IMI - INVESTMENT CLIMATE STATEMENT, 2005 - SRI LANKA

UNCLAS SECTION 01 OF 28 COLOMBO 000875



SIPDIS



STATE FOR EB/IFD/OIA AND SA/INS

STATE PASS USTR

STATE PASS OPIC, TDA, EXIM



TREASURY FOR DO/GCHRISTOPOLUS



USDOC FOR ITA/ATAYLOR



E.O 12958:N/A

TAGS: EINV, EFIN, ETRD, ELAB, KTDB, PGOV, ECON, CE, OPIC, USTR, ECONOMICS

SUBJECT: IMI - INVESTMENT CLIMATE STATEMENT, 2005 - SRI

LANKA



REF: (A) 04 STATE 269486 (B) 04 STATE 250356



1. THE FOLLOWING IS THE INVESTMENT CLIMATE STATEMENT

FOR SRI LANKA FOR 2005.



INVESTMENT CLIMATE STATEMENT SRI LANKA



March 2005



Openness to Foreign Investment

--------------



2. Sri Lanka welcomes foreign investment, which has

become an important element of the country's economic

growth. Sri Lanka opened its economy to foreign

investment in 1978, long before its South Asian

neighbors, but results have been mixed, a result of

half-hearted commitment to economic reforms and policy

inconsistency through changes in successive

governments. Over the past twenty-six years, several

hundred foreign investors have invested in the country

but foreign investment flows have been weak in the last

decade due to an ethnic conflict and the inconsistent

and erratic economic policies mentioned above. While

the current ceasefire led to improved investment flows

in the recent past, the reversal of economic policies

following the change of Government in 2004 has put a

damper on flows once more. Although some investors

have done well, particularly in the manufacturing and

services sectors, others have had problems with

government practices and regulations, particularly in

large-scale infrastructure projects.



3. Sri Lanka's economic growth has been reasonable,

averaging 4.6 percent over the past decade. The

country boasts unique human development achievements

for a developing country. Sri Lanka's per capita

income of $1,000, a literacy rate of over 90 percent in

the local language and life expectancy of 72 years rank

well above those of India, Bangladesh and Pakistan.



4. The 20-year ethnic conflict between the US-

designated Liberation Tigers of Tamil Eelam (LTTE) and

the Government of Sri Lanka has been widely recognized

as a key drag on development and an obstacle to foreign

investment. A Norwegian-brokered ceasefire, between

the LTTE) and the government, in effect since February

23, 2002, continues to hold despite the LTTE withdrawal

from peace talks in April 2003. The LTTE presented its

proposals for an Interim Self Governing Authority

(ISGA) in October 2003. While both parties have

expressed their commitment to a negotiated settlement,

efforts to restart peace talks have floundered so far.

It is important though to differentiate between the

peace talks, which are suspended and the overall peace

process, which continues. Although many ceasefire

violations have been recorded, the peace process has

substantially improved the political, economic and

investment climate and initially resulted in attracting

substantial funding from multilateral and bilateral

donors to rebuild the country.



5. The December 2004 tsunami caused extensive damage

to life and property, fundamentally altering Sri

Lanka's economic outlook and increasing economic

vulnerability. Approximately 31,000 people were

killed, another 6,300 are missing and 443,000 people

have been displaced. A joint damage and needs

assessment by the key donor agencies has estimated the

overall damage to Sri Lanka at $1.5 billion, with a

large portion of losses concentrated in housing,

tourism, fisheries and transportation. Major export

sectors were not affected. Some of the destruction is

in areas under the control of LTTE, which requires the

Government to work with them to start reconstruction.

The reconstruction program will take at least three

years to implement.



6. Since independence, the rule of government has

alternated between the two major political parties,

United National Party (UNP) and the Sri Lanka Freedom

Party (SLFP) or coalitions led by them. Both the UNP

and the SLFP generally support open and outward looking

economic policies, though a failure to embrace

consistent economic reform policies has sent confusing

and inconsistent messages to investors and donors.



7. In February 2004, President Chandrika Kumaratunga

dissolved the Parliament, just two years into the rule

of the reform-minded United National Front Government.

Subsequent elections resulted in a resounding defeat of

the UNP, largely at hands of rural voters who had not

yet tasted the benefits of economic reforms. As no

single party was expected to garner sufficient seats to

form a government, the President's SLFP joined with the

left leaning, Marxist-nationalist Janatha Vimukthi

Peramuna (JVP) to form the United People's Freedom

Alliance (UPFA) ticket to run for the election. The

UPFA contested the election on a platform of pro-poor

growth policies. The UPFA government's Economic Policy

Framework "Creating Our Future, Building Our Nation"

http://www. treasury. gov.lk focuses on development of

the small and medium enterprise sector (SME),

agriculture and infrastructure, with a much heavier

reliance on government intervention in markets. The

Government has also abandoned plans to privatize

strategic state enterprises. Instead, the government

will retain ownership and management of these

enterprises ranging from large state-owned banks to

electrical utilities. The government hopes to insulate

them from political interference and make them

profitable. Recent efforts to restructure large public

utilities, however, have faced serious problems, due to

stiff JVP and union opposition. Smaller non-strategic

state enterprises are to be privatized. The government

has created three new agencies to improve state-owned

enterprises, economic development, and procurement the

Strategic Enterprises Management Agency (SEMA),

National Council for Economic Development (NCED) and

Procurement Management Agency.



8. On a positive note, the government has acknowledged

the vital role played by both foreign and local private

investors in the economy. The government has promised

to encourage private investment through the removal of

impediments and an introduction of an investor friendly

administration. However, they have introduced

prohibitive new taxes on the acquisition of land by

foreigners and other bureaucratically inspired

impediments to foreign investments. Further, import

duties have been increased. A new tax "Economic

Service Charge (ESC)", ranging from 0.25 percent to 1

percent, depending on the type of company, applies to

all companies with a turnover exceeding Rs 50 million

(USD 500,000),including companies enjoying tax

holidays. Companies already paying income tax will be

able to set it off against income tax but for those

companies, especially foreign investments, with tax

holidays it will be an additional tax.



9. The government has rejected the former government's

poverty reduction strategy paper (PRSP) titled

"Regaining Sri Lanka," citing its failure to benefit

the poor and rural areas and is in the process of

revising the PRSP. Pending clarity on economic and

fiscal policies, and the presentation of a revised

PRSP, the IMF has withheld disbursements under a

Poverty Reduction Growth Facility (PRGF) and Enhanced

Fund Facility (EFF) extended to Sri Lanka in April

2003. The government conducted Article IV discussions

with the IMF and resumed discussions on PRGF/EEF

supported programs in May 2005.



10. Over the past year, prior to the tsunami, macro

economic conditions deteriorated. In the face of a

drought and increasing oil prices, the government

resorted to expansionary fiscal and monetary policies

which helped to maintain GDP growth at around 5

percent. Inflation rose sharply and the fiscal and

external positions deteriorated. There was a slowdown

in aid and investment inflows. The trade deficit

expanded in 2004, despite strong export growth, due to

a heavy oil import bill. Gross official receipts fell

by 13 percent to $1.8 billion. As a result, the Sri

Lankan Rupee depreciated throughout 2004, falling by 8

percent against the US Dollar. The rupee strengthened

in early 2005, on the expectation of aid flows for

reconstruction of tsunami damaged areas, but this

strengthening is likely to be temporary. Total

reserves in January 2005 were approximately $3.3

billion, sufficient to cover 4.9 months of imports.

Sri Lanka's total government debt rose to 108 percent

of GDP in 2004, of which about half was foreign (mostly

concessional) debt.



11. The government took steps towards the end of 2004

to strengthen the macro economic policy stance.

Petroleum prices were revised upwards, and a costly

subsidy on wheat flour was removed. But numerous

subsidies including petroleum (still significant,

despite price increases) and electricity continue. The

2005 budget, presented in November 2004, envisaged a

reduction in the fiscal deficit to 7.5 percent of GDP.

The budget focuses on reducing poverty through rural

development and higher spending for health, education

and public infrastructure. The budget also includes

significant increases in government employment and

wages (the Government has hired about 40,000 previously

unemployed university graduates in an effort to stem

unemployment). It also contains new revenue measures.

In the count down to the budget, the government took

action to increase import taxes on selected imports.

Despite tsunami losses, the Government has expressed a

desire to take required action to maintain macro

economic stability, pursue the reform agenda of the

2005 budget, and fiscal reforms in line with the policy

outlines of the Fiscal Management (Responsibility) Act,

which has a deficit and debt reduction plan over the

medium term.



12. Estimates vary about the tsunami's overall

economic impact but reliable projections predict GDP

growth to slow by .5 - 1 percent. The bulk of the

impact on growth is expected to be offset by the

reconstruction effort. The Government is trying to

minimize the fiscal impact of the reconstruction

program, by seeking foreign assistance. The impact on

balance of payments could also be significant due to

reconstruction related imports. Meanwhile, for the

first time, Sri Lanka has accepted a Paris Club offer

to freeze its debt payments by industrialized countries

until the end of 2005, which will release approximately

$300 million from the regular budget (allocated for

dept repayment) for reconstruction. In addition, the

IMF has also approved an emergency loan of about $159

million to Sri Lanka. The World Bank and the ADB have

also pledged both grant and loan assistance. On

balance, the level of fiscal and balance of payment

impact of reconstruction will depend on the ability of

the government to mobilize external resources and the

absorptive capacity of the country. The inflationary

momentum from 2004 is expected to continue in 2005 with

inflation projected to remain at double digit level for

most of the year. The Central Bank has so far left key

interest rates unchanged despite rising inflation, in

order to facilitate spending on reconstruction and

provide liquidity for restarting economic activity.



