The Report: Sri Lanka 2016

Sri Lanka’s investment environment is set to become more balanced, transparent and predictable, with the elections of 2015 largely heralded as a win for inclusive governance, providing a fresh five-year mandate for an administration committed to economic revolution. As the country looks to broaden its investor base, it is hoped that policy changes and plans brought in by the new government will attract the added investment needed to help the country reach its growth goals.

Country Profile

Sri Lanka, the “Wonder of Asia”, formerly known as Ceylon, has long served as an important strategic destination in the Indian Ocean, catering to merchants and travellers from South-east Asia, India, the Middle East and East Africa. While much of the country’s recent history has been tainted by a decades-long civil war, post-conflict euphoria has brought a sense of renewal and optimism to the island nation. A new administration, elected in 2015, has pledged its commitment to inclusive governance and economic reform, as well as rebalancing its foreign policy and reconciling with the country’s ethnic minorities.

This chapter contains an interview with President Maithripala Sirisena, a viewpoint from Prime Minister Ranil Wickremesinghe, and interviews with Hugo Swire, Minister of State, British Foreign and Commonweath Office; and Arjun Bahadur Thapa, Secretary General, South Asian Association for Regional Cooperation.

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Investment & Trade

Sri Lanka is well situated for trade and an attractive target for international investment. Lying on major shipping and air routes, it is close to the markets of Asia, Africa and the Middle East. Moreover, the country has a literate workforce, good infrastructure, a healthy population and relatively low wages. Since the 2009 cessation of a long-running civil war, Sri Lanka has become one of the region’s more stable nations, and following elections in 2015 it has become increasingly open. The new government has indicated it is doing away with the country’s statist past and is embarking on a period of material liberalisation.

This chapter contains a viewpoint from Malik Samarawickrama, Minister of Development Strategies and International Trade; and interviews with Harsha de Silva, Deputy Minister of Foreign Affairs; Upul Jayasuria, Chairman, Board of Investment; Samantha Ranatunga, Chairman, Ceylon Chamber of Commerce; Ugo Astuto, Director and Deputy Managing Director for Asia and the Pacific, European External Action Service; and Razeen Sally, Chairman, Institute of Policy Studies.

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The Sri Lankan economy has been growing well recently despite a degree of political uncertainty and the global slowdown in emerging markets, with GDP expanding on average more than 6% since 2010. The new government inherited an economy with great potential but burdened by debt and lacking the types of investment to see it through to the next stage. Accelerating growth is now necessary, not only in order to pay down its debts but also to avoid the middle-income trap. Sri Lanka has developed new avenues for significant expansion, such as its burgeoning tourism sector, and investments in shipping and infrastructure. If the country can build on the steps it has already taken, there is no reason why it should not continue to prosper.

This chapter contains interviews with Ravi Karunanayake, Minister of Finance and Planning; Kabir Hashim, Minister of Public Enterprise Development; Ajit Gunewardene, Deputy Chairman, John Keells Holdings; and Mohan Pandithage, Chairman and Chief Executive, Hayleys.

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The Sri Lankan banking sector is well capitalised, well regulated and fast growing. It has faced no collapses in recent years and has benefitted from strong economic growth and relative stability following the end of the civil war in 2009. Financial stability is not seen as a major concern, and any problems related to the health of institutions are regarded as manageable, with the regulators keeping a close watch on the sector. However, Sri Lanka’s banks are more challenged in terms of innovation, efficiency and value added. As strategies to investment shift under the new government, banks will have to adjust, prepare for some instability and take advantage of the opportunities that arise.

This chapter contains interviews with Arjuna Mahedran, Governor, Central Bank of Sri Lanka; and Ajay Kanwal, Regional CEO, ASEAN and South Asia, Standard Chartered.

