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Decoding US investment climate warning for Sri Lanka
This article is authored by Shishir Priyadarshi, president, Chintan Research Foundation and former director, WTO, New Delhi.
Sri Lanka’s investment climate—a critical barometer of its ambitions for its post-crisis recovery and sustainable development—remains mired in uncertainty and policy inconsistency, as underscored by the US Department of State’s 2025 Investment Climate Statement for the island nation. The report offers both a sober diagnosis and a cautionary tale, highlighting how regulatory ambiguity, bureaucratic delays, and unpredictable policy shifts are deterring large-scale investment and stifling growth prospects, in a country where previously foreign investment had thrived.
Sri Lanka entered 2025 with hopes rekindled. GDP growth had hit 5 percent in 2024, outperforming expectations and signaling a rebound from the economic crisis of 2022. The sweeping electoral victory of President Anura Kumara Dissanayake and the National People's Power (NPP) coalition had brought a measure of political stability and a clear mandate for reform. International stakeholders were encouraged by NPP’s support for Sri Lanka’s $3 billion International Monetary Fund (IMF) programme, an anchor for fiscal discipline and policy predictability. Yet, despite this renewed optimism, the investment climate in Sri Lanka remains deeply constrained, as the report by the US’s State Department shows. Foreign direct investment (FDI) is languishing, with most deals that are happening being in the modest $3–5 million range, far short of the government’s ambitious $5 billion target for 2025.
The Report says that “Regulatory unpredictability, bureaucratic hurdles, and selective transparency continue to limit broader participation.” Investors routinely cite project reversals, abrupt regulatory changes, and slow decision-making that undermines confidence and makes long-term investment planning nearly impossible. The Board of Investment (BOI), intended to be a one-stop shop for investors, struggles under the weight of fragmented authority and overlapping ministry jurisdictions—leading to lengthy approval processes and opaque decision-making. The cumulative effect is a market where not only are operating costs high, but access to transparent, rule-based procedures remains elusive. Unlike Singapore or Vietnam, where investors find regulatory clarity and predictable enforcement, Sri Lanka’s approach leaves both domestic and foreign investors guessing about tomorrow’s rules.
The most vivid illustration of these structural deficiencies is Adani Green Energy’s withdrawal from its $400 million, 484 MW wind power project in northern Sri Lanka. Announced with much fanfare and touted as a linchpin in the island’s renewable energy strategy, this project ultimately faltered, as analysed in the Report, because of protracted tariff negotiations, unresolved environmental approvals, and shifting regulatory goalposts.
After securing most required approvals and spending more than $5 million on preliminary activities—including land acquisition and environmental studies—Adani found itself embroiled in endless rounds of tariff renegotiation with the government. The government sought to lower the power price from an already committed and agreed upon $0.08 per kilowatt-hour to $0.06, citing fiscal pressures—a move which rendered the project commercially unviable for the investor. Meanwhile, environmental clearances in Mannar remained blocked, and an ongoing Supreme Court case added to uncertainty.
This episode did not merely reflect a failed investment opportunity – this breakdown of a high-profile investment is reflective of a much deeper malaise in the system, which is likely to have serious implications for the island county’s broader effort to attract investment into its critical infrastructure, especially in to its energy sector.
Structural reforms, particularly the privatisation of loss-making State-owned enterprises like the Ceylon Electricity Board, have been slow and contentious. These organisations, meant to anchor the energy sector, are riddled with inefficiencies, cross-subsidization, and a lack of market discipline. Attempts to inject private capital or restructure these entities invariably stumble at the threshold of political calculations. The State Department Report explicitly links the lack of energy sector reform to the wider challenge of attracting cost-competitive investment for industrial expansion and climate resilience. Without a clear pathway toward modernizing SOEs, Sri Lanka’s energy mix—and its ability to support industrial growth—remains precarious.
