From promise to paralysis: Elusive FDI boost in Sri Lanka

Early this month, confusion arose as to how much Foreign Direct Investment (FDI) was channelled into the country’s economy in the first quarter (1Q) of this year due to various individuals and institutions of the Government apparatus presenting contradictory figures. Minister of Industries and Entrepreneurship Development Sunil Handunneththi stated that Sri Lanka received $ 650 million in FDI during the 1Q of 2025. However, his remark differed from the latest data issued by the BOI. 

According to the state foreign investment promotion agency, the realised FDI over the first three months of the year was $ 203 million — representing a surge of 90% over the corresponding period in the previous year. These inconsistencies prompted Opposition politicians to criticise the Government and question the credibility of its statistics. That said, the reported 90% rise in the realised FDI over the 1Q 2024 is undoubtedly a positive development.

Last year coincided with two national elections. It was not a conducive period for investments due to uncertainty over Government policy direction. In contrast, the country today is associated with heightened political and policy stability, with both the Executive and Legislature represented by the same political party. During the run-up to the national election cycle last year, the NPP assured the electorate that an administration led by them would be better poised to attract a significant amount of FDI by eliminating the entrenched culture of soliciting bribes and kickbacks from investors.

Nevertheless, the realised figure during the 1Q remains inadequate to meet the BOI’s target of securing $ 2 billion in FDI for the year. One particular area in which Sri Lanka lags behind regional peers such as Vietnam and Thailand is export-oriented foreign investment inflows. Vietnam, for instance, has been highly successful in attracting investments of multinational giants, enabling it to produce high-value manufactured goods for international markets. The Southeast Asian nation has transformed itself to become a global manufacturing hub, with the South Korean mobile phone giant Samsung serving as its largest exporting entity. 

Meanwhile, Sri Lanka’s ability to attract prominent multinationals is severely constrained by its outdated laws and regulations. For example, under the current legal framework, foreign-owned firms are prohibited from purchasing land outright. Unless these archaic laws are reformed, the prospects of attracting larger volumes of foreign investment will remain remote.

Although the Government is upbeat about FDI inflows during the 1Q, the uncertainty surrounding the $ 3.7 billion oil refinery investment by Sinopec in Hambantota — which is considered the largest-ever FDI project in Sri Lanka — is a major cause for concern. The keenly anticipated project is reported to have reached a stalemate due to disagreements between the investor and the Government regarding access to the local market for the latter’s refined products. The Chinese firm is expected to build a refinery with a capacity of 200,000 barrels, with a substantial portion of its output intended for export. Should Sinopec pull out, it would be a major blow to Sri Lanka’s anticipated economic revival.

In the meantime, despite high expectations for greater foreign investments, BOI Chairman Arjuna Herath had recently expressed a rather lukewarm view on Sri Lanka’s attractiveness for FDI. “What do we offer? Why would a foreign investor come? Either we have market access, or we are close to supplies, or we have human resource skills and some excellent, unique properties, but all these things are not on our side,” Herath had lamented.

Sri Lanka’s track record in attracting FDI has been highly disappointing for decades. Although the war ended in 2010, the expected post-war surge in FDI never materialised. A large influx of investment, driven by meaningful policy reform, could help elevate economic growth and enable the country to transform into a modern, prosperous economy. If the Government is serious about economic transformation, it must stop paying lip service and start executing real reform.