Investment incentives and pro-business policies bolster prospects of Sri Lankan industry

Buoyed by its powerhouse apparel, tea, coconut, rubber and gemstone segments, Sri Lanka’s industrial sector has recorded significant expansion in export volumes and earnings in recent years. Although rubber and tea have been impacted by falling global commodities prices and volatility in key export markets, rising demand for value-added products, a specialty of the sector, is expected to offset any near-term losses, while growing opportunities for foreign direct investment (FDI) demonstrate the country’s positive long-term growth prospects. Investment in transportation and increasingly pro-business policies are also expected to help the sector maintain its upwards trajectory, as will a spate of planned free trade agreements and the reinstatement of key trade concessions with the critical markets of the US and the EU.

Industrial development is a major national priority, with the government setting a number of bold export targets across critical sectors, including apparel, tea, rubber and gemstones. The sector is overseen by the Ministry of Industry and Commerce (MIC), which is responsible for formulating policies aimed at improving exports and raising employment, with an emphasis on diversification, value addition, environmental sustainability and regional industrial development. Under this mandate the MIC has launched a number of initiatives over the past few years across the country. These include the Industrial Estate, Gamata Karmantha, Thrust Area Development, Textile Industry Development and Productivity Improvement programmes, implementation of a chemical weapons convention and an industrial survey.

Economic liberalisation in Sri Lanka first began in the late 1970s, and successive governments have targeted industrialisation and FDI as critical to economic growth. In 1989 the country launched its Sri Lanka Industrialisation Strategy, aimed at attracting FDI and reinforcing the free market economy. The 2005 Mahinda Chinthana 10-year economic plan, which officially launched in 2010, emphasised industrialisation as critical in meeting macro targets, including 8% annual GDP growth, as well as increasing FDI’s total contribution to GDP to 33-35%. In 2015 the government announced it was in the process of formulating a new export development strategy, in consultation with the Exporters Association of Sri Lanka.

Board Of Investment

The Board of Investment (BOI) and the Sri Lanka Exports Development Board (EDB) play a critical role in industrial and manufacturing development. The BOI’s mandate is to act as a central, nationwide facilitation point for all investors in the country. BOI services include information and guidance for investment applications, coordinating approvals with other relevant agencies, evaluating and approving new industrial and manufacturing investments, and assistance during project set-up. This includes site selection, advising on factory buildings and technical matters, arranging supporting utilities and infrastructure, facilitating residence visas and import-export clearance, and advising on environmental norms and necessary permits. BOI companies provide employment for more than 470,000 workers, and account for nearly 65% of Sri Lankan exports and 86% of the country’s industrial exports.


The EDB is the country’s principal organisation for export promotion and development. Its responsibilities include policy advisory, performance monitoring, export promotion, facilitation of export-related activities and provision of advisory services. The EDB’s most recent strategic plan, which ran from 2011-15, aimed to increase export earnings to $15bn by 2015, reduce reliance on the US and the EU by expanding to markets outside of these areas by 50%, and enhancing export growth in seven key sectors. These included garments, tea, rubber products, gemstones, ICT, food and beverages, and fisheries.

Big Goals

New investment in industrial developments and manufacturing facilities is a key priority for the administration of President Maithripala Sirisena, although these sectors have traditionally struggled to meet ambitious government targets. In August 2014, for example, the government announced plans to attract $5bn in new FDI by 2016, following upgrades to the country’s utilities sector which expanded electrification to 99% of the population, with a coinciding 25% reduction in the cost of electricity tariffs.

In addition to strengthening investment in the tourism sector, the government emphasised its 300 Industries Programme, which was first rolled out in the early 2000s, as a prime area for new investment, with the programme focusing on industrial development outside of Colombo and Gampaha. The goal is ambitious – total FDI inflows to the country reached $1.6bn in 2014, according to BOI figures, and although this represents a 21% increase over 2013, and 2.2% of total GDP compared to 2% in 2013, it still fell below the government’s $2bn target. In May 2015 the Daily Mirror also reported that just 20% of FDI inflows in 2014 were channelled to manufacturing and industrial sectors, indicating room for improvement.