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Capital Markets

The Sri Lankan capital markets are recovering after a period of great change and a measure of controversy. Stocks boomed when the civil war ended, only to fall back as regulation and regulators were unable to keep up with the surge in activity, and manipulation and unfair dealing were alleged. With a new government in power, the apparent wrongs of the past are being addressed and a roadmap for the future is being drawn. Legislation is changing, with rules updated and key market infrastructure under development. At the same time, an overhaul of the exchange and the regulator is under way. These efforts are seen as vital to the future of the country, as efficient, effective and fair capital markets are needed to attract and deploy the capital Sri Lanka needs.

This chapter contains interviews with Rajeeva Bandaranaike, CEO, Colombo Stock Exchange; and Dilshan Wirasekara, CEO, First Capital Holdings.

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As Sri Lanka’s economy has expanded over the past half decade, its insurance industry has grown apace, in the process becoming a vibrant and competitive market in its own right. Some 29 insurance companies were operating in Sri Lanka as of the beginning of 2016, at which point the sector’s total assets were valued at LKR394.2bn ($2.8bn), according to data from the industry regulator. This figure is up slightly from the same period the previous year, although down from an end-2014 total of LKR406.8bn ($2.9bn). Recent short-term fluctuations aside, over the past five years the industry has grown considerably, with total assets nearly doubling over the 2010-14 period. On the back of a raft of recent regulatory improvements and demand-driven uptake, local players expect to see continued expansion for the foreseeable future.

This chapter contains an interview with Damayanthi Fernando, Director General, Insurance Board of Sri Lanka.

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Industry & Retail

Buoyed by its powerhouse apparel, tea, coconut, rubber and gemstone segments, Sri Lanka’s industrial sector has recorded significant expansion in export volumes and earnings in recent years. Although rubber and tea have been affected by falling global commodities prices and volatility in key export markets, rising demand for value-added products, a specialty of the sector, is expected to offset any near-term losses, while growing opportunities for foreign direct investment demonstrate the country’s positive long-term growth prospects. Investment in transportation and increasingly pro-business policies are also expected to help the sector maintain its upwards trajectory, as will a spate of planned free trade agreements and the reinstatement of key trade concessions with the critical markets of the US and the EU.

This chapter contains an interview with Mahesh Amalean, Chairman, MAS Holdings.

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Transport & Logistics

Often referred to as the pearl of South Asia, Sri Lanka’s strategic position at the southernmost point between Africa, the Middle East and East Asia has supported its transformation into a leading global shipping hub. The Port of Colombo now stands as the largest and busiest in the region, benefitting from years of investment that have significantly increased handling capacity and cargo volumes. With a host of ambitious upgrades to the country’s ports now completed, the administration of newly elected President Maithripala Sirisena is renewing its focus on the island’s interior, where poor transport infrastructure has constrained access to basic services and overall economic growth, while stifling tourism potential.

This chapter contains interviews with Nelson Liu, Overseas Operations Officer, China Merchants Holdings International; and Hanif Yusoof, Group CEO, ExpoLanka Holdings.

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Spanning 65,000 sq km and with a moderate climate, fertile soil and an abundant supply of groundwater, Sri Lanka has long benefitted from favourable agricultural conditions. The sector remains an economic mainstay and primary national employer. As manufacturing and industrial activities have expanded, agriculture’s position as the primary economic engine has been eroded in recent years, although it remains a major strength, with high-value tea, rubber, coconut and spice production contributing significantly to export earnings. This is despite falling global commodities prices and reduced production hitting export crops in recent years.

This chapter contains interviews with Rohan Pethiyagoda, Chairman, Sri Lanka Tea Board; and Merrill Fernando, Founder and Chairman, Dilmah Tea.

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Construction & Real Estate

Sri Lanka’s construction industry has been a major beneficiary of the country’s rapid economic development over the past six years. Since the end of the civil war in May 2009, the country has rushed to make up for more than two and a half decades of intermittent building activity across most segments, from high-end residential housing to commercial and office space to a variety of key infrastructure segments. In 2015 and early 2016 Sri Lanka’s real estate market expanded rapidly, continuing a medium-term growth trend that has been fuelled by an increased appetite for residential property among the nation’s wealthy and middle-class population, growing demand for grade-A office and commercial space from local and foreign corporates, and rising interest in the country as a tourist destination.

