Sri Lanka’s investment climate remains challenging despite the country’s economic recovery, with foreign direct investment (FDI) inflows still well below levels commonly seen in emerging economies, according to the U.S. Department of State.

In its 2026 Investment Climate Statement on Sri Lanka, the Department said FDI stood at US$1.06 billion in 2025, equivalent to around 1% of GDP. This is significantly below the 3–4% of GDP commonly seen in emerging economies.

The report noted that Sri Lanka recorded 5% economic growth in 2025, exceeding expectations, while political developments following the election victories of the National People’s Power (NPP) in late 2024 provided greater political stability.

However, it said many investors remain cautious, citing mixed messages on market openness and concerns over policy consistency and regulatory predictability.

Political stability, but policy uncertainty

The NPP government’s commitment to the US$3 billion IMF Extended Fund Facility (EFF) programme covering 2023–2027 has helped reassure investors, according to the report.

At the same time, investment experts have identified policy stability, regulatory reform, skilled labour and access to industrial land as areas requiring greater attention.

The report also said investors have raised concerns about project reversals, regulatory changes, slow decision-making and inadequate government support. The IMF and local business chambers have called for structural reforms, including improvements to trade facilitation, digitisation and governance.

High-profile investment projects face setbacks

The report highlighted several major investment projects that have faced delays or changes under the current government.

In January 2025, the President committed to a US$3.7 billion oil refinery project by Sinopec near Hambantota International Port. However, as of June 2026, the project remained pending amid disagreements between the government and the Chinese company.

In February 2025, Adani Green Energy withdrew from a proposed US$400 million, 484-megawatt wind power project in northern Sri Lanka. The report said the company cited efforts by the Sri Lankan government to renegotiate the previously awarded contract.

The report also said the government ended negotiations with China Harbour Engineering Company over a proposed floating liquefied natural gas terminal in December 2025, just days before the contract was due to be signed.

The government has also suspended many of the previous administration’s plans to privatise state-owned enterprises, opting instead for restructuring and management reforms. The report said some investors remain concerned about mixed public messaging on the role of the state in the economy.

Red tape and labour challenges

Sri Lanka continues to face difficulties in making the Board of Investment (BOI) function as a genuine one-stop shop for investors, with approvals often requiring coordination among multiple government agencies.

The report said foreign investors continue to face unnecessary regulations, legal uncertainty, slow bureaucratic responses and high transaction costs. It also pointed to inefficiencies in state-owned energy enterprises, particularly the Ceylon Electricity Board, as a factor affecting investment.

In May 2026, the government launched the Ready to Invest platform as an effort to improve the investment process.

The report also identified labour regulations and shortages of skilled workers as continuing challenges. Strict labour rules can make workforce reductions difficult and costly, while skilled-worker shortages have become a major concern as Sri Lankans continue to migrate for employment opportunities abroad.

The garment sector, for example, has experienced employee turnover of up to 40%, according to the report.

Foreign investors also face restrictions on land ownership. In general, the sale of land to foreigners and companies with more than 50% foreign ownership is prohibited, subject to limited exceptions.

Financial sector shows resilience

Despite the challenges facing investment, the report highlighted improvements in Sri Lanka’s financial sector and external position.

The Colombo Stock Exchange’s All Share Price Index (ASPI) rose 42% in 2025, while the S&P SL20 increased 27%. Market capitalisation also grew by 42%.

The report said the Central Bank of Sri Lanka purchased around US$2 billion in foreign exchange during 2025, helping gross official reserves rise to US$6.8 billion, the highest level since the 2022 economic crisis.

Worker remittances also increased to US$8.1 billion in 2025 from US$6.6 billion in 2024.

The banking sector also recorded stronger performance, with banking profits after tax rising 19% to around US$1.2 billion. Total banking assets increased 12% to approximately US$80 billion, while all banks remained above the minimum capital requirement.

Structural reforms remain important

The report said Sri Lanka has made progress in recovering from the economic crisis, but attracting higher levels of foreign investment will depend on addressing structural and regulatory weaknesses.

It highlighted the need for more predictable policies, streamlined approval procedures, improved trade facilitation, stronger governance and greater digitisation.

While the country’s financial stabilisation has improved the broader economic environment, the report indicates that addressing these longer-term investment barriers remains important for attracting more foreign capital.