Investment Incentives

The government has rolled out several pro-business policies and incentive schemes under the auspices of the BOI. Any foreign venture in Sri Lanka must receive BOI approval prior to establishment, with the board granting a number of incentives to new companies provided they satisfy certain eligibility criteria. Broadly speaking, investors are provided with preferential tax rates, constitutional guarantees on investment agreements, exemptions from exchange control and 100% repatriation of profits and capital. Tax holidays, concessionary rates and duty exemptions are also available in certain circumstances for export-oriented enterprises.

Section 16 of the BOI’s main governing legislation, the BOI Law, permits 100% foreign ownership in certain sectors, although manufacturing activities, agricultural processing and export-oriented service projects generally fall under the purview of Section 17, in which approval for projects where foreign investment exceeds 40% of the total project value is granted on a case-by-case basis.

Projects approved under Section 17 are eligible for a host of government incentives, including duty exemptions, tax concessions and holidays, and exchange control exemptions. For example, companies which export more than 90% of goods produced – or 60% within the apparel and ceramics segments – are entitled to Customs duty exemptions on capital goods and raw materials, while non-export-oriented projects are exempt from import duty exemptions for project-related capital goods. Agreements reached with the BOI remain valid for the life of the project.

Growth In 2015

Although FDI continues to lag below government targets, export volumes and revenues have been rising in recent years, though 2015 saw a distinct downturn. Earnings from merchandise exports rose by 7% year-on-year in 2014 to reach $11.1bn, from $10.4bn in 2013 and $9.8bn in 2012, according to the EDB. However, 2015 saw a 5.6% decline to $10.5bn, driven by an 18% decline in tea exports to $1.3bn, a 36% decline in fisheries exports to reach a total of $163m, as well as continued declines in apparel, gems and rubber products. Apparel exports continue to dominate, representing 44.5% of total exports in 2015, followed by Ceylon tea at 11.4%, rubber and rubber products at 8.6% and ICT-business process outsourcing – one of the continued strong points – at 6.4%


Sri Lanka’s garment industry stands as its largest foreign exchange earner and most significant manufacturing segment, with textile and apparel exports comprising 44.5% of total export earnings in 2015, and reaching a total value of $4.5bn, according to the EDB and the Joint Apparel Association Forum (JAAF). This represents a mild decline from 2014 growth, when ready-made textile articles saw the sharpest growth, up 14.4% in 2014, followed by apparel (9.8%) and woven fabrics (0.3%), while earning from other textile articles fell by 11.7%.

Although the apparel segment does not compete regionally in terms of high volumes and low-cost production, high levels of value addition and a focus on the niche markets of lingerie, swimwear and athletic apparel have enabled the country to maintain a competitive advantage despite the market’s smaller size (see analysis). More than 90% of Sri Lankan-made garments are exported to the US and the EU, with demand in both markets rising steadily over the previous decade, despite a move by both to suspend their generalised system of preference plus (GSP+) trade concessions with Sri Lanka following the conclusion of the country’s civil conflict in 2009.

The EDB reported that earnings from US-bound exports rose by 8.8% in 2014, while most European markets also increased, including France (42.9%), the Netherlands (44.8%), Italy (22.5%) and the UK (1.2%). Meanwhile, export earnings from Germany and Canada fell by 2% and 2.1%, respectively. In 2015 exports to the US hit $2.5bn, followed by the UK ($816m), Italy ($356m), Germany ($197m) and Belgium ($166m).

The US GSP+ scheme was reinstated in July 2015, although Sri Lanka’s apparel exports do not benefit from its provisions. However, JAAF anticipates that its GSP+ with the EU, which includes garment exports, will be renewed by 2016, creating significant opportunities for future expansion, particularly in the fabric milling segment (see analysis).