13. There may be commercial opportunities for US

companies in the post-tsunami reconstruction program.

The bulk of the reconstruction expenditure will be

spent on housing, townships, transportation

infrastructure (roads, railway and ports),fisheries

infrastructure (harbors, anchorage and related

facilities),water supply and sanitation projects, and

school and hospital buildings.



14. Numerous risks and challenges to the economy

remain. The peace process could falter. Domestic

political frictions between the President and her

coalition partner JVP could disrupt the peace process

or further hamper economic reform. A weak coalition of

political parties, and the inability of the main

parties to cooperate on key issues have compounded the

political difficulties facing Sri Lanka at this

juncture. There are concerns regarding the speed of

reconstruction and resettlement of tsunami affected

population. The Government is trying to reach

consensus with the LTTE on a framework for tsunami

related reconstruction in the north and east. The pace

of reconstruction could also be hampered by

administration bottlenecks as the state is not equipped

to carry out large scale projects in a timely manner.

Other down side risks will stem from uncertainties over

oil prices and the impact of the end of the Multi Fiber

Agreement, although large factories accounting for bulk

of the exports are expected to continue to perform well

in the quota free era. Another major business concern

in the medium term is the cost and supply of power.

Sri Lanka has faced periodic power shortages, with the

most recent period extending from mid 2001 to early

2002. Although new power plants are being added, the

government is yet to procure sufficient base-load power

to avert a power crisis in the medium term. The JVP is

resisting Government moves to restructure the state

owned electrical utility, which reduces the possibility

of solving the power problem in the foreseeable future.

Increasing oil prices are also causing an already

inefficient and money losing state-owned electrical

company to face serious cash flow difficulties and

renege on power purchase agreement commitments and

contractual obligations. Uncertainty over the future

of the energy sector has led most businesses to install

onsite generating capacity.



--Board of Investment



15. The Board of Investment (BOI) (www.boi.lk),an

autonomous statutory agency, is the primary government

authority responsible for foreign investment. The BOI

acts as a facilitator for investment. It is intended

to provide "one-stop" service for foreign investors,

including approval of projects, granting incentives and

arranging services such as water, power, waste

treatment and telecommunications. The BOI also assists

in obtaining resident visas for expatriate personnel

and facilitates import and export clearance. The BOI

has undertaken a major review of its activities with

the intention of improving its services.



16. The Bureau for Infrastructure Investment (BII)

(www.boi.lk),a division of BOI, is assigned the

responsibility to coordinate all private infrastructure

projects. Projects are usually structured on the basis

of build, own, operate (BOO),build, operate, and

transfer (BOT) or build, own, operate and transfer

(BOOT).



--Laws Affecting Investment



17. The principal law governing foreign investment is

Law No. 4 of 1978 (known as the BOI Act),including

amendments made in 1980, 1983 and 1992, and

implementing regulations established under the Act.

The BOI Act provides for two types of investment

approvals. Under section 17 of the Act, the BOI is

empowered to grant concessions (see details below) to

companies satisfying certain eligibility criteria.

Investment approval under section 16 of the act permits

entry for foreign investment to operate under the

"normal" laws of the country and is applicable to

investments that do not satisfy eligibility criteria

for BOI incentives. Other laws affecting foreign

investment are the Securities and Exchange Commission

Act of 1987, amendments made in 1991 and 2003 and the

Takeovers and Mergers Code of 1995. In addition,

various labor laws and regulations affect investors.

See sections below.



--Foreign Equity and Sectors



18. Foreign equity participation of up to 100 percent

is allowed in many sectors of the economy and the BOI

gives automatic approval for most foreign investments.



19. The government relaxed investment rules in early

2002, allowing 100 percent foreign investment in the

following services: banking, finance, insurance,

stockbroking, construction of residential buildings and

roads, supply of water, mass transportation,

telecommunications, production and distribution of

energy, professional services and the establishment of

liaison offices or local branches of foreign companies.

These services are regulated and subject to approval by

various government agencies. The screening mechanism

is non-discriminatory and, for the most part, routine.



20. Investment in some other sectors is restricted and

subject to screening and approval on a case-by-case

basis, where foreign equity exceeds 49 percent:

shipping and travel agencies; freight forwarding;

fishing; timber-based industries; growing and primary

processing of tea, rubber, coconut, rice, cocoa, sugar

and spices; and, finally, the production for export of

goods subject to international quota. Foreign

investment restrictions and government regulations also

apply to international air transportation; coastal

shipping; lotteries; large-scale mechanized gem mining;

and "sensitive" industries such as military hardware,

dangerous drugs and currency.



21. Foreign investment is not permitted in the

following businesses: non-bank money lending; pawn-

broking; retail trade with a capital investment of less

than $1 million (with one notable exception: the BOI

permits retail and wholesale trading by reputed

international brand names and franchises with an

initial investment of not less than US$ 150,000);

coastal fishing; and award of local university degrees.



22. In general, the treatment given to foreign

investors is non-discriminatory. In fact, some local

companies have complained that they are discriminated

against, as qualifying foreign investors can benefit

from a wide range of advantages. Even with incentives

and BOI facilitation, foreign investors can face

difficulties operating in Sri Lanka. Problems range

from the mundane, but critical, matter of clearing

equipment and supplies through customs, to getting land

for factories. The BOI encourages investors to locate

their factories in industrial processing zones managed

by the BOI to overcome land allocation problems.

Investors locating in industrial zones also get access

to relatively better infrastructure facilities such as

reliable power, telecommunication and water supplies.



--Privatization



23. Previous governments, including one headed by the

SLFP, actively pursued privatization. When the UPFA

(led by the SLFA) Government came to power in 2004,

however, it pledged to halt the privatization process

of strategic enterprises and institute more effective

government oversight. This was a concession to get JVP

participation in its coalition. Smaller government

corporations are to be privatized.

24. Government treatment of foreign investors in the

privatization process has been largely non-

discriminatory. In 2003, however, the government sold

part of retail operations of state-owned Ceylon

Petroleum Corporation (CPC) to Indian Oil Corporation

(IOC) without a formal tender process. One US firm,

which had earlier acquired a government owned lubricant

plant and obtained exclusivity in the sale of

lubricants in CPC outlets until mid-2004, has also

complained that the government had reneged on the terms

of the exclusivity agreement. Labor unions in the

state-owned enterprises are often opposed to

privatization and restructuring and seem particularly

averse to foreign ownership. In the past this has made

the purchase of certain strategic entities problematic

for new foreign owners. Sometimes liberal and unwieldy

concessions, not announced during the bidding process,

were granted to investors, and other times substantive

changes were introduced once the process had begun.



--Investment Trends



25. Foreign direct investment flows to Sri Lanka have

averaged only about $150 million per year (excluding

privatization receipts) during 1998-2001. Following

the commencement of the peace process and improved

investor confidence, annual foreign investment flows

have averaged about $200 million. Although initially

FDI was expected to rise faster following the

ceasefire, due to the stalemate in the peace process it

has stagnated. In 2004, FDI was about $233 million,

according to the Central Bank. FDI mainly funded

telecommunications and manufacturing industries (cement

and textiles). Other major deals struck in 2004

included a $30 million BPO center by the Hong Kong and

Shanghai Banking Corporation Ltd (HSBC).



26. The Colombo Stock Exchange(CSE) has been growing

markedly since 2002, due to local investor activity.

In July 2004, Colombo was named the best performing

market in Asia and the fifth best performing equity

market in the world by Bloomberg. The upsurge in

stocks could be directly attributed to the ceasefire

agreement and a rise in tourism stocks. The market has

also become attractive to local investors due to

negative real interest rates. A large IPO from a new

Indian oil retail business in Sri Lanka also boosted

the market heavily in December. Despite the boom,

foreign investors have largely stayed out of the

market, and were net sellers in 2003-2004. Uncertainty

about the peace process, weak macro economic

fundamentals and reversals in economic reforms are

major concerns to foreign investors. CSE is taking

steps to broaden the investor base both in Sri Lanka

and abroad.



Conversion and Transfer Policies

--------------



27. Sri Lanka has accepted Article VIII status of the

IMF and has liberalized exchange controls on current

account transactions. In early 2001, in response to a

fall in Sri Lanka's foreign exchange reserves, the

Central Bank introduced temporary controls on foreign

exchange transactions, which have since been removed.

There are no surrender requirements on export receipts,

but exporters need to repatriate export proceeds within

120 days to settle export credit facilities. Other

export proceeds can be retained abroad. Currently,

contracts for forward bookings of foreign exchange are

permitted for a maximum period of 360 days for the

purposes of payments in trade and 720 days for the

repayment of loans.



28. There are also no barriers, legal or otherwise, to

the expeditious remitting of corporate profits and

dividends for foreign enterprises doing business in Sri

Lanka. Remittance of business fees (management fees,

royalties and licensing fees) is also freely permitted.

Funds for debt service and capital gains of BOI-

approved companies exempted from exchange control

regulations are freely permitted. Other foreign

companies remitting funds for debt service and capital

gains require Central Bank approval. All stock market

investments can be remitted without prior approval of

the Central Bank. Investment returns can be remitted

in any convertible currency at the legal market rate.

Controls on capital account (investment) transactions

usually prohibit foreigners from investing in debt and

fixed income securities. One exception has been the

Central Bank's dollar denominated bond issues in the

local market in 2001, 2002 and 2004 which were opened

to foreign investors. It has been proposed to allow

foreigners to invest in corporate debentures and

government bonds.



