aspirational peers
like Costa Rica, Malaysia, and Thailand. Some transformation in production
and employment has happened: the share of agriculture in GDP declined from
14.3 percent (2002) to 7.7 percent (2018), and agriculture’s share of employment
declined from 38 to 26 percent, while employment in services increased from 38 to
46 percent over the same period. Agriculture employment remains, however, higher
than in some aspirational peers (Costa Rica, Malaysia). In fact, a large part of the
economy—including the apparel and agriculture sectors—continues to operate in
the low-skills labor-intensive space at wages comparable to those in lower income
countries like Bangladesh.
• There is significant spatial disparity in economic and social development, with
several regions of the country significantly lagging the relatively prosperous region
around Colombo. Regions affected by the civil war (in the Northern Province,
Mullaitivu, Mannar, and, to a lesser extent, Kilinochchi), Batticaloa in the Eastern
Province, and Monaragala in the Uva Province remain far behind in levels of poverty,
infrastructure, and economic development.
Finally, the economy is facing the economic fallout of the COVID-19 pandemic2 , which
has adversely affected several sectors, including tourism, and further constrains the
already tight fiscal space. Moreover, rapid aging poses an additional constraint on the
country’s future growth performance.
ES.2 KEY CONSTRAINTS ON THE ECONOMY
Attempts to resume growth and accelerate structural transformation in the Sri Lankan
economy face a number of obstacles, some of which have been present for a long time.
The Cost of Doing Business for Outsiders
The policy environment is often unpredictable and nontransparent, and policy
decisions lack consistency; both contribute to a complex investment climate. Policies
are subject to frequent shifts (reversals in trade and tax policies, in particular for
sectors that benefit from protection owing to political connections). Periods of inward-
and outward-oriented policies have alternated. Policy decisions also lack consistency:
for instance, in 2012, “hub” regulation laws were passed with the goal of becoming
a logistics hub, while maintaining a 40 percent equity cap for foreign investors and
high levels of protection. Examples of lack of coordination were found in several
policy areas reviewed in this report: education policy, innovation policy, transport and
logistics, and tourism.
3
SRI LANKA COUNTRY PRIVATE SECTOR DIAGNOSTIC
A highly restrictive trade regime with average customs duties on imports of 22.3
percent because of para-tariffs creates a bias against exports and diversification by
directing private investments into protected sectors served by Sri Lanka–based firms.
Import protection has been driven partly by the desire to protect national production,
and partly by fiscal exigency: taxes on international trade accounted for a high average
of 18 percent of tax revenue during 2014–19, much higher than in other upper-middle-
income countries, where the average is about 1–3 percent. Access to foreign-sourced
inputs also becomes more costly because of high taxation and controls at the border.
The investment climate is poor for most firms. The poor quality of the regulatory
environment constrains investment decisions. However, some foreign investors and
larger companies can access far better terms, notably under Board of Investment (BOI)
sanctioned regimes and BOI zones. The success of some of the exporters attests that
investment climate conditions can be improved when needed.
Gaps in Supply of Essential Inputs
Constrained fiscal space and inefficient management of some large-scale projects have
limited the ability of the government to address key infrastructure gaps, especially in
transport and energy. There is a particularly urgent need to upgrade airport and port
infrastructure (expansion of the Port of Colombo terminals) and improve internal
road connectivity. At the same time, while the country enjoys almost 100 percent
electrification, the cost of electricity is high, and generation is at capacity. Procuring
additional generation capacity through an improved public-private partnership (PPP)
framework, and a better economic incentive structure implying a gradual shift to cost-
reflective tariffs, combined with rebalancing the generation mix toward renewables
would be needed to support a faster growth trajectory.
With the government owning about 40 percent of the banking system, large budget
deficits are to a significant extent funded by state-owned banks. Furthermore, the
state provides guarantees to state banks to facilitate lending to SOEs and occasionally
allows for outright dismissal of loan obligations. As a result, the private sector, in
particular small and medium enterprises (SMEs), is deprived of resources that are
needed to support innovation and productivity-enhancing investments. Furthermore,
the preferential access to finance for SOEs distorts competition with the private sector
and in turn affects the quality and cost of services in these sectors.
