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THE ECONOMY


"Comparisons have shown that Sri Lanka offers one of the most liberal business environments in Asia."

Sri Lanka's economy recorded considerable growth in 1997 with Gross Domestic Product (GDP) growth reaching 6.4 per cent (compared to an average of 5.00/0 per annum from 1994 to 1996). The salient features of the economy for 1997 are summarised below

Manufacturing output increased by 10.3% and the unemployment rate declined to 10.4% compared to 11.1% in 1996.

Inflation declined to 9% in 1997, compared to 12% in the previous year, primarily due to reduction of the budget deficit to 7.9% of GDP from 9.4% in 1996. (If privatisation proceeds are included, the budget deficit for 1997 was 5.3%.)

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The external sector was buoyant. Total exports and industrial exports grew by 13% and 16% in US$ terms respectively. The current account deficit and the trade deficit declined to 2.5% and 8% of GDP respectively.

Total foreign investments (including net foreign direct and portfolio investment and privatisation proceeds) reached US$ 450 million for 1997 - the highest ever on
record.

The external debt service ratio was reasonable at 13.7% of exports in 1997. Short term foreign borrowings were less than l0/o of total capital inflows, thus insulating Sri Lanka's economy against volatile capital transfers.

The balance of payments recorded a surplus of over US$ 163 million (2.7% of GDP) and foreign reserves (U S$ 2 billion) are adequate to cover almost 4 months' imports.

INFRASTRUCTURE


Private and public investment programmes have been implemented to improve the country's basic infrastructure facilities, which today rank as the best available in South Asia.

Ports : Throughput at Colombo Port has grown at a compound annual rate of 20.3 % over the last five years to reach 1.68 million TEUs at present. Trans-shipment cargo accounts for 72% of throughput, positioning Colombo as a major shipping hub. Construction has already commenced to further expand capacity to 3 million TEUs within the next 3 years.

Telecom : Today Sri Lanka has multiple providers of Basic (3 companies), Cellular (4 companies) and Pay(phone) (5 companies) telephone services, making the industry among the most competitive in Asia. The number of fixed telephone lines installed increased by 65% in 1997 due to the entry of 2 wireless local loop operators and the privatisation of Sri Lanka Telecom.

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Power: Sri Lanka has reduced its dependency on hydro energy to a great extent, thus virtually eliminating reliance on weather patterns for stable supply. In 1997, due to an accelerated public investment programme, thermal generation capacity installed as a percentage of total capacity increased to 33% compared to 28% in 1996. Additional thermal capacity will come on stream during this year.

BUSINESS CLIMATE

Comparisons have shown that Sri Lanka offers one of the most liberal business environments in Asia. Total foreign ownership is welcome in most areas of the economy. While there are a few areas where foreign investment is restricted or limited, these are being minimised. There are no restrictions on the repatriation of earnings and capital.

The Sri Lankan government is business-friendly and is actively pursuing a policy of economic liberalisation with emphasis on private sector investment. The private sector plays a vital role in

traditional areas of public investment such as telecommunications, energy and transport. So far, many 98 enterprises are in the process of undergoing privatisation.

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In the last 12 months, several landmark investments were approved and implemented in the infrastructure, manufacturing and service sectors. The most significant of these include the following:

The largest ever privatisation involving the purchase of 35 per cent in Sri Lanka Telecom by NYT of Japan for US$225 million.

In late 1995, two license were awarded to set up basic telecommunication services using wireless local loop technology to business groups led by Telia AB of Sweden and GTE Nortel of North America. Approximately two thirds of the anticipated US$ 350 million investment is already committed and the implementation of the projects is on schedule.

A US$385 million investment by IMC Agrico, Freeport McMoran Resource Partners (both of the USA) and Tomen Corporation (Japan) for phosphate mining and processing of DAP fertiliser was approved and the Mineral Investment Agreement initialled. This is the largest single foreign direct investment in the manufacturing sector ever approved by the BOI.

A concession was awarded to a consortium led by P&O of the United Kingdom and John Keells Holdings of Sri Lanka to expand the Port of Colombo. The first phase of the project valued at US$ 240 million is expected to commence shortly.

The first-ever power generation project on.a BOO basis was successfully structured by the BOI. This US$62 million project where the lead investor is the UK-based KHD Group has now been completed.

THE LOCATION ADVANTAGE


Sri Lanka is the logical location for manufacturing and service organisations that wish to establish a presence in what is fast becoming an economic powerhouse in the region. The island is ideally located as the gateway to the vast Indian subcontinent - home to a quarter of the world's population.

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In addition, trade barriers are falling throughout the region. The seven countries which comprise the South Asian Association for Regional Cooperation (SAARC) have resolved to progress towards a South- Asia Free Trade Arrangement (SAFTA) over the next 5 years.