Ironically, the investment climate statement does not portray an entirely bleak horizon. Sectors like ICT, tourism, aviation, and logistics continue to draw interest, with U.S. firms and other internationals exploring select opportunities. The NPP government’s rhetoric remains pro-investment, and its commitment to the IMF reform package has reassured some stakeholders of its willingness to embrace change.
Moreover, Sri Lanka’s geographical location, educated workforce, and improving infrastructure—most notably the Chinese-funded Hambantota Port expansion and the upcoming $3.7 billion Sinopec refinery—suggest that if regulatory and policy frameworks can be stabilised, the country may still be able to attract investment. The challenge, as the report makes plain, is converting this latent potential into sustained investor confidence.
The path to a vibrant, competitive investment environment will require the Government to take a number of steps. Sri Lanka needs to pursue comprehensive regulatory reform with an emphasis on transparent enforcement to build trust among investors and ensure the orderly functioning of markets. This requires revising outdated laws, harmonising disparate rules across sectors, and empowering independent regulatory agencies to act fairly and consistently, thereby eliminating arbitrary decision making and reducing red tape.
Streamlining the approval process is equally essential. The government should establish empowered, well-resourced one-stop authorities. These bodies must be equipped to provide time-bound, clearances and guidance, which would not only accelerate project implementation but also enhance accountability for policy delivery.
A cornerstone of a healthy investment climate is credible and predictable mechanisms for tariff setting, dispute resolution, and environmental clearance. Investors need clear, objective frameworks to plan capital-intensive projects without fearing sudden reversals, price controls, or arbitrary interpretations. Transparent pricing, independent adjudication of disputes, and straightforward pathways for environmental permissions are vital for stabilising investor confidence, especially in long-term sectors like energy and infrastructure.
Reform of State-owned enterprises, especially in sectors like energy, demands political courage. The government must move decisively to restructure inefficient public monopolies, introduce commercial discipline, and allow private sector competition where possible. Only through true institutional and governance reforms will these enterprises become engines of growth rather than bottlenecks or fiscal drains. Real progress will require overcoming entrenched interests and pushing for statutory, not just administrative, change.
Finally, fostering an ongoing, constructive dialogue between the government and both domestic and foreign investors is crucial at every level. Policy must not be forged in isolation; open consultation, formal business councils, and transparent feedback mechanisms help prevent misunderstandings, surface practical implementation issues early, and build a shared vision for Sri Lanka’s economic future. Sustained engagement sends the message that the government values partnership and is responsive to concerns—a core ingredient in restoring faith in Sri Lanka’s economic potential.
The 2025 US Investment Climate Statement for Sri Lanka is a clarion call to policy makers, corporate leaders, and international partners. Sri Lanka stands at an inflection point where future economic progress depends on translating hard-won stability into lasting reform. While the nation’s recent economic rebound and success in securing international support have restored a measure of confidence, these gains remain fragile unless backed by deeper, structural change. Reform momentum is not just desirable—it is essential to break the cycle of policy volatility that has hampered private investment and long-term development.
The cautious optimism surrounding Sri Lanka is grounded in the recognition that macroeconomic reforms are yielding positive outcomes, with growth steadily returning and inflation remaining subdued. International reserves have improved and key milestones in fiscal discipline are being achieved. These successes suggest that Sri Lanka is capable of undertaking necessary changes, even if the path ahead is demanding and the risks—external shocks, trade uncertainty, and climate issues—remain real.
Ultimately, the country’s ability to fulfill its development ambitions will require leaders to embrace the lessons of recent crises and persist with steadfast reform, especially in governance, regulatory frameworks, and the energy sector. Investors, both foreign and domestic, are closely watching for signs of consistency, transparency, and genuine partnership. If Sri Lanka’s government chooses the path of reform over volatility, it will not only retain investor interest but also unlock the resilient, inclusive economic growth that its people deserve. The next opportunity is within reach—the challenge is to seize it, and not let it slip away.
This article is authored by Shishir Priyadarshi, president, Chintan Research Foundation and former director, WTO, New Delhi.