29. Local companies require Central Bank approval to

invest abroad. The process of granting approval for

such investments was streamlined in 2002, resulting in

a substantial increase in approvals.



Expropriation and Compensation

--------------



30. Since economic liberalization policies began in

1978, the Sri Lankan Government has never been legally

found to have expropriated a foreign investment. Under

the terms of the US/Sri Lanka Bilateral Investment

Treaty (BIT),investors have the right to arbitration

under the International Center for the Settlement of

Investment Disputes (ICSID). A longstanding dispute

involving an alleged expropriation of a US company's

investment was satisfactorily resolved during 1998

after lengthy negotiations involving the company, the

Sri Lankan Foreign Ministry, the Sri Lankan Attorney

General and the US Embassy.



Dispute Settlement

--------------



--Legal System



31. Sri Lankan commercial law is almost entirely

statutory. The law was codified before independence in

1948 and reflects the letter and spirit of British law

of that era. It has, by and large, been amended to

keep pace with subsequent legal changes in the U.K.

Until recently, the court system was largely free from

government interference. The judiciary is sometimes

subjected to political influence. Procedures exist for

enforcing foreign judgments. Litigation can be very

time consuming. Several important legislative

enactments regulate commercial matters: the Board of

Investment Law, the Intellectual Property Act, the

Companies Act, the Securities and Exchange Commission

Act, the Banking Act, the Industrial Promotion Act and

Consumer Affairs Authority Act. Most of these laws

were revised recently to meet current business

practices.



--Bankruptcy Laws



32. The Companies Act and the Insolvency Ordinance

provide for winding up insolvent companies, but

existing legislation hinders smooth re-organization.

Currently, there is no mechanism to facilitate the re-

organization of financially troubled companies. The

Termination Act, for example, prohibits employers from

laying off workers even on the grounds of inefficiency.

The Parliament has passed an amendment to the

Termination Act to facilitate retrenchment, but its

implementation was delayed until the development of a

compensation formula and an unemployment insurance

scheme for displaced workers. After revisions and

delays, the compensation formula was finally published

in March 2005, but employers have protested as it is

excessive compared to similar formulae in the Asian

region. The compensation plan could adversely affect

restructuring plans of companies.



33. In the absence of proper Bankruptcy Laws, extra

judicial powers granted to financial institutions by

law protect the rights of creditors and have helped to

strengthen credit discipline. Lenders are able to

enforce financial contracts through powers that allow

them to foreclose on loan collateral without the

intervention of courts. A recent judgment, however,

ruled that these powers would not apply in respect of

collateral provided by guarantors to a loan. Financial

institutions also face other legal challenges as

defaulters obtain restraining orders on frivolous

grounds due to technical defects in the recovery laws.

Also, for default cases that are filed in courts, the

judicial process is time consuming. The private sector

has urged the government to introduce US Chapter 11-

style Bankruptcy laws. The financial community has

requested strengthening of debt recovery laws.



--Investment Protection



34. Foreign investments are, in principle, guaranteed

protection by the constitution of Sri Lanka. The

government has entered into 24 investment protection

agreements with foreign governments (including the

United States) and is a founding member of the

Multilateral Investment Guarantee Agency (MIGA) of the

World Bank. Sri Lanka is also a founding member of the

World Trade Organization. The government has ratified

the provisions of the convention on Settlement of

Investment Disputes, which provides the mechanism and

facilities for international arbitration through the

ICSID of the World Bank.



35. The US-Sri Lanka BIT was ratified by both

governments in early 1993. A bilateral treaty on

avoidance of double taxation went into effect on June

12, 2004.



36. Settlement of disputes through the Sri Lankan

court system is subject to protracted and inexplicable

delay. Aggrieved investors (especially those dealing

with the government of Sri Lanka on projects) have

frequently pursued out-of-court settlements, which

offer the possibility -- not frequently realized -- of

speedier resolution of disputes.



--Arbitration



37. The Arbitration Act of 1995 gives recognition to

the New York Convention on recognition and enforcement

of foreign arbitral awards. Arbitral awards made

abroad are now enforceable in Sri Lanka. Similarly,

awards made in Sri Lanka are enforceable abroad. A

center for arbitration known as the Institute for the

Development of Commercial Law and Practice (ICLP) has

been established in Colombo for the expeditious,

economical and private settlement of commercial

disputes. The ICLP appears unlikely to become involved

in disputes involving the Sri Lankan Government, the

source of most disputes involving US companies in

recent years. Sri Lanka's first commercial mediation

center was established in 2000 and became operational

in mid 2001. Commercial mediation is conducted under

the Commercial Mediation Act. Interest in mediation is

still low.



38. The Labor Department has a process involving labor

tribunals for settling industrial disputes with labor,

and compulsory arbitration is available when attempts

to reconcile industrial disputes fail. The Parliament

has passed an amendment to the Industrial Disputes Act

to expedite labor dispute resolution through the Labor

Tribunals of the Department of Labor. The Labor

Commissioner typically becomes involved in labor-

management mediation. Other senior officials,

including the Labor Minister, and the President, have

intervened in particularly difficult cases.

--Investment Disputes Involving U.S. Companies



39. There continue to be trade and investment

disputes, particularly surrounding government

procurement. The government procurement process in Sri

Lanka is slow and non-transparent. US Companies

continue to face problems with payment on valid

contracts, implementation on agreements with the

Government and inexplicable failure to secure

contracts, despite superior performance, high value and

low bids. Some US companies have found it difficult to

secure payment for power generation due to CEB's tight

cash flow situation.



40. In May 2000, the Sri Lankan Supreme Court

effectively blocked an existing investment agreement

between the Government of Sri Lanka and a US mining

company. Although the investment agreement was already

initialed and approved by the Sri Lankan cabinet, work

on the project had not yet begun. A group of citizens

filed a fundamental rights case, which under Sri Lankan

law allows any person to seek protection from the

Supreme Court in respect of infringement of a

fundamental right by the government or by

administrative action. The plaintiffs alleged in this

case that their rights would be violated by

implementation of the mining project, and the court

upheld their complaint. Without any technical

argument, a partial bench of 3 judges ruled that the

project could not proceed before completion of a new

series of detailed and highly comprehensive and

expensive studies, some of which appear to be

technically impractical. Because this is a Supreme

Court decision, options for reversing the decision

appear limited.



41. In another case, a US investor with a substantial

investment in an export manufacturing company has faced

lengthy delays in a court case over a large insurance

claim. The company instituted legal action in June

1999 and court proceedings are still ongoing. The

Company has wound up its operations in Sri Lanka

recently. In many disputes, defendants resort to

obtaining injunctions, stay orders or postponements to

drag cases on for years.



Performance Requirements/Incentives

--------------



--Performance Requirements



42. The Board of Investment specifies certain minimum

investment amounts for both local and foreign investors

to qualify for incentives. Firms enjoying preferential

incentives in the manufacturing sector in most cases

are required to export 80 percent of production, while

those in the service sector must export at least 70

percent of production. Sri Lanka complies with WTO

Trade Related Investment Measures (TRIMS) Obligations.



43. Foreign investment is encouraged in information

technology, electronic assembly, light engineering,

automobile parts and accessories manufacture,

industrial and IT parks, rubber based industries,

information and communication services, tourism and

leisure related activities, agriculture and agro

processing, port related services, regional operating

headquarters and infrastructure projects. Foreign

investors are generally not expected to reduce their

equity over time or to transfer technology within a

specified period of time, except for build-own-transfer

or other projects in which such terms are clearly

specified.



44. Maintaining a certain level of employment is a

condition in some BOI-approved enterprises. In

addition, privatization agreements as a rule prohibit

new owners from laying off workers, although the owners

are free to offer voluntary retirement packages to

reduce their workforce. Some foreign investors have

received political pressure to hire workers from a

particular constituency or a given list, but have

successfully resisted such pressure with no apparent

adverse effects.



45. Foreign investors who make an equity investment of

$50,000 can qualify for a resident visa. Employment of

foreign personnel is permitted when there is a

demonstrated shortage of qualified local labor.

Technical and managerial personnel are in short supply,

and this shortage is likely to continue in the near

future. Foreign employees attached to BOI-approved

companies usually receive preferential tax treatment

and do not experience significant problems in obtaining

work or residence permits.



--Investment Incentives



46. The Board of Investment has announced the

following investment incentives:



Incentive Program I



Qualifying industries:

--Non traditional manufacturing exports (excluding tea,

rubber and coconut),and companies supplying to

exporting companies. Minimum investment of $150,000;

--Export oriented services. Minimum investment of

$150,000;

--Manufacture of industrial tools and/or machinery.

Minimum investment of $150,000;

--Small scale infrastructure. Minimum investment of

$500,000;

--Research and development. Minimum investment of

$50,000;

--Agriculture and agro processing industries. Minimum

investment of $10,000;



Incentives: Above industries will qualify for a five-

year tax holiday initially. A preferential tax of 10

percent in the 6th and 7th years follows the tax

holiday. After the 7th year, a preferential tax of 15-

20 percent will apply. In addition, these industries

qualify for duty-free imports (generally, during the

life of the project for export-oriented projects, and

during the project implementation period for others).

Exporting companies and export-oriented services will

be exempted from exchange control regulations. They

will also qualify for free repatriation of profits and

dividends and free transferability of shares. A

recently introduced Economic Service Charge at 0.25

percent of income will be applicable to BOI approved

companies with tax holidays, from the fourth year of

operation.