Most land is publicly owned (80 percent). Land use is highly fragmented and can be
subject to regulations, such as the restriction of the use of agricultural land in some
regions to certain crops (rice for instance) and restrictions on foreign use of land.
Also, ownership of vast tracks of land by some public entities leads to underutilization
and misallocation.
4
EXECUTIVE SUMMARY AND MATRIX OF ACTIONS
HOW DID SRI LANKA GROW DESPITE CONSTRAINTS
ES.3
IN THE PAST?
Many of the above constraints have been prevalent in the past, including periods when
Sri Lanka enjoyed rapid economic growth and poverty reduction. Understanding how
this came about provides guidance in charting a growth strategy in the future. Some of
the constraints have endured for a long time because they are politically sensitive and
may be challenging to relax in the near term. A growth strategy must take this into
account and identify reforms that are both economically salient and politically feasible.
In reviewing Sri Lanka’s past economic performance in the wake of several obstacles,
three lessons emerge:
a. Making use of the global marketplace. In some sectors (textile and clothing,
tourism, IT, high-end manufacturing) companies have been expanding their
footprint to the global marketplace where the distortions prevalent in the domestic
market are not present and demand is unlimited. In this process, companies have
been able to become competitive and upgrade production to more sophisticated
products and markets.
Recent successes in mainly export-focused niche sectors, such as IT-enabled
services and light value-added manufacturing show that Sri Lankan firms can be
internationally competitive, including in the most competitive destination markets
(for selected sectors). Sri Lanka’s private sector is changing, including recent
growth of sophisticated IT-services exports (business process management [BPM]
in legal, accounting, and financial services; knowledge process outsourcing [KPO]
services in data analysis and software operations) and new investment and exports
in precision and high-quality manufacturing and agro-food processing (advanced
technical apparel and textile-based products and customized rubber-derived
products for instance).
To fully harness Sri Lanka’s comparative advantage and integrate it further into
global value chains, the country needs to build on the innovative drive in the large
existing manufacturing sectors, such as apparel, and entrepreneurial dynamism
in niche sectors, such as information and communications technology (ICT) and
high-tech products. These sectors, if scaled up, hold the potential to drive Sri
Lanka’s full transformation to an upper-middle-income country. Improved access
to external markets is essential in this respect: the size of the country’s domestic
market is too small to allow production of higher technology products at the
scale necessary to fully support their growth potential. In this context, it will be
essential to step up efforts at greater integration in global value chains: concluding
bilateral free-trade agreements could be the key to accessing large markets and
becoming a more attractive destination for new investments.
5
SRI LANKA COUNTRY PRIVATE SECTOR DIAGNOSTIC
b. Finding a way to work around the distortions. One important characteristic
of the Sri Lankan economy is the coexistence of structures typical of advanced
economies with those of lower-income economies. There are large conglomerates
that are generally efficient and operate at the global production frontier, while
most of the private sector is small with low productivity firms in the informal
sector—many of them in the agriculture and service sectors. Conglomerates—a
few large enterprises—are active in sectors as diverse as transport, apparel,
retail, light manufacturing, and tourism. Many are long-established companies
that have significant market shares, and sometimes protected positions in some
of their sectors of activity, and as a result, have been less affected by complex
regulations. In addition, many globally competitive firms, including foreign-owned
corporations, operate in export processing zones, which has allowed them to
circumvent restrictive labor regulations and access more efficient trade regimes.
Leaving aside these large firms, Sri Lanka’s private sector is dominated by the
informal sector (in terms of number of firms), albeit to a lesser extent than in
some South Asian peers. While there are numerous SMEs, they are not dynamic
enough to drive structural transformation toward a more typical upper-middle-
income country.
c. Addressing interdependent distortions. Some of the distortions in the system are
the result of a complex equilibrium and fundamental redistribution effects and
cannot be easily removed without simultaneously addressing other constraints.
Important sensitive policy areas such as land, infrastructure, and education reflect
redistributive or compensating policies that will be difficult to disentangle.
For instance, even though Sri Lanka has a good education system with among
the best indicators in South Asia and boasts pockets of highly qualified labor,
skills gaps are noted by employers as one of the important constraints to their
development. Notably, lack of graduates from public education in science,
technology, engineering, and mathematics (STEM) fields and technical and
vocational skills that can more easily be used in the private sector are among
the most significant shortcomings noted by employers. While there are private
providers of education, to the extent authorized, the regulatory environment fails
to properly monitor their quality.
