General Information

Economic Indicators

Trade Indicators

Economic Overview

Sri Lanka is a relatively open market in South Asia, with steady GDP growth and a political commitment to further economic liberalisation. Tariffs are relatively low and there are few non-tariff barriers although some structural rigidities remain.

The governments economic policy is aimed at the promotion of exports and the control of import growth. As such, Sri Lanka has experienced strong export-led growth in the past few years that significantly increased the total value of its foreign trade.

The services sector accounts for the largest share of GDP (50%) and the economy is heavily dependent on trade. However the manufacturing sector (17% of GDP in 1998) is the preeminent growth sector in the economy with export-oriented factory industries leading this expansion. 1

FDI has risen steadily over the last few years and, with the exception of 1996, Sri Lanka has managed to record an overall surplus on balance of payments. 2

Regulatory Environment

"For the past three decades structural adjustment and economic reform have been the cornerstone of economic policy, but implementation has been erratic", however, tax and trade reforms made progress during 1997 and 1998 and the privatisation program has been the most successful area of structural reform. 3

Sri Lanka has a three-band import tariff schedule based on the harmonised system of classification. The three bands are 5%, 10%, and 30%. Most consumer goods, agricultural products, chemicals and other intermediate goods manufactured locally are subject to a 35% tariff. Tobacco, cigarettes and liquor do not come under the three-band rate structure. Motor vehicle duties previously between 50% and 100% are now levied at 30%. Imports for most export-oriented industries are either entered duty free or entitled to duty rebates.

Sri Lanka has made major strides since the early 1980s in creating a favourable environment for the private sector. The government has deregulated most sectors, eliminated most price controls and quotas, liberalised the issuance of import licenses, terminated export taxes, and privatised many state-owned companies. It actively promotes inward foreign investment in most fields. Sri Lanka attained full current account convertibility in March 1994, when it accepted the obligations under Article VIII of the IMF Articles of Agreement. 4

The Board of Investment (BOI) is the primary government authority responsible for foreign investment. Total foreign ownership is permitted across virtually all areas of the economy. 5

The BOI is empowered to offer special incentives for firms involved in several key sectors including: (a) the manufacture and export of non traditional products and services;
(b) the manufacture and supply of fabric and other accessories for the garment industry,
(c) the development and export of computer software. These incentives include:

• Full tax holidays for a period of up to 20 years;
• Concessionary tax at 15% per annum for a period of up to 20 years;
• Duty free imports of plant, machinery, raw material and other project related goods as approved by the BOI.
• Exemptions from turnover tax and excise duty for imports of export companies.
• No restriction on repatriation of dividends, profits etc.
• Free transferability of shares.
• Import duty exemptions;
• Exchange control exemptions; 6

Trade liberalisation, deregulation and privatisation have improved conditions for employment and growth. Efforts are being made to further streamline the tax and tariff system, including through the introduction of a comprehensive goods and services tax, and to inject competition into public sector domains.

Sri Lanka has made significant progress in reducing trade barriers through tariff liberalisation ana harmonisation, the abolition of virtually all quantitative restrictions, the termination of many state-trading monopolies and the gradual opening of some service industries to foreign suppliers and investors.

1. Country Profile: Sri Lanka: 1999-2000 (The Economist Intelligence Unit, London, 1999), p. 15.
2. lbid., p.31.
3. Ibid., p. 16.
4. Trade Compass Country Commercial Guides,
   (http://www.tradecompass.com/library/books/com_guide/).
5. Sri Lanka Investment Policies and Incentives, (Board of Investment of Sri Lanka, Sri Lanka, 1998), p. 4.
6. Ibid., pp. 42-51; Trade Compass....