Incentive Program II



Qualifying Industries:

--Information technology services such as call centers,

data entry services, data centers, software

development, hosting centers of e-governance related

projects (a);

--IT training institutes (b);

--Regional operating headquarters providing following

services to related businesses outside Sri Lanka:

sourcing raw materials, R&D, technical support,

financial and treasury management, marketing and sales

promotion;

--Any industrial, agriculture, service, or construction

activity approved by the BOI. Minimum investment of $5

million.

(a) Minimum employment of 15 IT professionals is

required in IT companies

(b) Minimum 300 students required for IT training

institutes.

Incentives: Above industries will qualify for a 3-year

tax holiday period initially. A preferential tax of 10

percent will apply in the 4th and 5th years. From 6th

year onwards a preferential tax of 15-20 percent will

apply. In addition, capital goods will be exempted

from import duty. A recently introduced Economic

Service Charge at 0.25 percent of income will be

applicable to BOI approved companies enjoying tax

holidays, from the fourth year of operation.





Infrastructure development:



47. Companies acquiring existing companies in

petroleum, power generation, transmission, development

of highways, sea ports, airports, railway, water

services, public transport, agriculture and agro

processing and other infrastructure projects approved

by the BOI will qualify for tax holidays ranging from 5

to 10 years depending on the magnitude of investment.

A preferential tax of 15 percent will follow the tax

holiday. They will also qualify for duty free imports

of capital goods. Minimum investment of $12.5 million.



48. Large-scale infrastructure projects in power

generation, transmission and distribution; development

of highways, seaports, airports, public transport and

water services; establishment of industrial parks, and

other infrastructure projects approved by the BOI will

qualify for tax holidays ranging from 6 to 12 years

depending on the size of the investment. A

preferential tax of 15 percent will follow the tax

holiday. They will also qualify for duty free imports

of capital goods. Minimum investment of $10 million.



--Indo-Lanka Free Trade Agreement



49. A preferential trade agreement, the Indo Lanka

Free Trade Agreement (ILFTA) (www.indolankafta.org),

between Sri Lanka and India is in operation. Under

this agreement, most products manufactured in Sri

Lanka, with at least 35 percent domestic value addition

(if raw materials are imported from India, domestic

value addition required is only 25 percent),qualify

for duty free entry to the Indian market. Tariff

concessions for Sri Lankan products include zero

tariffs on 4,150 items; 50 to 75 percent reduction for

tea and garments under quota; 25 percent reduction for

528 items, and no reduction for 429 items (negative

list). The two countries have begun discussions on

services sector liberalization, although no specific

goals have been set yet.



50. Sri Lanka recently signed a free trade agreement

with Pakistan. These are seen as steps towards making

Sri Lanka a regional hub and the gateway to South Asia

and the Middle East for foreign investors.



--Prospects for U.S. Investment under Indo Lanka Free

Trade Agreement (ILFTA)



51. Foreign investors in Sri Lanka can enjoy

preferential access to the Indian market, under the

ILFTA. Domestic value addition of 35 percent is

required to qualify for concessions granted under the

agreement. The BOI hopes to attract foreign joint

ventures to Sri Lanka under the ILFTA. Indian imports

amounted to over $49 billion in 2002. The BOI's

strategy is to identify products imported into India

and to target its investment promotion efforts to

countries and companies manufacturing them. The US is

one such country; the US accounts for about 7 percent

of Indian imports valued at $5.5 billion in 2003-4. A

majority of these products would qualify for

substantial duty concessions if exported from Sri Lanka

under the ILFTA. The BOI encourages US manufacturing

companies and regional operating headquarters to

relocate in Sri Lanka to benefit from ILFTA. The BOI

has identified the following sectors for investment

promotion in the US: electronics, light engineering,

pharmaceuticals/cosmetics, information technology and

financial services.



52. Currently, US companies avail themselves of this

agreement adding 35 percent value in Sri Lanka and

getting import duties into India reduced from as much

as 40 percent to as little as zero.



53. For further information on investment incentives

and other investment-related issues, potential

investors are encouraged to contact the Board of

Investment directly. The BOI can be found at

www.boi.lk, or reached via e-mail at info@boi.lk



Right to Private Ownership and Establishment

--------------



54. Private entities are free to establish, acquire

and dispose of interests in business enterprises.

Private enterprises enjoy benefits similar to those

granted to public enterprises, and there are no known

limitations on access to markets, credit or licenses.

Foreign ownership is allowed in most sectors. Private

land ownership is limited to fifty acres per person.

About 80 percent of the land in Sri Lanka is owned by

the government, including most tea, rubber and coconut

plantations. The government has divested most of these

plantations to the private sector on 50-year lease

terms. Although state land for industrial use is

usually allotted on a 50-year lease, 99-year leases may

also be approved on a case-by-case basis, depending on

the nature of the project.



55. Foreign investors can purchase land from private

sellers. The government has re-imposed a 100 percent

tax on land transfers to foreigners.



Protection of Property Rights

--------------



--Property rights



56. Secured interests in property are recognized and

enforced. A fairly reliable registration system exists

for recording private property such as land, buildings

and mortgages. However, there have been problems due

to fraud and forged documents. The Government has

begun to address these issues under a World Bank

sponsored judicial reforms project. The legal system

is nondiscriminatory and protects and facilitates

acquisition and disposition of property rights by

foreigners.



57. Private farmers are working state-owned lands

under varying tenure agreements, ranging from

restrictive tenures to land grants. These lands have

ill-defined property rights. A World Bank-funded

project is underway to develop a legal framework for

implementing a titling system for land. This will also

remove restrictions related to the sale, leasing and

transfer and mortgaging of rural lands previously

distributed to farmers.



58. In 2004, the Government changed land ownership

regulations, by re-imposing a 100 percent tax on land

sales to foreigners, which was removed in 2002. Under

the previous version of this tax, foreign companies

registered in Sri Lanka were considered local companies

and were not subject to tax. In its current form

however, any company with 25 percent foreign ownership

would be considered "foreign" for the purposes of the

tax. Apartments above the third floor of condominium

buildings, land for the development of large housing

schemes, hospitals, hotels, exporting companies with a

minimum investment of USD 1 million and large

infrastructure projects are to be exempted from the

tax. Foreigners maintaining $ 150,000 in a bank

account in Sri Lanka will be given concessionary

treatment. Regulations regarding these exceptions are

yet to be published. In addition to the tax, the

government has plans to prohibit certain geographical

areas for purchase by non-citizens.



--Intellectual Property Rights Protection



59. Sri Lanka is a party to major Intellectual

Property Agreements including the Bern Convention for

the protection of literary and artistic works, the

Paris Convention for the protection of industrial

property, the Madrid Agreement for the repression of

false or deceptive indication of source on goods, the

Nairobi Treaty, the Patent Co-operation Treaty, the

Universal Copyright Convention and the Convention

establishing the World Intellectual Property

Organization (WIPO). Sri Lanka and the US signed a

Bilateral Agreement for the Protection of Intellectual

Property Rights in 1991, and Sri Lanka is also a party

to the Trade Related Intellectual Property Rights

(TRIPS) Agreement in the World Trade Organization.



60. A new intellectual property law came into force in

November 2003. It meets both US-Sri Lanka bilateral

IPR agreement and TRIPS obligations to a great extent.

The IPR law governs copyrights and related rights,

reproduction rights, public distribution rights,

industrial designs, patents for inventions, trademarks

and service marks, trade names, layout designs of

integrated circuits, geographical indications, unfair

competition, data bases, computer programs and

undisclosed information. The law also covers the

rights of performers, producers of sound recordings and

broadcasting organizations. All trademarks, designs,

industrial designs and patents must be registered with

the Director General of Intellectual Property.



61. Infringement of Intellectual Property Rights (IPR)

is a punishable offense under the law. Intellectual

Property Rights come under both criminal and civil

jurisdiction. Relief available to owners under the new

law includes injunctive relief, seizure and destruction

of infringing goods and plates or implements used for

the making of infringing copies, and prohibition of

importation and exports. Police can take ex-officio

action to enforce the law. Aggrieved parties can also,

on their own, seek relief redress of any IPR violation

through the courts, which can be a frustrating and time-

consuming process.



62. Although the legal system is well-established and

non-discriminatory, it is fraught with long delays.

Enforcement was a serious problem under the old law, as

is public awareness of IPR. Domestic implementing

legislation, under the old law, was very weak and the

government did not act as an enforcer of IPR laws.



63. With the passage of new law, Sri Lanka has begun

to enforce IPR laws. However, it will take time before

new procedures and court precedents are established.

In October 2004, Sri Lankan Police raided a previously

unknown illegal CD manufacturing plant owned by

Malaysian nationals. The Police carried out additional

raids of counterfeit CD/VCD stores in the first quarter

of 2005. The Customs has also seized counterfeit

consumer goods, mainly cigarettes. Meanwhile, local

agents of reputed US and other international recording

companies, software development companies, motion

picture companies, clothing companies and consumer

product companies continue to complain that lack of IPR

protection is damaging their businesses. The Embassy,

along with key industry players including the IFPI,

continues to lobby the government to improve Sri

Lanka's IPR regime.



64. Sri Lanka needs to ratify and conform to the WIPO

Performances and Phonograms Treaty (WPPT) and the WIPO

Copyright Treaty (WCT). Ratification of these two

treaties will support electronic commerce, protect the

rights of performers and producers of phonograms and

the rights of authors in their literary and artistic

works, and offer an adequate basis to fight

international piracy in view of the new technological

developments. Sri Lanka also does not have provisions

dealing with electronic transactions, electronic

signatures, computer crimes and evidence. The IPR law

does not cover protection of new plant varieties.



