FDI Freeze: The Hidden Barriers Behind Sri Lanka’s Investment Drought

FDI Freeze: The Hidden Barriers Behind Sri Lanka’s Investment Drought

Referenced Article:
“From promise to paralysis: Elusive FDI boost in Sri Lanka”
Published on: July 2, 2025
Source: Daily FT
Author: Daily FT Editorial Team

Summary of the article

Through this article, Daily FT examines the challenges faced by Sri Lanka in attracting foreign direct investments. Despite the political stability, the country struggles with outdated laws and weak institutions. These issues send negative signals to investors along with stalled massive projects like Sinopec.

The Numbers Game of the Government

The story behind Sri Lanka’s Foreign Direct Investment (FDI) in the 2025 first quarter is confusing. The Industries Minister claimed the country received $650 million in FDI during the first quarter, but the Board of Investment (BOI) said it was only $203 million. This demonstrates the poor coordination between those institutions and the government. Despite this situation, BOI reported a 90% increase in its foreign investments compared to the same period last year. The major concern is that Sri Lanka is still struggling to attract foreign money despite having political stability and good promises.

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Old Laws are Killing Investment Opportunities

In Sri Lanka, foreign companies can not purchase land directly. Such laws and regulations signal red flags for serious investors, which is a major problem for the country. Countries like Vietnam showcase a completely different scenario. They have changed their laws to welcome foreign giant manufacturers like Samsung. Now, Vietnam is a pioneering manufacturing hub in the world, while Sri Lanka is still stuck with old rules that make investors fearful. This shows how important strong institutions and clear property rights are for attracting foreign money to achieve the country’s economic development targets.

 

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Warning Sign of the Sinopec Project

Recently, the Chinese Sinopec company proposed a $3.7 billion oil refinery project in Hambantota, which would be the largest foreign investment in Sri Lanka’s history. The concern is that the project remains stuck due to disagreement between the government and the company on market access for refined oil products. If this fails, it will send a bad signal to all the potential foreign investors who wish to invest in the country in the future with massive investment plans. The country continues to struggle due to these terrible bureaucratic problems, which have led to a failure to attract significant foreign investment even after the war ended in 2010.

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What Sri Lanka Lacks

"What do we offer? Why would a foreign investor come?" This represents the honest assessment of BOI Chairman Arjuna Herath about investment attractiveness when he was asked. He admitted that in Sri Lanka, limited special market access, distance from key suppliers, and a lack of skilled workers prevent the country from attracting foreign money. Countries attract foreign investment by offering special facilities to investors; however, Sri Lanka’s administration has yet to identify its unique value proposition. This is the harsh reality behind the country’s economy.

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Time for Action, Not Just Talk

Sri Lanka should stop making promises and start making real changes; that is the central message of this article, which includes changing old laws, improving government efficiency, building better infrastructure, and creating a business-friendly environment. The current government’s political stability gives it a chance to do these tough reforms. The 90% increase in FDI during the first quarter is encouraging, but it falls well short of the $2 billion target for 2025. In this race for global foreign investment, Sri Lanka will continue to fall behind countries like Thailand and Vietnam without those particular reforms. The concern is whether the current government has the courage to make the tough reforms needed for economic transformation.

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Personal Analysis

FDI attractiveness requires considering multiple dimensions, not only governance issues. FDI flows depend on risk-return calculations because investors look into factors like capital market efficiency. Weak institutions are not just Sri Lanka’s problem; inadequate financial infrastructure and limited capital market depth are also there. The conflict between the government and the BOI numbers increases the investment risk. The Sinopec case shows how bureaucratic delays can kill even large-scale projects. The country must reconsider how sudden capital outflows during crises can destabilize our already fragile financial system. We need to build strong banking systems, efficient capital markets, and proper monetary policies to attract sustainable FDI.

✍️ Written by: Ravindu Wijesiri

📅 Published on: July 6, 2025