FDI inflows: Moving beyond numbers

Last month, the BOI announced that Sri Lanka registered a remarkable 101% year-on-year surge in realised Foreign Direct Investment (FDI) inflows during the first half of 2025, reaching about $ 507 million. The investment promotion agency had pointed out the impressive performance marks the country’s strongest first-half FDI achievement in recent years and reflects deepening investor confidence in Sri Lanka’s economic reforms and investment climate. It is also reported that the BOI received around $ 4.7 billion investment proposals during the first half of 2025.

The prevailing stable political and economic structure in the island creates a highly favourable and conducive environment to attract FDIs compared to the period of 2022-24, which was associated with non-ending instability and uncertainty. Prior to the national elections last year, the NPP was claiming that a government under their command has better prospects of attracting substantially higher levels of FDIs due to their commitment to end the entrenched culture of bribery and corruption in the country. It has been universally acknowledged that a significant growth in FDI inflows would undoubtedly enhance the standard-of-living of the nation besides accelerating economic growth.

For decades, attracting FDIs has been considered as the Achilles’ heel of the Sri Lankan economy. The neighbouring India on average attracts over $ 70 billion FDI inflows per year, and the Modi administration aims to raise it to $ 100 billion. Even a country like Cambodia (which has a less population than ours) received $ 8.1 billion FDI inflows last year (from 2023 Sep to 2024 Sep). Hence, celebrating the realisation of $ 500 million FDIs as a major victory is quite meaningless considering the outstanding FDI-related track records of regional peers

Meanwhile, the IMF’s restrictions on granting sweeping tax exemptions to investment projects has reportedly stalled the implementation of some of the landmark FDI projects that were signed few months ago. Sinopec’s state-of-the-art, oil refinery in Hambantota—a $ 3.7 billion investment, is facing implementation delays due to disagreements over tax holidays as well as access to the local market. Although a 25-year-tax holiday was agreed with the Chinese State-owned Corporation in the initial stage, the Government is unable to provide such a generous concession due to the IMF program.

Recently, the IMF had opined that providing ad hoc, non-transparent and large tax exemptions in the past has created significant issues, particularly with regard to erosion of tax revenue. However, despite offering a host of tax incentives in the past, Sri Lanka was unable to attract a meaningful quantum of FDIs. Analysts have stressed that investors prioritise considerations such as macroeconomic stability, access to skilled labour, and quality infrastructure facilities when making investment decisions over and above tax concessions.

When the war ended in 2009, all would have expected a substantial upsurge in FDIs to the economy. Unfortunately, those expectations did not materialise. According to the former BOI Chief Thilan Wijesinghe, FDI net inflows during the 20 years prior to the end of the conflict averaged 1.3% of the GDP but 10 years after end of the conflict, the average declined to 1.1% of the GDP. FDIs to the country have largely been channelled towards tourism, real estate, mixed development projects, ports and telecommunications in the recent past as per the BOI.

A major impediment that considerably dilutes Sri Lanka’s appeal as an investment destination is its declining labour force, notably, driven by increased migration and ageing population. Going forward, policymakers might have to explore avenues of opening up the labour market to workers from excess-labour countries in the region by devising policies to issue work visas in a systematic manner.

To improve Sri Lanka’s prospects of attracting FDIs, the Government needs to give priority towards creating a favourable macroeconomic environment with policy consistency apart from improving the efficiency of institutes like the BOI. Eradicating corruption alone is not sufficient to raise the country’s profile as a sought-after destination for FDI.