--Patents, Copy Rights and Trade Marks



65. Patents are granted for inventions, with the

following exceptions: discoveries, scientific theories

and mathematical methods, plant or animal varieties

(other than micro biological processes) and essentially

biological processes for the production of plants and

animals (other than non biological and microbiological

processes),business rules and methods, methods of

treatment by surgery or therapy, and diagnostic methods

practiced on the human or animal body. The law also

permits compulsory licensing and parallel imports of

pharmaceutical products. The compulsory licensing will

allow government to grant licenses to manufacture

certain drugs, overruling patent licenses, in a

national emergency. The parallel imports will allow

the import of a branded drug from an alternative

source.



66. A patent is valid for 20 years from the date of

application but must be renewed annually.



67. Copyrights are not registered. A work is

protected automatically by operation of law. Original

literary, artistic, and scientific works including

computer programs and databases are protected under the

new law. There are enforcement limitations applying to

copyrights, including software.



68. Sri Lanka recognizes both trademarks and service

marks. The exclusive right to a mark is acquired by

registration. A mark may consist of words, slogans,

designs, etc. Protection also is available to well

known marks not registered in Sri Lanka. Registered

trademarks are valid for ten years and renewable. The

law also recognizes both certification marks and

collective marks.



Transparency of the Regulatory System

--------------



69. The BOI strives to inform potential investors

about laws and regulations that may affect operations

in Sri Lanka. Laws pertaining to tax, labor and labor

standards, exchange controls, customs, environmental

norms, and building and construction standards are in

place. Some of the laws and regulations are not freely

available and are difficult to access. Foreign and

domestic investors often complain that the regulatory

system allows far too much leeway for bureaucratic

discretion. Outdated regulations and rigid

administrative procedures imposed by public sector

institutions have been identified as impediments to

private sector growth. Effective enforcement

mechanisms are sometimes lacking and coordination

problems between the BOI and relevant line agencies

frequently emerge. Lethargy and indifference on the

part of mid- and lower-level public servants compound

transparency problems. Non-availability of technical

capacity within the government to review financial

proposals for private infrastructure projects also

creates problems during tendering.



70. Although many foreign investors, including US

firms, have had positive experiences in Sri Lanka, some

have encountered significant problems with government

practices and regulations. For example, one foreign

company that had obtained a waiver of a particular

requirement in order to obtain a license was later told

it must meet the requirement to continue to be

qualified for the license; with no advance warning and

little justification. Some multinational firms have

experienced extensive unexplained delays in trying to

reach agreement on investment projects. Others have

had contracts inexplicably canceled without

compensation, even after those contracts had been

approved by the Sri Lankan Cabinet.



Efficient Capital Markets and Portfolio Investment

-------------- --------------



--Availability of financial resources



71. Retained profits finance about 70 percent of

private investment, with short term borrowing financing

a further 20 percent of investment. The stock market

and corporate securities market have not been

significantly used to raise capital. FDI finances

about 4 percent of investment.



72. The State consumes over 50 percent of the

country's domestic financial resources and has a

virtual monopoly on the management and use of long term

savings in the country. This inhibits the free flow of

financial resources to product and factor markets. In

the past, high interest rate volatility, due to

excessive use of short term borrowing by the state,

increased intermediation cost leading to higher costs

to other borrowers. Since 2002, the government policy

has supported a low interest rate regime. As a result,

interest rates have fallen significantly and have given

impetus to increased credit which has contributed to

increased domestic investment. The investment/GDP

ratio rose to 25.3 percent in 2004 compared with 22

percent in 2001. The prime lending rate currently

averages 9.8 percent compared with about 12.8 percent

in December 2001. Foreign investors are allowed to

access credit on the local market. They are also free

to raise foreign currency loans.



73. A total of Rs 12.3 billion (approx. $123 million)

was raised in the primary market by way of new equity

and debt in 2004, reflecting the potential for

companies to raise funds through the market.



--Credit Instruments



74. Commercial banks and two development finance

institutions, the National Development Bank (NDB) and

the Development Finance Corporation of Ceylon Bank

(DFCC),are the principal source of bank finance. Bank

loans are the most widely used credit instrument for

the private sector. Financial institutions such as the

DFCC and some commercial banks also raise syndicated

bank loans to fund large-scale investment projects

undertaken by the private sector.



75. The domestic debt market in Sri Lanka is still at

a very nascent stage. The first credit rating agency,

Fitch IBRC opened an office in Colombo in 1999, which

has helped companies to raise funds through debt

markets. Fitch Rating Lanka Ltd, is a joint venture

between Fitch IBRC, IFC, the Central Bank of Sri Lanka

and several local financial institutions. Credit

ratings are now mandatory for all deposit taking

institutions and for all varieties of debt instruments.



--Accounting Standards

76. There is an active and relatively competent

accounting profession, based on the British model. The

source of accounting standards is the Institute of

Chartered Accountants of Sri Lanka (ICASL) and

standards are constantly updated to reflect current

international accounting and audit standards. Due to

the lack of an adequate enforcement mechanism, however,

problems with the quality and reliability of financial

statements exist. Sri Lanka carried out a major

revision of accounting and auditing standards in

September 1997. Since then, the standards have been

periodically updated to meet new international

standards adopted by the International Accounting

Standards Board (IASB).



77. Sri Lanka accounting standards are applicable for

all banks and companies listed on the stock exchange

and all other large- and medium-sized companies in Sri

Lanka. Accounts of such business enterprises are

required to be audited by professionally qualified

auditors holding ICASL membership. ICASL has recently

published accounting standards for small companies as

well. Companies in Sri Lanka now have the choice of

adopting International Financial Reporting Standards

(IFRS) of the IASB. The Accounting Standards and

Monitoring Board (ASMB) is responsible for monitoring

compliance with Sri Lanka accounting and auditing

standards.



--Securities and Exchange Commission



78. The Securities and Exchange Commission (SEC)

regulates the securities market in Sri Lanka. The SEC

law was revised in 2003, enhancing its coverage and

investigative powers. The SEC now covers stock

exchanges, unit trusts, stock brokers, listed public

companies, margin traders, underwriters, investment

managers, credit rating agencies and securities

depositories.



79. Foreign investors can freely purchase up to 100

percent of equity in Sri Lankan companies in numerous

permitted sectors. In order to facilitate portfolio

investments, country funds and regional funds are also

allowed to invest in Sri Lanka's stock market; such

funds must first receive Ministry of Finance approval

to operate in Sri Lanka. These funds make transactions

through share investment external rupee accounts

maintained in commercial banks.



80. Sri Lanka's SEC was rocked by a scandal in early

2003, tarnishing the image of the market watchdog. The

SEC Chairman and another leading businessman were

implicated for insider dealing at a blue chip local

conglomerate where they were both directors. Initial

attempts by the SEC secretariat to institute legal

actions against the two were blocked by the SEC Board

of Directors. Later, the Attorney General ruled that

the SEC Board had acted improperly, casting doubt on

the board members' credibility. The SEC Chairman

resigned and pleaded innocence, subsequently. Later

the two parties came to an out of court settlement.



81. The SEC scandal has caused many to call for

increased corporate governance and accountability in

the private sector. Some business consultants have

asked for laws such as the US Sarbanes-Oxley Act to

regulate financial services and professional services

organizations.

--Colombo Stock Exchange

82. The Colombo Stock Exchange (CSE),while small by

"big emerging market" standards, is one of the most

efficient in the region. The CSE is fully automated,

with automated trading and clearing and settlement

systems. The CSE has a rolling settlement period of

five days for buyers and six days for sellers. Fifteen

local and foreign joint venture brokers currently

operate at the CSE. Foreign stock-brokers are

permitted to hold up to 100 percent equity in stock

broking firms operating at the CSE. SEC has a

settlement guarantee fund with an initial capital of Rs

100 million ($1 million) which aims to guarantee the

settlement of trades between clearing members of the

exchange. The Chartered Financial Analysts (CFA)

program is conducted in Sri Lanka.



83. Acquisition of companies through mergers and

takeovers is governed by the Takeovers and Mergers Code

of 1995 made under the Securities and Exchange

Commission of Sri Lanka Act. This law applies only to

companies listed on the Colombo Stock Exchange. It is

modeled on the lines of the London City Code on

Takeovers and Mergers. Acquisition of more than a 30

percent stake of a listed company requires the buyer to

make an offer to all other shareholders. The articles

of association of a few listed companies restrict

foreign equity to certain levels.



84. There are 242 companies listed on the stock

exchange and the top ten positions by market

capitalization are held by banks and food and beverage

companies. In 2003-2004, CSE was one of the best

performing markets in the world. The cease-fire

agreement between the Government of Sri Lanka and the

LTTE has helped to boost investor confidence. During

1998-2001, the Colombo Stock Market experienced a sharp

downturn due to a variety of local and international

factors. As a result, the CSE was removed from the

Morgan Stanley Capital International (MSCI) Index in

2001. It has not been reclassified in the MSCI yet,

despite recent surge driven mainly by locals. In April

2005, however, the California Public Pension Fund

(CALPERS) rated Sri Lanka as investment grade for

CALPERS Investment. As of early May 2005, however, no

CALPERS funds had been invested.



85. The single overriding factor inhibiting the

sustainable development of the stock market has been

the conflict in the North and East and its effect on

investor confidence and the economy as a whole. Other

broader issues include lack of liquidity and limited

market size. Improvements are also needed in corporate

governance, accountability and public disclosure in

companies. The Accounting and Auditing Standards

Monitoring Board, the Ceylon Chamber of Commerce, the

Colombo Stock Exchange and professional accounting

bodies are taking initiatives in these areas.



