EFC Chief calls for urgent labour reforms to unlock investment and drive growth

EFC Director General Vajira Ellepola 

• Warns of low workforce participation, with national LFPR at 47.4% and female LFPR at 31.3%, far below regional peers
• Points to country’s FDI inflow fluctuations, reflecting weak investor confidence
• Says outdated labour laws, rigid termination rules and fragmented employment regulations hinder competitiveness
• Proposes reform around three pillars: termination of employment, conditions of employment and industrial relations
• Urges unified employment code, modern social security system and shift from litigation to mediation in labour disputes
• Pushes for cross-cutting reforms, including flexible work models, evidence-based minimum wage setting and night work access for women
• Stresses regulatory simplification, technology adoption and institutional reform are key to global competitiveness

By Charumini de Silva

The Employers’ Federation of Ceylon (EFC) Director General Vajira Ellepola recently called for bold and comprehensive labour reforms, warning that without decisive changes, Sri Lanka risks remaining stuck in economic stagnation and missing out on critical foreign direct investment (FDI) needed for long-term growth. 

He made these remarks during a webinar jointly organised by the Daily FT, Association of Chartered Certified Accountants (ACCA), International Chamber of Commerce Sri Lanka, Women in Management (WIM), SLASSCOM, Sri Lanka Institute of Directors, MBA Alumni Association of the University of Colombo, and the EFC. 

Sharing insights against the backdrop of fluctuating investment flows and the regional labour market, Ellepola warned that the country’s outdated labour framework, low workforce participation, and fragmented employment laws are severely undermining its competitiveness. Citing data from the latest World Investment Report 2025, he noted that global FDI contracted by 11% last year, while inflows into Asia dipped by 3% from $ 622 billion in 2023 to $ 605 billion in 2024. North America and Africa bucked the trend, registering a sharp increase of 23% and 75%, respectively.

He said Sri Lanka’s own FDI performance over the past five years reflects similar fluctuations. According to him, in 2019, FDI stood at $ 743 million, in 2020 it dropped to $ 434 million, in 2021 it was $ 592 million, in 2022 it was $ 884 million, in 2023 it was $ 713 million, and last year it was $ 761 million. 

“These figures point to the urgent need to evaluate regional investment trends and evaluate how Sri Lanka can create a conducive environment to woo and retain investment,” Ellepola added.

A key area of concern he said lies in the country’s underutilised labour force. “With a population of 22 million and 17 million people of working age, only 8.3 million are officially part of the labour force. Of them, 7.3 million are employed, with an unemployment rate of 4.4%,” he noted.

However, Ellepola highlighted that Sri Lanka’s overall labour force participation rate (LFPR) stands at a worrying 47.4%, while female participation is just 31.3%. 

In contrast, he said regional peers such as Malaysia’s LFPR is 70.8%, Vietnam 68.2%, Japan 64%, the Philippines 63%, and Indonesia 69.3%, while the female LFPR in Vietnam is 69%, Australia 63%, and even India with 41.7% report far stronger levels of engagement. 

“These comparisons highlight a major structural issue. If we want to advance labour market reforms, we cannot ignore such low participation, particularly among women. Raising these figures is a prerequisite for meaningful economic growth and attracting FDI. A conducive labour market is fundamental to foreign investment decisions,” he opined.

He noted that investors focus primarily on three criteria—labour costs, the availability of a skilled workforce, and the flexibility of labour laws. On these three fronts, Sri Lanka’s labour laws have remained largely unchanged until recent years.

“We must now move decisively to implement labour law reforms that align with the modern economy, especially as digital transformation reshapes the world of work,” he added.

The EFC Chairman proposed a reform agenda focused around three key pillars—termination of employment, conditions of employment, and social security and industrial relations.

The first factor, termination of employment, he said continues to be governed by rigid legal provisions under the Termination of Employment of Workmen Act. 

Ellepola warned that the current system, which creates legal ambiguity and procedural delays around layoffs and retrenchment, discourages enterprise restructuring and job creation. “A more transparent and simplified regime would enhance business confidence and flexibility,” he added.

In terms of the second pillar, which concerns the fragmented legal framework that governs employment terms, he said Sri Lanka currently maintains over a dozen laws on wages, working hours, leave, and holidays, many of which conflict with one another. 

“This legal tangle deters investors,” Ellepola said, calling for the unification of these provisions into a single, modern code. In addition, he said social security reforms must go beyond retirement benefits to include health insurance, maternity benefits, and other forms of social protection. Governance of existing social security funds must also be improved to ensure transparency and restore public trust.

On industrial relations, Ellepola pushed for a shift from adversarial litigation to cooperative conflict resolution mechanisms, including mediation and arbitration. “Reducing the incidence of labour disputes and strikes would help ensure business continuity and preserve investor confidence,” he added.

In addition to these, he urged policymakers to consider several cross-cutting reforms, including lifting outdated restrictions on night work for women, introducing flexible and hybrid working models, and moving away from politically driven wage-setting mechanisms. 

“Minimum wages should be determined through evidence-based tripartite bodies and not arbitrary Government intervention. Predictability and policy stability are key to restoring investor confidence,” he stressed.

He also noted that although labour reform is necessary, it is not sufficient on its own. “Sri Lanka must revise its education and training systems to build a workforce ready for the demands of the digital economy,” he added. 

The EFC Chairman was of the view that curricula should reflect emerging trends in Artificial Intelligence (AI), ICT, the green economy, and automation. 

“Institutions must form closer links with industry to align learning outcomes with labour market needs. Without a skilled, future-ready workforce, labour market flexibility means little,” he pointed out.

On the broader economic front, he asserted that investment, especially in infrastructure, remains a non-negotiable requirement. 

He called for renewed capital inflows into renewable energy, digital infrastructure, water and sanitation, tourism, and smart agriculture. 

Ellepola also insisted on public-private partnerships (PPPs) to strengthen to achieve these and Sri Lanka must present itself as an attractive, rules-based investment destination. “Capital flows to where it is easiest, not necessarily where it is most needed,” he stressed. 

The EFC Chairman opined that if Sri Lanka is to compete globally, it must simplify its regulatory environment, embrace technology, and commit to long-term institutional reforms. “These measures must be integrated into a wider economic strategy focused on growth, competitiveness, and resilience,” he said.