Reforms: Do it now

 The implementation of economic reforms with a sense of urgency is vital for sustained long-term development of Sri Lanka. The political will to implement these reforms will be key in determining the successful execution of the reforms

We live and work in a ‘VUCA’ world. In other words, our environment is Volatile, Uncertain, Complex and Ambiguous. In short, a VUCA world means change is constant, outcomes are uncertain, and clarity is often limited. Therefore, success depends on adaptability and smart decision-making. These will thrive only in an environment where the country’s structural foundations are strong. In other words, Sri Lanka’s ability to withstand domestic/external shocks will depend on how strong the country’s structural foundations are. Economic reforms are a vital component in building and strengthening Sri Lanka’s structural foundations. The key factors that have impeded Sri Lanka’s long-term development have been the lack of consistent and predictable policies, and the very slow implementation and sometimes non implementation of urgently required economic reforms. 

Although macroeconomic indicators such as inflation, gross official reserves and exchange rate stability improved after the 2022 economic crisis, the IMF has emphasised that continued economic reforms are essential to sustain macroeconomic stability and ensure durable growth. 

The sections below deal with some of the key economic reforms that need to be urgently pursued and implemented. 

State-Owned Enterprises (SOE) reforms

Effective State-Owned Enterprises (SOEs) reform in Sri Lanka require the establishment of professionally qualified and independent boards, merit-based recruitment systems and performance-oriented management structures. Financial transparency should be improved through regular publication of audited financial statements prepared according to international accounting standards. Cost-reflective pricing mechanisms are also essential in sectors such as energy and transport.  Further, selective private sector participation and increased competition can improve innovation, service quality and operational efficiency while reducing monopolistic inefficiencies. Procurement reform, digital transformation and stronger anti-corruption measures are equally important for reducing waste and improving public trust in state institutions (IMF 2025, Sri Lanka: Fourth Review under the Extended Fund Facility Arrangement).

The experiences of Temasek Holdings in Singapore and Khazanah Nasional Berhad in Malaysia provide important lessons for governments seeking to improve the management of state-owned assets and enterprises. Both institutions were established to hold and manage government investments/enterprises. 

One of the key lessons from both models is the importance of separating government ownership from operational management. Although the governments of Singapore and Malaysia remain the ultimate owners of these institutions, investment and business decisions are delegated to professional boards and management teams. Both institutions highlight the importance of building strong institutions rather than relying on individual leaders. Their effectiveness stems from clear legal mandates, professional governance structures, independent oversight mechanisms and robust accountability frameworks. These institutional arrangements have enabled continuity and stability despite changes in political leadership and economic conditions.

For countries such as Sri Lanka, the key takeaway is not simply to establish a state holding company, but to create institutions that are insulated from political interference, managed by competent professionals, and focused on long-term value creation. By applying these principles, the government can transform state-owned assets from fiscal burdens into productive sources of national wealth and economic development. [Temasek Holdings (2025) Temasek Review 2025, Singapore: Temasek Holdings, https://www.temasek.com.sg ; Khazanah Nasional Berhad (2025) Khazanah Annual Review 2025: Investing with Purpose for Malaysians, https://www.khazanah.com.my/publication/khazanah-annual-review-2025/] 

One of the most successful SOE reforms undertaken in Sri Lanka was in relation to the telecommunications sector. In more recent times, under the SOE reform agenda, the CEB and CPC have undergone major reforms. The lessons learnt from successful SOE reforms in Sri Lanka should be used as a valuable guide in implementing reforms in relation to other relevant SOEs too. 

Land and ladies

Land and female labour are two heavily underutilised assets in Sri Lanka. Reforms in relation to these two areas are imperative if Sri Lanka is serious about long-term economic development. The sections below discuss the reforms that need to be implemented in relation to these two important areas. 

Land market reform and land governance in Sri Lanka

Land market reform has emerged as a critical component of Sri Lanka’s broader economic transformation agenda. Despite its strategic importance for agriculture, industry, tourism, housing and infrastructure development, land remains one of the most underutilised economic resources in the country. Investors, farmers and entrepreneurs continue to face significant challenges arising from fragmented ownership structures, incomplete land titling, lengthy approval procedures, outdated land administration systems and regulatory uncertainty regarding land use. These constraints increase transaction costs, reduce investment incentives and limit the productive utilisation of land assets across the economy.

A key challenge continues to be the incomplete nature of Sri Lanka’s land registration and titling system. Large portions of land remain subject to uncertain ownership records, overlapping claims and outdated documentation. These weaknesses reduce legal certainty, hinder property transactions and restrict access to finance because landowners often face difficulties when using land as collateral. The broader national digital transformation programme, supported by international development partners, seeks to improve transparency, service delivery and administrative efficiency through the digitalisation of government systems, creating opportunities for modernising land administration and cadastral management [World Bank (2025) World Bank Group and Sri Lanka Partner to Improve Digital Services and Grow the Digital Economy]. 