--Banking System



86. Sri Lanka has a fairly well diversified banking

system. There are 22 commercial banks, consisting of

eleven local banks and eleven foreign banks. In

addition, there are thirteen local specialized banks.

Citibank NA is the only US bank operating in Sri Lanka

and has expanded its operations recently. In 2001-

2003, Mashreq Bank, American Express Bank, Nova Scotia

Bank and ABN Amro Bank sold their banking operations in

Colombo to existing banks. Sri Lanka experienced its

first bank failure in December 2002 when the Central

Bank took action to revoke the license of a small

licensed specialized bank as its financial condition

deteriorated to insolvency. There has not been any

fallout for other banks from this incident. Two other

small troubled banks were restructured under Central

Bank guidance. In April 2005, the Central Bank

introduced higher capital requirements for commercial

banks in a bid to enhance the banking system stability,

promote consolidation and facilitate entry of larger

banks.



87. The Central Bank is responsible for supervision of

all banking institutions. Wide-ranging improvements

have been made in banking regulation and in public

disclosure of banking sector performance. In 2002 the

Monetary Law Act (MLA) was amended to provide Central

Bank broader supervisory powers and greater

independence. The Bank also issued a code of corporate

governance for banks and financial institutions in

2002. In addition, rules on classification and

provisioning were improved significantly from January

2004. Further, the Banking Act was amended in 2005 to

give additional supervisory powers to the Central Bank

and introduce guidelines to check the suitability of

bank directors. The amended Banking Act outlaws

pyramid type programs. Further amendments to the laws

are also expected in the next two years under ongoing

financial and legal reforms programs.



88. In 2004, the Central Bank introduced technical

improvements to facilitate banking sector efficiency by

establishing a Real Time Gross Settlement (RTGS) system

and a Scriptless Securities Settlement (SSS) system.

They have improved the efficiency and the safety of the

country's payment and settlement systems and will

facilitate trading of government securities.



89. Central Bank supervision as well as auditing

practices of private audit firms came under criticism

after the 2002 specialized bank failure mentioned

above. The Central Bank obtained the services of an

international expert to strengthen bank supervision in

2004.



--State Owned Banks



90. Total assets of the commercial banks stood at Rs

885 billion ($8.8 billion) as of December 31, 2003.

Bank of Ceylon and People's Bank with assets of Rs 266

billion ($2.7 bn) and Rs 224 billion ($2.2 billion),

respectively in 2004, still dominate banking, making up

about half of all assets.



91. The financial profile of both state banks

deteriorated over the years, mainly as a result of

directed lending and operating inefficiencies. Since

most of the bad debt of the two banks was implicitly

guaranteed by the state, these problems did not affect

the credibility of the banking system in Sri Lanka.

The government re-capitalized these banks during the

1990's. The weaknesses in the state banks, however,

make it possible for other inefficient banks to operate

and for the more efficient banks to make higher profits

than they would otherwise. The World Bank and IMF have

identified the dominance of the inefficient state banks

as a main constraint for development of the financial

sector. Consequently, the government has been trying

to reorganize the banks. Both banks launched

restructuring exercises to return to commercial

viability in the medium term. Top management at both

Bank of Ceylon and People's Bank now contains private

sector personnel and the banks were granted greater

autonomy. Further, asset classification and

provisioning norms have been progressively

strengthened. While Bank of Ceylon has met most of the

restructuring targets and shows substantial

improvements in its financial profile, the situation at

People's Bank remains weak. In particular, the

provisioning has left the bank with a large negative

equity affecting its operations. In addition, loans to

Government corporations could again badly affect the

bank's liquidity.



92. The Cabinet has recently approved new business

development plans for the two state banks to make them

more viable. The plans were developed under the

guidance of SEMA, the high powered restructuring agency

of the Government. The plan for Bank of Ceylon aims to

increase its profitability and efficiency. In case of

People's Bank, the state is to re-capitalize the bank,

for the third time, to meet a capital shortfall of Rs

10 billion. The latest capitalization is to be

supported by an ADB program, which will see equity

funding over 3 years. ADB funding will be subject to

meeting performance targets on non performing loans,

profitability, cost, and capital adequacy. The new

plan signifies a departure from the earlier IMF agreed

plan to sell the bank under a restructuring program.



--Private Commercial Banks and Foreign Banks



93. Private commercial banks and foreign banks

operating in Sri Lanka generally follow more prudent

credit policies and as a group are in better financial

shape. Nonetheless, the private banking sector also

remains trapped with a high level of non-performing

loans, despite high margins. In 2002, the average rate

of non-performing loans to total loans was 19 percent

for the two state commercial banks, 15.3 percent for

private domestic banks and 12.1 percent for foreign

banks operating in Sri Lanka. There are concerns

regarding inadequate loan loss provisioning and low

operational efficiency in some local private banks.

The banks are expected to improve provisioning with the

introduction of new provisioning rules by the Central

Bank in 2004. Foreign banks tend to make provisions in

line with international best practices as most foreign

bank branches are subject to home country supervision

in addition to that of the Central Bank of Sri Lanka.

To help improve bank performance, an Asset Management

Company Law is being prepared with World Bank and IMF

assistance. The law aims to provide troubled banks

with a mechanism to effectively deal with their non-

performing loans.



94. Credit ratings are mandatory for all banks

operating in Sri Lanka from January 2004.



--Capital Adequacy



95. Sri Lanka adopted capital adequacy standards set

by the Basel Committee on banking regulations and

supervisory practices in 1993. The Central Bank has

raised the minimum capital adequacy standards from 4.5

to 5 percent for core capital (Tier I) and from 9 to 10

percent for risk weighted assets (Tier I and Tier II)

from January 2003. Further enhancing banking sector

stability, Central Bank has also imposed capital

adequacy standards on foreign currency banking units.

In addition, in keeping with Basel Core Principles on

effective banking supervision, compliance with Capital

Adequacy on a consolidated basis was introduced in

2003.



96. People's Bank does not meet Capital Adequacy

Requirements (CAR) of Sri Lanka but it has Ministry of

Finance guarantee for funds required to meet

requirements. Bank of Ceylon Tier I CAR was about 12.1

percent in 2003. Current data on average Capital

adequacy of private commercial banks is not available,

but most of them maintain CA at required levels. CA at

foreign commercial Banks usually exceeds required

levels.



Political Violence

--------------



97. Since early 2002, there has been a marked

improvement in the business climate due to the peaceful

atmosphere prevailing in the country. This is in

contrast to the period between 1983-2001 when the

country was plagued by ethnic conflict, a civil war and

related urban terrorism. The fighting between the

Liberation Tigers of Tamil Eelam (LTTE) and the Sri

Lankan military was primarily in northern and eastern

Sri Lanka, but other parts of the country suffered

sporadic terrorist attacks. Since 1997, the LTTE has

been on the US State Department list of foreign

terrorist organizations. Terrorist activities of the

LTTE have declined significantly since late 2001 when

the LTTE declared a unilateral cease-fire and signed a

formal open-ended cease-fire agreement on February 22,

2002 with the hope of ending the war. Following, six

rounds of peace talks with the government of Norway

acting as facilitator, the LTTE suspended its

participation in the peace talks in April 2003.



98. There have been many ceasefire violations, and an

uptick in violence, mostly in the eastern part of the

country, related to fighting between the LTTE and a

faction that split from the LTTE in 2004. In July

2004, there was a suicide bombing in a Colombo police

station following a failed assassination attempt

against an anti-LTTE Tamil minister. Five people

(including the bomber) were killed. Despite these

incidents, the ceasefire largely holds and both sides

have publicly committed to its maintenance. Optimism

remains as neither side sees an advantage in returning

to war.



99. During the almost 19 years of war, tourists and

foreign business representatives have not been

terrorist targets but have suffered collateral injury

during attacks on other targets. On July 24, 2001 the

LTTE attacked the international airport and destroyed

both commercial and military aircraft. Several

military personnel were killed in the attack, military

and airport employees were injured, and civilians were

caught in crossfire. Sri Lankan Airlines, jointly

owned by the Government of Sri Lanka and Emirates

Airlines of Dubai, lost several commercial aircraft in

the attack. The LTTE has also attacked several

commercial ships flying foreign flags in the waters off

the north and east of the country. In response to

these attacks, insurers imposed war risk insurance

surcharges on aircraft and ships using Sri Lankan

seaports and airports. These surcharges have since

been lifted. During the conflict, the LTTE also

detonated several large bombs in Colombo's financial

and business districts causing numerous casualties and

extensive damage to property. Very few foreigners were

injured in these terrorist incidents due to the LTTE's

policy of targeting local interests. There have been

no major attacks since the peace process began on

December 24, 2001. The LTTE has been implicated in the

slayings of several anti-LTTE politicians and police

informants of Tamil heritage since the signing of the

ceasefire. There have also been several violent

incidents at sea.



Corruption

--------------



100. The country has fairly adequate laws and

regulations to combat corruption, but they are unevenly

enforced. US firms identify corruption as a constraint

on foreign investment, but, by and large, it is not a

major impediment to operating in Sri Lanka. According

to Transparency International (TI),corruption is most

pervasive in terms of political appointments to

government institutions, in government procurement, and

in high frequency low value transactions. Police and

the judiciary are perceived to be the most corrupt

public institutions. Corruption is a persistent

problem in customs clearance and enables wide-scale

smuggling of certain consumer items, to the detriment

of legitimate manufacturers and importers. Corruption

appears to have the greatest effect on investors in

large projects as well as government procurement and

tendering, especially in previous defense purchases.



