Industrial exports have long played a crucial role in Sri Lanka’s economic output, even during periods of civil strife and macroeconomic instability. Over the years, an emphasis on export orientation has led to greater productivity and employment generation. However, a new wave of instability – characterised by political uncertainty, currency depreciation and rising interest rates – affected productivity towards the end of 2018, adversely affecting investment confidence and nullifying some of the nation’s competitive advantages.

Domestic consumption patterns also decreased during this period. “Between October 2017 and the end of 2018 the domestic tyre market contracted by around 8%,” Ravi Dadlani, managing director and CEO at CEAT Kelani, a joint-venture tyre manufacturer owned by local and Indian firms, told OBG. “There has been an extensive decline in consumption across industries. The beverage industry, which is transport dependent, fell by about 35%,” he said.

Despite these issues, Sri Lanka’s industrial exports remained a key driver of the economy and opportunities in the sector continued to entice international investors in the latter portion of 2018 and into early 2019. As such, the sector is set to play a key role in the government’s aim of attracting $3bn worth of foreign direct investment (FDI) in 2019, a considerable increase from the estimated $2.2bn raised in 2018 – a record amount – and $1.9bn in 2017.

Structure & Oversight

While a number of challenges need to be addressed, the country’s sophisticated manufacturing segment has gained recognition for quality, ethical practices and customisation. The island’s location and market structure have also allowed it to pursue niche production opportunities, marketing itself as a vital component in value chains or an alternative manufacturing site.

The sector underpins Sri Lanka’s economy and is the prime force of value creation and innovation; however, it faces intense international competition. As such, lawmakers have formulated a mixture of policies to establish a more conducive business environment, while forging trade agreements and multilateral partnerships, with the aim of raising total annual exports from $11.4bn in 2017 to a 2020 target of $20bn, as outlined in the five-year National Export Strategy (NES), which was initiated in 2018.

Alongside this, the government also created the National Trade Policy in July 2017 – which is responsible for establishing necessary frameworks for areas such as the provision of market information, policies, regulations, tariffs and non-tariff barriers – and the National Single Window, a trade facilitation portal. The latter, which was still in the testing phase as of the first quarter of 2019, provides a facility to lodge online applications for import and export permits, which will ultimately allow foreign investors to undergo a fast-track approval process.

The Board of Investment (BoI), meanwhile, serves as the regulatory authority for all investments in the country, reviewing transactions for competition-related concerns. The BoI serves as the primary government authority responsible for foreign investment. Its duties include the approval of projects, granting incentives and arranging utility services. In addition, it assists in obtaining resident visas for expatriate personnel and facilitates import and export clearances.

Supportive Measures

While the manufacturing segment has a number of advantages such as low labour costs, the country struggles to compete with the economies of scale in other regional manufacturing bases such as China, Bangladesh and Vietnam. As it stands, Sri Lanka does not have a specific competition law, but it does have a framework in place to guard against unfair trade practices and unforeseen surges of imports. In early 2017 the government bolstered industry by approving the Anti-Dumping and Countervailing Act and the Safeguard Measures Act, which allow government trade agencies to initiate investigations relating to unfair business practices and impose additional duties and countervailing fees.

Ethical business policies have been implemented that have elevated Sri Lanka’s international reputation, such as the Garments Without Guilt programme, which promotes labour rights and environmentally friendly manufacturing, and has been applauded for offering a fair wage, good working conditions and employing a skilled and educated workforce.

“Successive governments have seen apparel manufacturing as a focus of support,” Shirendra Lawrence, COO at MAS Holdings, told OBG. “There is a big difference in perception of the segment in comparison to other South Asian countries. In Sri Lanka, it tends to be the industry of choice when people are picking their careers,” he said. Between the late 1970s and mid 1990s, manufacturing developed at an impressive pace. According to Lawrence, the 200 Garment Factories programme initiated in 1992 was a turning point for apparel production. Under the initiative, numerous zones were established to promote the industry and attract foreign investment, and linked villages to global markets.