Meanwhile, students graduating from public universities in Sri Lanka cannot
find good jobs in part because they are taught skills that are less relevant for the
modern-day private sector, and in part because they prefer prestigious government
jobs over private sector jobs. Absent any civil service reform, there will be little
uptake for improved education. Furthermore, proposals to introduce private
universities have been met with strong resistance from education professionals.
6
EXECUTIVE SUMMARY AND MATRIX OF ACTIONS
ES.4 THE WAY FORWARD
With this backdrop of an economy that needs to accelerate economic growth but is
faced with numerous constraints. This CPSD proposes the following steps to promote
a more dynamic private sector in the country (table ES.1).
With a limited domestic market, Sri Lanka cannot compete at scale in most industries.
It must differentiate itself by further diversifying into higher value-added industries
and harnessing opportunities for regional integration. Recent successes in knowledge
and quality-intensive sectors (spanning sectors from value-added agricultural products,
to specialized manufacturing and IT-enabled services) could be scaled up with
appropriate upstream policies. The second pillar of private sector-led growth should be
on scaling up tourism, as soon as recovery from the COVID-19 crisis will permit, and
then investing in more sophisticated and varied tourism offerings.
A focus on green and sustainable development will leverage Sri Lanka’s natural
assets and a well-preserved environment while contributing to the fight against
climate change. The environmentally sustainable use of natural assets is central to the
tourism industry, but also to several key natural-resources connected sectors such as
agriculture and marine-based production mentioned below. Mitigation of the impact of
climate change will also be integral to future private sector growth through an increase
in renewable energy use (a key objective for the energy, urban, and transport sectors)
and better management of coastal areas.
Through SOE reforms, the government can mitigate the mounting fiscal risks
and costs negatively affecting macrofiscal stability, a key determinant for foreign
investments. It can further use its state-owned business enterprises as catalysts for
private investments and partnerships instead of displacing them. This would require
the government to modernize and consolidate the legal and regulatory framework
governing SOEs, reduce the competitive neutrality concerns affecting the level
playing field, and strengthen the corporate governance and performance of its key
SOEs through specific measures recommended by the World Bank integrated SOE
diagnostic, which complements this report (World Bank 2020c).
Strengthen Innovation Ecosystem to Enable Dynamic Industries
There are innovative industries in Sri Lanka, but overall, the country scores relatively
low on innovation metrics, and the public sector underinvests in innovation. In 2018,
Sri Lanka adopted its Innovation and Entrepreneurship Strategy 2018–2022 with the
involvement of significant private sector players. The National Innovation Agency was
created to implement it. To more fully realize the potential of producing value-added
goods and services, public policies supporting innovation must be less fragmented
and more oriented toward commercial efforts. This supposes stronger links between
public policies and the private sector, with a more diverse array of incentivizing plans
and publicly funded facilities to provide space for innovation, as well as better links
between university research and commercial use.
7
SRI LANKA COUNTRY PRIVATE SECTOR DIAGNOSTIC
Support “Islands of Excellence” in IT, Specialized Manufacturing, and
Agribusiness
Sri Lanka has several islands of excellence in sectors that have the potential to grow
and further contribute to exports. There is manifest and latent comparative advantage
in several sectors, such as ICT (as demonstrated by artificial-intelligence-based KPO
services), resource-based industries (coconut and rubber derived industrial applications
and products), and light specialized manufacturing (with high value-added content such
as high-end textiles or electronic sensors) that have driven growth in recent times and
have the potential to drive it in the future. These sectors do not systematically compete on
price, even though the cost of the work force remains attractive compared to competitors,
but rather on providing tailored value addition to their customers: they have in common
the ability to adopt innovative production techniques and customize production to clients’
needs. Another common characteristic is their ability to maintain high quality standards
that are demanded by the most sophisticated markets and customers.