INVESTMENT PROTECTION AND GUARANTEES


Sri Lanka has developed an enviable record of "political credibility" in the international arena. All major political parties are committed to free enterprise and individual freedom.

The government has never defaulted nor requested rescheduling of any of its international obligations. Significantly, this extends to protection given to foreign investors.

Bilateral investment agreements, supported by a constitutional guarantee, provide strong protection to foreign investment in Sri Lanka. The safety of foreign investment is guaranteed through the acceptance by a two thirds majority of Parliament of the Constitutional Guarantee of Investment Protection Agreements. Under Article 157 of the country's constitution, the agreement enjoys the force of law and no legislative, executive nor administrative action can be taken to contravene it.

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Bilateral investment agreements are valid for 10 years. They are extended automatically unless tenThnated by either party. If the agreements are terminated, investments already made are protected for another 10 years. A clause in the Sri Lankan constitution ensures the sanctity of the agreements.

These agreements provide for the following:

Protection against nationalisation.

o Prompt and adequate compensation if required.

Free remittance of earnings, capital and business fees.

Settlement of disputes under the

International Convention for the Settlement of Investment Disputes
(ICS ID).

Bilateral agreements exist between Sri Lanka and the following countries: Belgium, China, Denmark, Egypt, Finland, France, Germany, Indonesia, India, Iran, Italy, Japan, Korea, Luxembourg, Malaysia, Netherlands, Norway, Romania, Singapore, Sweden, Switzerland, Thailand, the United Kingdom and the United States of America.

Sri Lanka is also a founding member of the Multilateral Investment Guarantee Agency (MIGA). This provides further safeguards against expropriation and noncommercial risk. Investors may also refer disputes for arbitration under the Rules of the International Chamber of Commerce.

Property insurance can be obtained in foreign currency through domestic or foreign insurers.

INTELLECTUAL PROPERTY
ARBITRATION


The laws relating to copyright, industrial designs, patents, trade marks, service marks, trade names and unfair competition are covered by the Code of Intellectual Property Act of 1979 and subsequent amendments.

Protection for trade marks is based on registration in the Registry of Trade Marks. The classification used for this purpose follows the international grouping set by the Nice Agreement of the World Intellectual Property Organisation with 34 classes of goods and eight classes of services. Registration of a mark is valid for 10 years and renewable for additional periods of 10 years.


An Arbitration Centre has been established in Colombo for the settlement of commercial disputes expeditiously, economically and privately. A new law has already been enacted for this purpose. The Centre will be affiliated with the Arbitration Institute of the Stockholm Chamber of Commerce and will follow its standards and norms.

The Arbitration Act gives recognition to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

This means that arbitration awards made abroad are now enforceable in Sri Lanka. Similarly, awards made in Sri Lanka can be enforced abroad.

REMITTANCE OF EARNINGS AND CAPITAL
HUMAN DEVELOPMENT


By mid 1994, Sri Lanka had removed all foreign exchange restrictions on current account transactions. The monetary authorities are moving towards further liberalising exchange controls.

Within this liberal environment, foreign investors can freely remit dividends, capital or royalty payments through any commercial bank, as well as the sale proceeds of shares. (Note that as stated earlier, for qualifying investments, the BOI is authorised to exempt companies from the provisions of the Exchange Control Act).

"The safety of foreign investment is guaranteed by the constitutional
recognition of In vestment Protection Agreements"

"Sri Lanka has the highest literacy (92%)
and the highest life expectancy (71 years) among low income


According to data published by the World Bank, Sri Lanka has the highest life expectancy (71 years) highest literacy rate (92 per cent) and lowest infant and child mortality rates among the designated low income countries. Sri Lanka also has the lowest rate of population growth in the developing world (1.3 per cent). We also have the lowest urbanisation rate within this group. This situation is the result of extensive investment in public education and welfare by successive post-independence governments.

Today, investors will find an intelligent, educated and energetic workforce that is comfortable with modern production techniques and has a level of trainability that is among the best in the region.
In fact we believe we have the best quality workforce available at this income and wage level.

LAND OWNERSHIP


A foreign investor can either purchase or lease land for any proposed enterprise. If land is purchased by a non-national, a tax payment of 100 per cent of the purchase price is required. However, if a foreign investor incorporates a company in Sd Lanka under the Companies Act and buys the land in the name of the company, a tax payment is not requited even though the shareholders of the company are foreign nationals. This is because a company incorporated in Sri Lanka is deemed to be a citizen of Sri Lanka for the purpose of taxation.


Source: Board of Investment (BOI) , Sri Lanka

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