The current government has attempted to introduce pro-business reforms, which include a number of investment incentives adopted under the Inland Revenue Act, which was implemented in April 2018. The law allows for concessionary corporate tax rates of 14% – compared to the usual 28% – for companies exporting goods and services, small and medium-sized companies with an annual income of less than LKR500m ($3.1m), and firms engaged in certain sectors, such as agriculture, education, tourism or IT. The legislation also permits the deduction of 200% of research and development expenditure for three years, and depreciation allowances for assets acquired after the law’s promulgation. In addition, foreign investors qualify for Customs duty exemptions on capital goods during the project implementation period. As such, the import of raw materials is free of Customs import duty, value-added tax, ports and airport levy, and national building tax.


On the back of solid demand for its goods and a strong international reputation, industrial activities contributed approximately 27.2% to GDP in 2017, according to the Ministry of Finance. Mainly consisting of textiles and garment production, manufacturing dominates the industrial sector – which also includes mining and quarrying, construction, and utilities – accounting for over 59% of the output and 15.7% of national GDP. According to World Bank data, growth in industry has fluctuated consistently over recent years, from 2.2% in 2015 to 5.8% in 2016, before declining to around 4.6% in 2017.

Sri Lanka’s Manufacturing Purchasing Managers’ Index (PMI), an indicator of economic health for the manufacturing and service sectors in which a PMI above 50 represents month-on-month expansion, fell to 53.7 in December 2018 from 54.3 a month earlier, representing the slowest growth in factory activity since April. While production increased from 51.5 to 54, employment fell from 55 to 46.5 in December with jobs in textiles, apparels, leather and related activities all declining due to seasonal demand. At the same time, new orders rose to 57 from 54 as food and beverage demand increased during the holiday season. Similarly, stocks of purchases increased to 60.5 from 57.5, driven largely by anticipation surrounding the upcoming holiday season.

According to the Central Bank of Sri Lanka (CBSL), industry accounted for over 75% of total exports in 2017, reaching $8.5bn. This represented growth of 7.5%, following on from contractions of 1% and 2.9% in 2015 and 2016, respectively. Textiles and garments was a main driver of the expansion, accounting for $5bn, nearly 59%, of the 2017 total, and marked expansion of around 3% over the previous year.

Industrial export competitiveness has been bolstered by the NES and the return of EU’s Generalised System of Preferences Plus (GSP+) status, which was restored in May 2017 after a seven year suspension. As a GSP+ beneficiary, export tariffs for apparel, which can range from about 5.9% to 9.6%, have been removed for products shipped to EU markets. This is significant as 60% of all of the country’s exports to the EU are in this category.


The textiles segment has been the largest export revenue earner for the past 30 years, making it a substantial contributor to the economy and employment, comprising 30% of manufacturing jobs in the nation. In recent years, the government has taken steps to enhance the performance of the apparel industry with a host of large investments made in innovation and sustainability (see analysis).

Shortly after regaining the GSP+ preferential trade benefit, clothing exports grew at double digits. Although the pace has since slowed, full year performance remains high. Estimates from the Sri Lanka Apparel Exporters Association revealed that apparel exports in 2018 rose by 4.8%, compared to 3% in 2017, reaching approximately $5bn. In 2018 apparel shipments to the EU grew by 3.8%, while those to the US expanded by 5.8%, totalling $2.1bn and $2.3bn, respectively. Sri Lankan textile manufacturers are used to produce apparel for globally competitive companies such as Abercrombie & Fitch, Marks & Spencer, Tommy Hilfiger and MAS, the largest apparel manufacturer in South Asia, with a strong focus on intimate apparel and sportswear manufacturing.


Finding sufficient employees with the requisite skills is a challenge across industries, with manufacturing reporting a severe shortage of workers, particularly considering that Sri Lanka’s labour market is a fraction of the size of leading global manufacturing nations. According to CBSL data, as of mid-2018 the country had a household population of 16.3m and a labour force of 8.4m, with around 8m people employed – amounting to an unemployment rate of 4.6% and a labour force participation of 51.1%. Since 2016 industry has been the second largest employer, maintaining 27.5% of the total workforce as of June 2018, less than the services sector with 48.3%, but just ahead of agriculture at 24.2%. Of those working in industry, approximately 1.4m were in the manufacturing segment, while 748,483 were in construction and 78,362 in mining and quarrying.

Foreign Investment

By all accounts, Sri Lanka’s industrialisation highlights the importance of investment liberalisation. Between 2002 and 2016 a total of 469 foreign ventures entered Sri Lanka’s manufacturing sector, with textile wearing apparel and leather products the largest subsector, welcoming a total of 150 foreign companies over the time period, followed by food and beverages, which welcomed 77 foreign investments altogether.