Beyond strengthening government support to education, innovation, and standards
that will help accelerate the growth of high-value manufacturing and services, offering
a better business environment and land for new investments is critical. In the short-
term, an expansion of BOI processing zones is needed. However, in the long term,
instruments and practices that have proven successful in the context of the BOI (such
as customs and trade facilitation measures) should be rolled out to the rest of the
economy and remaining restrictions on foreign investment and ownership considered
for elimination.
Exploit Tourism Potential to Create Jobs in Lagging Regions and
Balance External Accounts
Tourism remains one of the most important sectors in the Sri Lankan economy as
the second-largest export earner, a significant employer (169,000 direct and 219,000
indirect jobs), and a key source to finance the balance of payments. The number of
annual tourist arrivals has grown more than 500 percent over the last decade—from
about 450,000 in 2009 to around 2.3 million in 2018, equivalent to roughly a 23
percent annual growth rate over this time period. The direct contribution from the
industry, estimated at US$4.4 billion (2016), accounts for about 5 percent of the
country’s GDP. Furthermore, tourism-specific investments accounted for close to 10
percent of total foreign direct investment (FDI) in 2018. Tourism is also important
because of its inclusivity, being the sector that is most geographically diverse,
having the largest share of SMEs and registering a significant growth in the female
employment share since 2018. However, women’s employment in the tourism sector
remains well below the industry average, accounting for less than 10 percent of the
industry, compared to the global average of 65 percent.
To ensure growth in the tourism sector in the medium term, there is a need to improve
logistics and connectivity and address shortages of skilled and service-oriented
workforce, which would be important to provide high-value tourism services. The
capacity of tourism and hospitality training institutes in regions outside Colombo
needs to increase to address future demand. There is also the need to build strategic
capacity for policy formulation within government agencies dealing with tourism and
enhance interagency coordination. Post-COVID-19, it will take longer than expected
to regain the confidence of tourists to return; now is the moment to review how this
could be facilitated.
8
EXECUTIVE SUMMARY AND MATRIX OF ACTIONS
TABLE ES.1 MATRIX OF INVESTMENT OPPORTUNITIES AND GOVERNMENT MEASURES TO CREATE MARKETS
SHORT-TERM MARKET CREATING
OPPORTUNITIES FOR INVESTMENT MEDIUM-TERM MARKET CREATING
PRIORITY AND GOVERNMENT MEASURES (12-24 OPPORTUNITIES FOR INVESTMENT AND
SECTORS MONTHS) GOVERNMENT MEASURES (3-5 YEARS)
Enabling sectors and objectives
Finance Opportunities for private investment Opportunities for private investment
Deepen the supply • Post-angel-stage VC funding. • Consolidation in the NBFI sector.
of the sector, while • Increased credit to MSMEs.
targeting dynamic Measures
sectors (working Measures • Establish comprehensive financial
around distortions). • Increase capital requirements for consumer protection framework.
the sector, which could facilitate • Rationalize the agencies overseeing
consolidation and/or exit of nonviable different subsectors of the financial
institutions and harmonize capital system into two supervisory agencies:
requirements between banks and the CBSL and a newly created FMA.
NBFIs. FMA could oversee financial consumer
• Review asset quality of NBFIs (after protection across all financial services.
pandemic). • Enact amendments to the Banking
• Eliminate lending interest rate caps. Action to: (a) enhance bank resolution
framework for banks and NBFI; and
• Create a risk-sharing facility for MSME (b) subject state-owned banks to the
credit. banking law.
• Facilitate creation of venture capital • Enact modern secured transactions law
fund for post-angel-stage investment in and create modern uniform online registry
promising start-ups. of security interests for movable assets
(tangible and intangible).
• Develop new legal framework,
including for emerging areas such as
digital finance and fintech.
Power Opportunities for private investment Opportunities for private investment
Boost renewables • None in the short term. • Renewable energy PPPs.
while preparing
for the future Measures Measures
(compensating for • Launch a multi-project competitive • Prepare a short- and medium-term
distortions). tender for renewable energy implementation and financing plan
procurement, including large (utility- based on the Long-Term Generation
scale) projects. Expansion Plan 2018–2037 with prioritized
• Assess feasibility, and identify investments.
appropriate business models and • Progressively move to cost reflective
financing structures for the proposed tariffs to improve the financial standing of
Sri Lanka-India transmission line. CEB; consider as transition a transparent
direct subsidy to CEB.