101. The law states that giving or accepting a bribe

(by a public official) is a criminal offense and

carries a maximum sentence of seven years imprisonment

and a fine at the discretion of the courts. A bribe by

a local company to a foreign official is not covered by

the bribery act. The Bribery Commission is the main

body responsible for investigating allegations of

bribery and corruption. The function of the Bribery

Commission, under Act No 19 of 1994, is to investigate

allegations brought to its attention and institute

proceedings against responsible individuals in the

appropriate court. The Commission's most recent term

expired in December 2004, and a new Commission was

appointed after a 3-month delay in March 2005. The

previous Commissions were not effective in dealing with

bribery or corruption.



102. Few have been found guilty of corruption in

recent years. Highly publicized efforts to investigate

bribery and corruption have failed, damaging public

confidence in such processes. While corruption charges

have been leveled against politicians and top officials

in charge of key government corporations, no politician

or senior government official has been convicted of

bribery yet. The Commission began investigating

corruption charges against the former deputy minister

of defense in 2002, but he is yet to be prosecuted. In

December 2004, the commission filed corruption charges

in courts against another former key minister (who ran

the Ministry in charge of public welfare).

Prosecutions and investigations against some former

senior public officials are moving slowly or have come

to an abrupt end.



103. Sri Lanka ratified the UN Anticorruption

Convention in March 2004. Sri Lanka has signed but not

ratified the UN Convention against Transnational

Organized Crime. Sri Lanka is not a signatory to OECD-

ADB Anti Corruption Regional Plan.



104. Transparency International (TI),an international

"watchdog" organization promoting anti-corruption

strategies runs a national chapter in Sri Lanka. In

TI's Corruption Perception Index for 2004, Sri Lanka

was ranked 67 among 146 countries with a score of 3.5

out of a clean score of 10, reflecting a relatively

high-perceived level of corruption among politicians

and public officials. TI's 2003 National Integrity

Systems Country Report recommends the establishment of

an independent anti-corruption authority with

sufficient powers as a top priority to combat

corruption. TI has asked the international donor

community to ensure transparency and clear lines of

accountability in the disbursement of donor aid for

post-war reconstruction and post-tsunami

reconstruction.



105. In terms of Economic Freedom, Sri Lanka is ranked

78 out of 123 countries in Canada's Fraser Institute's

Economic Freedom of the World ranking released in

August 2004. Sri Lanka earned a score of 6 out of 10

in the Economic Freedom Index. This ranking is derived

on the basis of 21 components categorized under 5 major

indictors.



Bilateral Investment Agreements

--------------



106. The Government of Sri Lanka has signed Investment

Protection Agreements with the United States (which

came into force in May 1993) and the following

countries:



1. Belgium

2. People's Republic of China

3. Denmark

4. Egypt

5. Finland

6. France

7. Germany

8. Indonesia

9. India

10. Iran

11. Italy

12. Japan

13. Korea

14. Luxembourg

15. Malaysia

16. Netherlands

17. Norway

18. Romania

19. Singapore

20. Sweden

21. Switzerland

22. Thailand

23. United Kingdom



107. A bilateral treaty on avoidance of double

taxation between Sri Lanka and the United States was

ratified and entered into force on June 12, 2004.



108. Foreign investors not qualifying for BOI

incentives such as tax and exchange control exemptions

or concessions will be liable to pay taxes on corporate

profits, dividends, and remittance of profits. They

will also be liable to pay a 15 percent Value Added Tax

on goods and services. The government has also imposed

a tax of 0.1 percent on debits to any current or

savings account maintained at any bank in Sri Lanka.

Debits made to accounts of government and international

organizations are excluded. Accounts maintained at

Foreign Currency Banking Units, accounts maintained for

stock exchange transactions (SIERA) and resident and

non-resident foreign currency accounts are exempted

from the tax. The Embassy encourages prospective US

investors to contact an international auditing firm

operating in Sri Lanka to assess their tax liability.



OPIC and Other Investment Insurance Programs

--------------



109. The US and Sri Lanka concluded in 1966 (and

renewed in 1993) an agreement that allows the Overseas

Private Investment Corporation (OPIC) to provide

investment insurance guarantees for US investors. OPIC

currently provides coverage to banking and power sector

investments in Sri Lanka. Sri Lanka's membership in

the Multilateral Investment Guarantee Agency (MIGA)

offers the opportunity for insurance against

non-commercial risks.



110. Over $21 million is spent annually by the US

Embassy and other US Government institutions in Sri

Lanka. This amount can potentially be utilized by OPIC

to honor an inconvertibility claim; however, no such

claims have been made to date in Sri Lanka. The

Embassy purchases local currency at the financial rate.

The Sri Lankan Rupee has fluctuated against major

foreign currencies during past 12 months. The currency

is not expected to fluctuate by more than 10 percent

relative to the US dollar over the next year.



Labor

--------------



--Labor Force



111. Sri Lanka's labor force is literate and

trainable, although weak in certain technical skills

and English language. More computer and business

skills training programs, and English language programs

are becoming available, but the demand still outpaces

supply and many qualified workers seek employment

overseas. The average worker has eight years of

schooling.

112. Two-thirds of the labor force is male. The

unemployment rate (employment is defined as one who

worked for pay, profit or unpaid family gain for one or

more hours during the survey week) in the first quarter

of 2004 was 8.1 percent, with an estimated 650,000 of a

total labor force of 7.9 million out of work. (Labor

force data excludes some areas in the Northern

province; armed forces personnel deployed away from

home and Sri Lankan migrant workers abroad.) Including

unpaid family workers, the unemployment rate is higher.

Youth and entry level unemployment remains a critical

problem. Nearly 80 percent of unemployed persons are

in the 15-29 year age range. Over 50 percent of

unemployed young people are educated at the Ordinary-

Level (British System equivalent of US 10th grade) or

higher. Underemployment is also a major problem, with

thousands of university graduates seeking places in the

already bloated public sector, and lacking skills

needed in the private sector.



113. A significant proportion of unemployed seek

"white collar" jobs, and most sectors facing labor

shortages offer manual or semi-skilled jobs or require

technical or professional skills such as management,

marketing, information technology, accountancy and

finance, and English language. Following election

pledges during April 2004 parliamentary elections, the

government has initiated several programs to expand

state sector employment. For instance, a graduate

employment program is expected to provide about 40,000

new jobs in the government sector.



114. The government has recognized the challenge of

reformulating the educational system to meet the needs

of the private sector better, but it will take time

before the mismatch of skills to requirements is

addressed. The Asian Development Bank and the World

Bank have recently approved projects to improve

distance learning and tertiary education. The private

sector is offering various well-recognized professional

study courses accredited to local and foreign

professional institutes and foreign universities.

However, access to these courses is limited due to high

fees involved. A fair number of Sri Lankan students

also proceed abroad for studies.



--Migrant Workers Abroad



115. There are an estimated 970,000 Sri Lankan workers

abroad. The majority of Sri Lankan workers abroad are

unskilled (housemaids and laborers) and are located

primarily in the Middle East. Sri Lanka is also losing

many of its technically and professionally qualified

workers to more lucrative jobs abroad.



--Labor Regulations, Cost of Labor



116. Labor is available at a relatively low cost,

though it is priced higher than in other South Asian

countries. Child labor is prohibited and is virtually

nonexistent in the organized sector though child labor

occurs in informal sectors. The minimum legal age for

employment is set at 14. Most permanent full-time

workers are covered by laws pertaining to maximum hours

of work, minimum wage, leave, the right of association,

and safety and health standards. The Termination of

Employment Act (TEA) makes it difficult to fire or lay

off workers who have been employed more than six months

for any reason other than serious, well-documented

disciplinary problems. Disputes over dismissals can be

brought to a labor tribunal administered by the

Ministry of Justice. The labor tribunals have large

backlogs of unresolved cases. Certain labor disputes

founded upon fundamental rights (allegations of

termination/transfers based upon discrimination, etc.)

can be brought directly to the Supreme Court.

117. There is widespread belief that the labor laws

and a plethora of holidays are dampening productivity.

The full moon day of each month (sacred to Buddhists),

if it falls on a weekday, is a paid holiday. There are

also eight other public holidays. The public sector

and banks enjoy additional holidays. The statutory

holidays are in addition to 21 days annual/casual leave

and approximately 21 days sick leave (number of days

for sick leave is at the discretion of the management).

In addition, female employees are entitled to 84 days

fully paid maternity leave for the first two

pregnancies. The 2005 budget proposed additional

maternity leave benefits, but they are yet to be

implemented. Female workers are permitted 60 hours of

overtime work per month.



--Termination laws



118. The Termination of Employment Act (TEA) makes it

difficult to fire or lay off workers. In January 2003,

under the previous government's labor reform agenda,

the Parliament passed amendments to the TEA and the

Industrial Disputes Act (IDA) to improve labor

mobility. The amendments to TEA seek to facilitate

termination and provided for a standard compensation

formula and an unemployment benefit scheme. Amendments

to the IDA included time-bound labor dispute resolution

rules to expedite labor dispute resolution. The

implementation of these new laws was delayed until the

establishment of a new compensation formula and a new

unemployment insurance scheme, which were finally

announced in March 2005. The compensation formula

takes into account the number of years of service and

offers 2.5 months salary as compensation for 5 years;

22.5 months for 10 years; and up to a maximum of 48

months salary for 34 years service. In addition, an

unemployment benefit insurance scheme would provide 12

months salary. Employers have shown reluctance to

accept this formula and complain that the package is

excessive, especially compared to international norms.

They have also pointed out that higher compensation

could adversely affect companies requiring

restructuring and discourage investment.