This chapter contains a viewpoint from Patali Champika Ranawaka, Minister of Megopolis and Western Region Development; and an interview with Ranjit Fernando, Chairman, Urban Development Authority.

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With rapidly rising arrivals and revenues in 2014 and 2015, Sri Lanka is currently in the midst of a tourism growth spurt, which has the potential to turn the small South Asian island nation into one of the world’s most popular tourist destinations in the years to come. In 2015 some 1.8m tourists visited the country, according to data from the regulator, the Sri Lanka Tourism Development Authority. This is up nearly 18% on the previous year. The newly elected government has made ambitious plans to attract 2.2m visitors in 2016 and 4m by 2020. This chapter contains an interview with Rajan Brito, Deputy Chairman and Managing Director, Aitken Spence.

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Energy & Utilities

In 2015 and early 2016 the state rolled out a series of reforms and initiatives aimed at shoring up the country’s energy industry, including expanding the national electricity grid, particularly in rural areas; developing new renewable energy sources; opening up the hydrocarbons sector to greater foreign investment; and working to introduce a new fuel pricing formula, which has the potential to improve the economics of the domestic energy business dramatically. These and other changes have been put forward as part of a sector development plan covering 2015-25 conceived by the Ministry of Power and Energy (MoPE). Along with a number of additional medium- and long-term strategies for the sector the MoPE’s efforts are expected to contribute to an uptick in energy sector investment in Sri Lanka. Indeed, the 2015-25 plan is a key step towards achieving the government’s objective of 100% energy self-sufficiency by 2030.

This chapter contains an interview with Damitha Kumarasinghe, Director-General, Public Utilities Commission of Sri Lanka.

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Telecoms & IT

Sri Lanka’s vibrant telecommunications industry has benefitted from two decades of market liberalisation, with five competing mobile operators driving retail tariffs to some of the lowest levels worldwide. End users and operators benefit from the country’s position as a swing point between Europe and East Asia, and its advantageous geographic location atop a host of high-capacity submarine cable networks. With national ICT policies and development dating back to the early 1980s, Sri Lanka’s IT sector stands at the regional forefront today, and is slated for further expansion on the back of both the government and the private sector’s intensifying focus on increasing exports and employment within the sector. Although unable to compete with its regional competitors in terms of size and volume, Sri Lanka’s ICT sub-segments – most notably business process outsourcing– have risen to become major employers and economic strengths, with the country targeting niche services in a bid to expand its global IT reach.

This chapter contains interviews with Hans Wijayasuriya, CEO, Dialog Axiata; and Mack Gill, CEO, MillenniumIT.

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Education & Health

Sri Lanka’s education system is widely regarded as among the best in South Asia. A commitment to improving the quality of teaching at all levels and across the country has resulted in impressive outcomes in recent years. The current government, which came to power in early 2015, has announced a series of ambitious new policies aimed at bolstering the nation’s reputation as a high-quality education provider and further improving the government-run primary, secondary and higher education systems. Free universal health care is enshrined in Sri Lanka’s Constitution. Its health care system delivers what is widely recognised as some of the highest-quality care in South Asia, despite spending considerably less than most other countries. Meanwhile, the private sector has made significant strides recently, with companies opening high-end hospitals and other specialised facilities at a rapid pace.

This chapter contains an interview with Ashok Pathirage, Chairman, Asiri Group of Hospitals.

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This chapter explores the Sri Lankan tax framework, giving a breakdown of the various regulatory authorities, revenue collection systems, taxpayer services and other elements. It also contains a viewpoint from Sujeewa Rajapakse, Managing Partner, BDO Partners.

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Legal Framework

This chapter explores the legal framework of Sri Lanka and features topics including foreign ownership rules, efforts to improve investor confidence, and employee rights and protections. It also contains an interview with John Wilson, Managing Proprietor, John Wilson Partners.

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The Guide

This chapter contains useful facts for visitors, phone numbers for business associations and embassies, contact information for state agencies, and advice on travelling through tea country.

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