Agricultural land use remains one of the most contentious areas of land policy. Existing legislation, including the Protection of Paddy Lands and Wetlands Act No. 1 of 2000 and related agrarian regulations, continues to impose significant restrictions on the conversion of paddy lands to alternative uses. These regulations were originally designed to safeguard domestic food security, preserve agricultural land and protect environmentally sensitive wetlands. Later amendments created procedures under which certain paddy lands could be released, reclassified, or approved for non-agricultural uses under specified conditions. These reforms were introduced partly because many lands classified as paddy fields had not been cultivated for years and were located in rapidly urbanising areas and in areas where paddy cultivation has become commercially unviable due to labour shortages, rising production costs, irrigation constraints and changing market conditions.  As a result, the law today is generally regarded as more flexible than the original 2000 Act, although controls remain significant. 

Land reform is also closely linked to agricultural modernisation. Although agriculture continues to employ a substantial share of Sri Lanka’s workforce, productivity remains relatively low compared with other sectors. Fragmented landholdings, limited economies of scale and constraints on land leasing and consolidation continue to inhibit mechanisation, technological adoption and commercial farming. Recent national development strategies place increasing emphasis on improving agricultural productivity, promoting value-added exports and strengthening climate-resilient agricultural production systems. Achieving these objectives will require more flexible land markets, secure land tenure arrangements and improved access to long-term leasing mechanisms that facilitate investment in modern agricultural technologies.  [Government of Sri Lanka (2024) Economic Transformation Act, No. 45 of 2024; World Bank (2025), World Bank Group and Sri Lanka Partner to Boost Agricultural Productivity, Rural Jobs and Climate Resilience]. 

Labour market reforms

Labour market reforms are also important in improving investment attractiveness and productivity. Sri Lanka’s labour regulations are often viewed as rigid, especially regarding hiring and termination procedures. Modernising labour laws while protecting worker rights could encourage firms to expand employment and invest in new industries. In addition, increasing female labour force participation would significantly enhance economic productivity. The World Bank identifies labour market reform and greater female participation as crucial factors for sustaining medium-term growth and reducing poverty [World Bank (April 2025) - Sri Lanka Development Update: Staying on Track]. Further, the Economic Transformation Act, No. 45 of 2024 identifies increased female labour force participation as a key national economic target.

Ladies to the fore

Increasing female labour force participation and female employment is not only a matter of gender equality but also critical for Sri Lanka’s long-term economic growth, resilience, poverty reduction, productivity enhancement, household welfare and social development. The International Monetary Fund has argued that narrowing gender gaps in labour markets can significantly increase gross domestic product in developing economies [International Monetary Fund (2022), Sri Lanka: Selected Issues Paper – Gender and Labour Market Participation]. For Sri Lanka, mobilising the underutilised female workforce could help address labour shortages associated with population ageing and outward migration.

Sri Lanka has historically recorded relatively low levels of female labour force participation compared with many middle-income countries, despite the country’s strong achievements in female education, literacy, and health outcomes. Female labour force participation rate (FLFPR) refers to the proportion of women aged 15 years and above who are economically active, i.e. either employed or actively seeking employment. According to recent World Bank and Department of Census and Statistics (DCS) data, Sri Lanka’s female labour force participation rate remained approximately 31.6% in 2024, significantly below the male participation rate of nearly 69.7%. This persistent gender disparity indicates that a substantial proportion of women remain outside the formal labour market despite possessing educational qualifications and skills. [World Bank (2024): Female Labor Force Participation Rate – Sri Lanka; Department of Census and Statistics, Sri Lanka: Labour Force Survey Annual Report 2024]

Female unemployment in Sri Lanka also remains consistently higher than male unemployment. According to the Sri Lanka Labour Force Survey Annual Report 2024 of the Department of Census and Statistics, Sri Lanka, the female unemployment rate was 7.1% in 2024, compared with 3.0% for males.

Addressing Sri Lanka's female labour market deficits requires a multi-dimensional policy response. The expansion and subsidisation of childcare infrastructure is arguably the most impactful single intervention available to policymakers. Drawing on the experience of South Korea, Vietnam, and Chile, the ADB recommends that Sri Lanka develop a national childcare framework combining public provision, employer-subsidised workplace crèches, and co-payment schemes calibrated to household income. The ILO further recommends extending maternity leave benefits to a social insurance model funded through tripartite contributions, to remove the current employer-side disincentive to hiring women. [Asian Development Bank & International Labour Organisation (2023), Investments in Childcare for Gender Equality in Asia and the Pacific].