However, amid changing market dynamics such as protectionist economic policies, rising labour costs and a depreciating currency, Sri Lanka has witnessed more foreign exits than entries recently. Approximately 410 firms registered with the BoI left the country between 2009 and 2016 compared to 202 entrants over the same period.

Despite this, according to the UN Conference on Trade and Development “World Investment Report 2018”, in 2017 Sri Lanka’s FDI inflows increased by approximately 53% over 2016, while FDI stock reached around $11bn, equivalent to 13.2% of GDP. This performance was driven by growth in manufacturing, IT, tourism and infrastructure. The government aims to raise annual FDI to $5bn by 2025.

Officials have long been working to promote the influx of foreign funds, through measures such as joining investment protection agreements with a host of nations, including the US, a number of EU member states, Australia, China and India. The business environment has also improved recently, with Sri Lanka moving up 11 spots to 100th overall in the World Bank’s “Doing Business 2019” report. The climb up the rankings was marked by significant improvements in areas such as registering property, dealing with construction permits and paying taxes.


One manufacturing sector the state has earmarked as having high potential for growth is the pharmaceutical industry. Indeed, officials have targeted producing 85% of the drugs needed by the domestic market by 2020, which would save Sri Lanka an estimated LKR40bn ($252m) per year. In order to help achieve this goal, financing has been provided as part of $11m in aid from the Japan International Cooperation.

As part of these efforts, in October 2018 a plant in the Ratmalana Kandawela area in south Colombo had reached completion, increasing production capacity of the State Pharmaceuticals Corporation from 1.9bn pills to 3.3bn per year, which will account for around 70% of the drug requirements of the Health Ministry.

Ancillary to this development, the MoH signed agreements with 46 local and foreign drug manufacturers to set up pharmaceutical manufacturing facilities, and three new factories had already been constructed in Horana, Kandy and Digana in late 2018, and three more were expected to open sometime within the first half of 2019.

Free Zones

Sri Lanka has 12 export processing zones administered by the BoI. Within these zones foreign investors and local entities enjoy a variety of incentives. For instance, while certain imports may be subject to other taxes, export oriented companies located in the zones are eligible to import project-related material and inputs free of Customs import duties. Many investors have previously preferred to locate factories near the Port of Colombo to reduce transportation and handling costs, but a concentration of production in this area has led to congestion and pollution. However, while the export processing zones outside of Colombo offer cheaper real estate and tax incentives, a limited road network makes these outlying zones a strain on logistical operations.

Trade Centre

A noteworthy development under way is the 6070-ha China Logistics and Industrial Zone within the Ruhunu Economic Development Area in Hambantota, expected to generate about 100,000 jobs. Implemented in collaboration with China, the zone will include the Hambantota Port and is expected to bring in an estimated $5bn in investment by 2020. Although the site is well positioned to spur industrial export growth, the project has seen controversy as unsustainable overseas borrowings under the previous government saw Sri Lanka relinquish a controlling stake in Hambantota Port to China Merchant Port Holdings on a 99-year lease. China’s Belt and Road Initiative is helping to transform trade and transport infrastructure through large investments around the world. However, while this creates great opportunity, it has also raised some concern over the nature of such international partnerships.

“Both in an industrial and commercial sense, Sri Lanka needs to take advantage of the Belt and Road Initiative, while keeping in mind the geopolitical tensions between China and India,” Suresh Shah, CEO at Lion Breweries, told OBG. “Balancing how well we work with each country will heavily influence our development over the coming years.”


The need for policy consistency is more apparent than ever before. Speeding up the approval process for investments through the National Single Window is a positive initiative, and the adoption of pro-trade reforms and an export-led growth strategy will enable the industry to exploit growth pockets. Provided there is political stability and cooperation between the executive and legislature, manufacturing performance is set to increase over the near, mid and long-term. According to estimates from CT CLSA, a stockbroking firm based in Colombo, the industrial sector is forecast to expand by 2.7% in 2019 and 3.4% in 2020, compared to approximately 2% in 2018. Given the maturity of the market, investments in textiles and garments remain a safe option, offering relative stability and ongoing growth to investors.