• Develop India-SL transmission line.
9
SRI LANKA COUNTRY PRIVATE SECTOR DIAGNOSTIC
SHORT-TERM MARKET CREATING
OPPORTUNITIES FOR INVESTMENT MEDIUM-TERM MARKET CREATING
PRIORITY AND GOVERNMENT MEASURES (12-24 OPPORTUNITIES FOR INVESTMENT AND
SECTORS MONTHS) GOVERNMENT MEASURES (3-5 YEARS)
Education and Opportunities for private investment Opportunities for private investment
skills • TVET PPPs. • Internationalization of universities:
Boost TVET offerings attracting international students; foreign
and industry- Measures investments in universities (with the BOI);
university links • Reinforce university–private sector links with foreign universities for research.
(compensating for coordination to match skills to • Private sector investment in universities
and working around demand and promote innovation focused on the provinces.
distortions). (improve fiscal incentives; review IPR
policies; fund innovation spaces).a Measures
• Develop Sector Skills Councils in • Improve university faculty in priority fields
priority sectors (TVET) with a view such as STEM: promote PhD scholarships;
to aligning the supply of skilled labor fill vacancies; hire foreign nationals.
with demand. Offer firms incentives to • Establish an independent quality
build in-house training capabilities. assurance council. Review quality of EDPs;
• Improve governance of the TVET reform National Vocational Qualifications
sector and coordination among the (course accreditation; quality assurance).
ministries responsible for training • Differentiate missions between teaching,
institutions to improve efficiency and research and innovation, and community
enhance the quality of training programs. services and regional development.
• Restructure the Skills Development Fund
to allocate resources competitively.
Transport and Opportunities for private investment Opportunities for private investment
logistics • Development of the East and West • Value-added storage facilities (cold
Develop future Container Terminals using a landlord storage, third-party logistics, and MCC/
transport and port model and evaluate strategic LCL services).
value-added logistics private sector participation. • Value-added services (bunkering, marine,
services (better and so forth) related to Hambantota port
use of the global Measures
activities.
marketplace) • Improve institutional strength and capacity
development to bolster SLPA as a regulator. Measures
• Develop a master plan to improve city-port • Finish highway expansion projects.
and port-hinterland connectivity (including • Expand Jaffna International Airport
feasibility studies and financing options). runway.
• Perform needs assessment for new • Automate port-gate clearances and
gateway supply chain advanced logistic transfers between extended port
infrastructure. gates, inland ports, and other customs
• Complete the extension of the BIA authorized economic zones, industrial
terminal.b parks, and container freight stations.
• Roll-out the Sri Lanka customs
National Single Window with the
appointment of a high-level steering
committee.
IT infrastructure Measures.
Prepare for a • Review regulations to allow local loop
more open market unbundling and address last-mile
(compensating for connection competition issues.
distortions).
10
EXECUTIVE SUMMARY AND MATRIX OF ACTIONS
SHORT-TERM MARKET CREATING
OPPORTUNITIES FOR INVESTMENT MEDIUM-TERM MARKET CREATING
PRIORITY AND GOVERNMENT MEASURES (12-24 OPPORTUNITIES FOR INVESTMENT AND
SECTORS MONTHS) GOVERNMENT MEASURES (3-5 YEARS)
Traded sectors
Tourism Measures Opportunities for private investment
Plan for volume • Strengthen intra-island and international • Underdeveloped sites (east and South
growth and develop air connectivity.c coast, nature reserves), MICE, wellness
new upscale • Reinforce capacity of tourism tourism.
offerings (better ministry to manage future growth
use the global Measure:
in value-added and environmentally
marketplace). sustainable tourism (new destinations, • Develop more sustainable tourist
branding, MICE, wellness tourism). destinations with public investment
in connectivity, marketing, and
• Establish a single regulatory agency
destination development.
to manage national parks and identify
future development sites; review the • Train the 50,000–60,000 new
Flora and Fauna Protection Act to assess hospitality staff needed, including
the potential for protected areas to be measures to attract and retain women
opened to tourism in an environmentally to the hospitality sector.
sustainable way.