Flexible working arrangements, including part-time employment, hybrid work, remote work opportunities, and flexible working hours, could also help women balance family and employment responsibilities more effectively. The expansion of digital infrastructure and remote employment opportunities may particularly benefit educated women living outside major urban areas. The growing digital economy and BPO sector represent a particularly promising avenue for expanding female employment, given flexible work arrangements, competitive wages, and lower physical mobility requirements [International Finance Corporation (2023), Women’s Economic Opportunities in South Asia: Digital Employment and Entrepreneurship].

When physical travel is indispensable, enhanced public transport systems with improved security measures, lighting, and surveillance can also encourage women to seek employment further from home.

Youth female unemployment is a particularly acute dimension of the problem. The Labour Force Survey 2023 of the Department of Census and Statistics, reports female youth unemployment (ages 15–24) at approximately 28.6%, compared to 16.4% for male youth. The World Bank has linked Sri Lanka's youth female unemployment to a mismatch between university and vocational training curricula, and private sector demand, noting that investment in STEM education for women and industry-aligned skills training for women could materially reduce this gap.

Although female educational attainment in Sri Lanka is relatively high, women are concentrated in arts and humanities streams while remaining underrepresented in science, technology, engineering, and mathematics (STEM) fields. Encouraging girls and women to pursue STEM education, vocational training, entrepreneurship development, and digital skills training can improve women’s access to high demand employment opportunities. [International Finance Corporation (2023] Women’s Economic Opportunities in South Asia: Digital Employment and Entrepreneurship].

Government and private sector partnerships could support female entrepreneurship through mentoring programmes, business development services and improved access to finance and markets. Women-owned small and medium enterprises have significant potential to contribute to employment generation and economic diversification if adequate institutional support is provided.

Trade and export-oriented reforms

Sri Lanka’s economy has remained relatively inward-looking compared to other successful Asian economies. It is now widely accepted that policies which are neutral, between those goods produced for the export market and those that are produced for the domestic market, lead to a superior outcome, by allowing comparative advantage to assert itself.

Sri Lanka’s export composition has changed little from that of the 1990s, despite significant shifts in technology and global demand. Sri Lanka must diversify beyond tourism, remittances, and traditional exports such as garments and tea, and more into sectors such as information technology, professional services, logistics, renewable energy and value-added agriculture.  Diversifying export markets too should be on the high priority list. It is encouraging to note that the National Export Development Plan 2026-2030 heavily emphasises export product diversification and export market diversification. So, the next step is to execute that plan diligently. 

The Economic Transformation Act, No. 45 of 2024 identifies export diversification, foreign direct investment and export competitiveness as central pillars of Sri Lanka’s economic transformation strategy. Achieving this transformation requires effective execution of reforms in customs procedures, logistics, trade facilitation (including the National Single Window), reducing trade costs and elimination of red tape, investment approvals and streamlining investment processes, digital regulation, improving productivity, expanding market access, and integrating local firms into regional and global value chains. Further, reducing tariff and non-tariff barriers and phasing out para tariffs, would help increase exports and attract export-oriented FDI. 

Investment climate reforms

Investors require policy stability, contract enforcement, transparent regulation and protection from corruption. Transparent, consistent and predictable policies are especially important because frequent policy reversals in taxation, trade, and import controls have historically undermined investor trust.

Strengthening governance

Weak institutional quality and governance failures were major contributors to Sri Lanka’s 2022 economic crisis. Investors require confidence that contracts will be enforced fairly and that public institutions operate transparently. The IMF has repeatedly stressed the importance of governance reforms, improved public financial management, and stronger fiscal discipline in restoring economic credibility. Anti-corruption frameworks, judicial independence, and transparent procurement systems would improve Sri Lanka’s international reputation and attract higher-quality investments. [IMF (2025) Sri Lanka: Fourth Review under the Extended Fund Facility Arrangement].

Conclusion

Temasek Holdings in Singapore and Khazanah Nasional Berhad in Malaysia were established to hold and manage government investments/enterprises. For countries such as Sri Lanka, the key takeaway is not simply to establish a state holding company, but to create institutions that are insulated from political interference, managed by competent professionals, and focused on long-term value creation.

Land reform should be pursued based on establishing secure property rights, digital land administration, climate-resilient land use and investment facilitation, and removing constraints on land leasing and consolidation.

Increasing female labour force participation requires among other things, a comprehensive policy approach involving childcare support, flexible employment arrangements, investment in STEM education and industry-aligned skills training for women, and better transportation. 

Trade and export-oriented reforms, investment climate reforms, strengthening governance, and reducing corruption are also essential reforms that need to be implemented.

The implementation of economic reforms with a sense of urgency is vital for sustained long-term development of Sri Lanka. The political will to implement these reforms will be key in determining the successful execution of the reforms.

(The author counts over three decades of experience in the field of economic research in the private sector. He has earned a BA (Hons) in Economics, an MA in Economics and a PhD in Economics at the Department of Economics of the University of Colombo. He can be reached at [email protected].)