119. Other planned reforms include amendments to the

Shop and Office Act to allow female employees in the IT

sector to work in the night. A more systematic

overhaul of the TEA and IDA would help to bring labor

laws in line with international norms.



--Trade Unions



120. About 15 percent of labor in the industry and

service sector is unionized. Labor in free trade zone

enterprises tends to be represented by non-union worker

councils.



121. Unions have complained that the BOI and some

employers, especially in the BOI-run export processing

zones (EPZ),prohibit union access and do not register

unions on a timely basis. Employers allege that the

Janatha Vimukthi Peramuna (JVP),a Marxist political

party now in government, could provoke labor to strike

in the guise of trade union activity. Due to its

violent past, employers are generally not in favor of

the JVP and its trade union arm, the Inter-Company

Trade Union.



122. The Government continues to take steps to improve

enforcement of labor regulations inside export

processing zones (EPZs). In BOI enterprises, including

those in the EPZs, worker councils composed of

employees generally provide for labor and management

negotiations. These worker councils have worked well

in some companies to provide for worker welfare. The

BOI has requested companies to recognize trade unions

and the right to collective bargaining. According to

the BOI, where both a recognized trade union with

bargaining power and a non-union worker council exist

in an enterprise, the trade union will represent the

employees in collective bargaining.



123. The ILO Freedom of Association Committee, has

observed that trade unions and employee councils can co-

exist, but there should not be any discrimination

against those employees choosing to join a union. The

right of employee councils to engage in collective

bargaining has been held as valid by the ILO. The ILO

has, however, noted weaknesses in rules governing

operation of employee councils and low prevalence of

collective bargaining agreements and requested the

Government to carry out improvements.



124. In response to these observations, the BOI

revised its labor manual in March 2004, requesting

companies located in EPZs to allow union access to

zones, and provide official time off to union members

to attend meetings. Along with this revision, the BOI

also issued new guidelines for the formation and

operation of employee councils giving powers to

employee councils to negotiate binding collective

agreements.



125. In 2002, the American Federation of Labor and

Congress of Industrial Organizations (AFL-CIO)

submitted a petition to the United States Trade

Representative seeking suspension of GSP benefits for

Sri Lanka due to labor right violations in some

factories in the export processing zones. This

petition was not acted upon. A similar submission was

made to the EU by a local trade union when Sri Lanka

applied for benefits under the special incentive

arrangements of the GSP. After an audit, the EU in

January 2004, granted significant benefits to Sri Lanka

under EU GSP in recognition of country's efforts to

implement core labor standards as the audit did not

find serious problems with regard to core labor

standards. The EU, however, observed the need for

further improvements in freedom of association.



126. In the plantation sector, union participation

rates are as high as 75 percent, though unionization

levels are reportedly on the decline. Key public

sector entities such as the Ceylon Electricity Board

and Sri Lanka Ports Authority also have large unions,

which stage protests, often to obtain pay hikes and

sometimes to protest anticipated moves towards

privatization or restructuring. Most of the major

trade unions are affiliated with political parties,

creating a highly politicized labor environment. In

what is seen as a positive development, several trade

unions with affiliations to main political parties have

formed themselves into an organized group, the National

Association for Trade Union Research and Education

(NATURE),to promote education and training among trade

unionists.



127. The growing strength of Marxist parties in active

politics and in parliament has increased politicized

union activity. State agencies with large unionized

workforces; have become vulnerable to politically

motivated strikes in response to restructuring and

privatization.

--Collective Bargaining



128. Collective bargaining is not yet popular.

Currently, about 50 companies (including a number of

foreign-owned firms) belonging to the Employers'

Federation of Ceylon (EFC) have collective agreements

and use them to conduct negotiations on their behalf.

More than half of EFC's 435 strong membership is

unionized.

--Labor-Management Relations



129. Labor-management relations in the past have been

by and large confrontational. This is due to a failure

on the part of both unions and employees to recognize

the need for a social partnership for mutual benefit.

The attitude of employers towards workers has changed

considerably in the last few years. Employers are

becoming more conscious of the need to look after their

human resources, and more effort is taken to ensure

that workers feel motivated and cared for. Labor-

management relations vary from organization to

organization; managers who emphasize communication with

workers and offer training opportunities generally

experience fewer difficulties. US investors in Sri

Lanka (including US garment buyers) generally promote

good labor management relations and labor conditions

that exceed local standards. A few large Sri Lankan

firms have started Employee Share Option plans. Work

stoppages and strikes in the private sector have been

on a decline in the past six months. Civil servants

other than officers in the police, armed forces, and

prison service, also have a right to strike.



--ILO conventions



130. Sri Lanka is a member of the International Labor

Organization (ILO) and has ratified 39 international

labor conventions. The labor laws of Sri Lanka are

laid out in almost 50 different statutes. The Ministry

of Labor has published a Labor Code, consolidating

important labor legislation. Sri Lanka has ratified

all eight core labor conventions included in 1998 ILO

Declaration on Fundamental Principals and Rights at

Work. ILO Convention 138 on minimum age for admission

to employment and Convention 182 on worst forms of

child labor were ratified during 2000-2001. Sri Lanka

ratified ILO convention 105 on Forced Labor in 2003.

The ILO, EFC and the AFL-CIO-sponsored American Center

for Labor Solidarity are working to improve awareness

about core labor standards. The ILO also promotes a

Decent Work Agenda in Sri Lanka.



Foreign Trade Zones

--------------



131. Sri Lanka has 10 free trade zones, also called

export-processing zones, administered by the BOI. The

oldest, the Katunayake and Biyagama Zones, located

north of Colombo near the Bandaranaike International

Airport, are fully occupied. The third zone is located

at Koggala on the southern coast. Several new mini

export-processing zones were opened in the provinces

during the last few years. There are nearly 200

foreign export processing enterprises operating in

these zones. There are also two industrial parks that

have both export-oriented and non-export oriented

factories. They are located in Pallekelle, near Kandy

in central Sri Lanka and in Seethawaka in Avissawela

about 60 kilometers from Colombo.



132. In the past, industrialists preferred to locate

their factories in close proximity to Colombo harbor or

airport to reduce transport cost and save time. The

excessive concentration of industries around Colombo

has created problems such as scarcity of labor,

inadequate infrastructure, environmental pollution,

escalation of real estate prices and congestion in the

city. Now, the BOI actively encourages the

establishment of export-oriented factories in the newly

developed industrial zones. The BOI also finds it

easier to provide infrastructure facilities and

security, as well as to monitor enterprises, when they

are located in the zones.



Foreign Direct Investment

--------------



--US Investments



133. Major US companies with investments in Sri Lanka

include: Energizer Battery, Mast Industries, Smart

Shirts (a subsidiary of Kellwood Industries),Caltex,

Sportif, Citibank, Gtech, Caterpillar, 3M, Cargill,

Coca Cola, Celetronix, Inc, Paxar Corp, Pepsi Co,

Warburg Pincus, Worldquest, Fitch IBCR, AES

Corporation, American International Group (AIG) and

American Premium Water. In addition, IBM, Lanier, NCR,

GTE, Motorola, Procter & Gamble, Liz Claiborne, May

Department Stores, Federated Department Stores, Tommy

Hilfiger, J.C. Penney, the Gap, Sun Microsystems,

Microsoft, Bates Strategic Alliance, McCann-Erickson,

Pricewaterhouse Coopers, Ernst and Young and KPMG all

have branches, affiliated offices or local

distributors/representatives. Kentucky Fried Chicken,

Pizza Hut, Federal Express, UPS, and McDonald's are

represented in Sri Lanka through franchises. Numerous

other American brands and products are represented by

local agents.



134. US investment in Sri Lanka is estimated to be in

the range of $200 million. Among the recent investors

in the power sector are AES Corporation and

Caterpillar. AIG insurance entered Sri Lanka in 1999.

Others are expanding, such as Celetronix Inc (memory

boards),Citibank, and Mast Inc (apparel and related

products). During the past few years, several US

companies have formed joint ventures or other

partnerships with Sri Lankan companies in the IT

sector, mainly in software development.



--Non-US Investments



135. Major non-US investors include: Unilever,

Nestle's, British American Tobacco Company, Mitsui,

Pacific Dunlop/Ansell, Prima, FDK, Telekom Malaysia Bhd

and S.P. Tao. Leading US and foreign investors which

have acquired significant stakes in privatized

companies include Caltex; Norsk Hydro of Norway; and

Hanjung Steel of Korea; Nippon Telephone and Telegraph,

Mitsubishi Corporation and C. Itoh (A.K.A. Itochu) of

Japan; Emirates Airlines of United Arab Emirates; Shell

Oil of the UK; P&O Netherlands and the Indian Oil

Corporation (IOC)



136. Reliable statistics on foreign investment by

country are not available. Leading sources of foreign

investments are South Korea, Japan, US, Australia, Hong

Kong, Singapore, and the U.K. FDI in 2004 was about

$33 million.



Investment Statistics



Estimated total foreign investment by sector

(in $ millions)



Sector Cumulative

Total End 2003

--------------

Food and beverage 98

Textile/apparel, leather 268

Chemical, rubber, plastic 151

Non-met. Mineral Products 52

Fabricated metal machinery 64

Other manufactured products 104

Services 1,126

--------------

Total 1,867

--------------

Source: Board of Investment of Sri Lanka

Note: Investment figures reported here consist of

direct investment plus loan financing. The data

provided by the BOI are incomplete. They do not

include foreign investment that came through non-BOI

sources prior to 1994. Foreign investment in the

banking and insurance sectors are also not included.



Lunstead