IT-enabled services Opportunities for private investment Opportunities for private investment
Facilitate the • Post-angel-stage VC funding (see above). • Continued expansion of the BPM sector.
supply of labor, key
skills, and inputs Measures Measures
to a growth sector Prioritize IT skills at the university level • Improve the regulatory environment to
(better use of the • Improve labor laws and facilitate address issues regarding data localization
global marketplace). granting visas for qualified expatriates and management and digital transactions
(for example, French Tech Visa). (signatures, payments).
• Develop a comprehensive strategy
to prop up the start-up ecosystem:
improve access to business facilities,
advice, and finance and regulatory
reform to address taxation, capital
repatriation, and bankruptcy.
Manufacturing Opportunities for private investment
Expand space and • Value-added manufacturing relying on
facilitation measures skilled manual labor and quality assurance.
for high-growth
firms (better Measure
use of the global • Create new BOI zones outside
marketplace and Colombo to accommodate demand
working around from prospective investors. Consider
distortions). specific needs of industries (logistics,
industry clusters) and the economic
viability of multiple zones.
11
SRI LANKA COUNTRY PRIVATE SECTOR DIAGNOSTIC
SHORT-TERM MARKET CREATING
OPPORTUNITIES FOR INVESTMENT MEDIUM-TERM MARKET CREATING
PRIORITY AND GOVERNMENT MEASURES (12-24 OPPORTUNITIES FOR INVESTMENT AND
SECTORS MONTHS) GOVERNMENT MEASURES (3-5 YEARS)
Innovation policy Measure Measure
Increase emphasis • Incentivize private investment in R&D (tax • Develop channels for greater access of
on innovation incentives, credit guarantees, and lending innovative firms to international markets
policies in facilities) targeting innovative sectors. and international sources of knowledge
connection with • Redirect public support to private by enhancing market knowledge and
export sectors innovation adoption: business facilitating regional integration with key
(better use the advisory services (for example, trading partner countries.
global marketplace) Colombia) and technology extension
services (for example, India), as
well as innovation vouchers and
collaborative grants.
• Reduce fragmentation of government
R&D programs and duplication of
agencies.
Access to land • Adopt the policy of parcel-based land • Establish a new policy on state land
registry and cadastral map for all land and building asset management
Better use fallow
ownership and land use rights in Sri Lanka. incentivizing public asset
public lands while
• Revise the registering property monetization and revising permitting,
improving land
processes to 3 steps (from the leasing, and granting concessions on
information systems
current 9). state lands.
(compensating for
distortions) • Carry out or review an inventory
of State Land Assets with a view to
putting them to commercial use .
Taxation and trade • Gradual reduction of para-tariffs as
fiscal situation improves. Target para-
tariffs based on analytical work and
consideration of priority sectors for the
government growth strategy.
Note: Priority measures are in boldface. BIA = Bandaranaike International Airport; BOI = Board of Investment; BPM = business process management; CBSL = Central
Bank of Sri Lanka; CEB = Ceylon Electricity Board; EDP external degree programs; fintech = financial technology; FMA = Financial Markets Authority; IPR = international
property rights; IT = information technology; LCL = less container load; MCC = multi-country consolidation; MICE = meetings, incentives, conference/conventions and
exhibitions/events; MSMEs = micro, small, and medium enterprises; NBFI = nonbank financial institution; NCRE = nonconventional renewable energy; PPP = public-
private partnership; R&D = research and development; SL = Sri Lanka; SLPA = Sri Lanka Ports Authority; STEM = science, technology, engineering, and mathematics;
TVET = technical and vocational education and training ; VC = venture capital.
a. Also relevant to innovation policies below.
b. Also of relevance for the tourism sector.
c. See also transport above.
NOTES
1 Sri Lanka's credit rating was downgraded by S&P (to 'Selective Default') ’Fitch (to 'C') and Moody's (to ‘Cd') after authorities announced
suspension of interest and principle repayments in foreign currency.
2 The successive national lockdowns affected not only tourism but also domestic consumption.
12
SRI LANKA COUNTRY PRIVATE SECTOR DIAGNOSTIC
IFC
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433 U.S.A.
CONTACTS
Jean-Christophe Maur
jmaur@worldbank.org
Volker Treichel
vtreichel@ifc.org
ifc.org
13