Footwear and leather products are another high-potential segment, with Sri Lanka’s readily available supply of high-quality natural rubber underpinning promising recent growth. Footwear exports surged in 2014, rising from $51m in export revenues in 2013 to hit $110m, with the EDB reporting a 196% rise in export volumes as a result of growth in exports to Vietnam (709%), China (680%) and the UK (241%). Growth tailed off in 2015, only marginally increasing.

Thanks to US demand, a potential free trade agreement with China and the expected reinstatement of its EU trade concessions, the sector remains on track to meet its 2020 target of $8.5bn in export revenues. GSP & GSP+: Although Sri Lanka has continued to benefit from a GSP scheme within both the EU and US since 2010, which generally sets export tariffs between 5% and 20%, reinstatement of full GSP+ benefits is likely to have a significant impact on manufacturing and export revenues. According to a July 2015 report published by Sri Lanka’s Institute of Policy Studies (IPS), limited coverage of export products exported by Sri Lanka under the US GSP scheme has constrained benefits to the sector, with just 7% of US-bound exports benefitting from GSP concessions in 2012, while just 0.11% of total apparel exports were eligible for GSP benefits in the same year.

According to the IPS, reinstatement of GSP+ will see the proportion of apparel benefitting from tax concessions rise to 0.16%, while 17% of rubber exports will benefit, and 25% of total Sri Lanka-US exports. Even more promising is the expected reinstatement of EU GSP+ benefits, with the apparel industry projected to retain an additional $350m-400m annually should GSP+ be reintroduced, according to JAAF. “The island will definitely benefit from GSP+ coming back, and we should see an increase in demand for Sri Lankan apparel,” Ranil Pathirana, director of Hirdaramani Group, a local apparel manufacturer, told OBG. “This will help support the existing producers and revive several production facilities which have reduced the scale of operations after the loss of GSP”.

Staffing Challenges

The apparel sector is increasingly suffering from staff shortages, as a rising number of educated Sri Lankans abandon traditional livelihoods to seek white collar jobs in Colombo or move abroad in search of other opportunities.

Wages for unskilled garment workers in their first year of work, at just $66 per month, were among the lowest in the world in 2015, according to the International Labour Organisation. Despite incentive programmes rewarding employees on certain key performance indicators, the lack of available workers has increasingly led apparel manufacturers to invest in the country’s underdeveloped north-eastern regions, as was the case when Hirdaramani Group opened an apparel factory in Puthukkudiyiruppu, Mullaitivu in March 2015. “It’s been a pretty big success; we found employees quite easily because the area used to be a war zone. However, these labour advantages have been slightly offset by a lack of available transportation infrastructure and water,” Sid Hirdaramani, director of the Hirdaramani Group, told OBG. “In the future I see that we will have no other choice but to automate, because we will eventually run out of labour, and so over the next five to 10 years we’ll be focusing on that, as well as improving productivity.”

Tea Exports

Agricultural exports, the country’s second-largest foreign exchange earner, are largely dominated by Sri Lanka’s world-leading tea industry, which satisfies nearly 20% of global demand. Sri Lanka is the world’s third-largest exporter of tea by volume, behind Kenya and China. It is also the largest exporter of “orthodox” black tea, meaning tea which is manufactured using traditional methods rather than the cut-curl-tear approach. The Colombo Tea Auction, where an estimated 6.5m kg of tea is sold each week, also stands as the largest tea auction worldwide.

Tea Export Growth

Tea exports surged from 2012-14, according to the EDB, with earnings reaching a record LKR199.4bn ($1.4bn) in 2013, and rising a further 5.4% to hit LKR210.2bn ($1.5bn) in 2014. Freight-on-board prices rose by 3.1% in 2014, reaching $4.95 per kg, another record achievement. The EDB reported that exports of all tea products rose both in value and volume (2.35%) in 2014. Tea packets accounted for 48.5% of total tea export earnings, rising in volume and value by 9.1% and 9.2%, respectively, in 2014, while bulk tea comprised a total of 49.1% of export earnings, but it also saw volumes fall by 3.3%, even as revenues increased by 0.7%.

The industry was hit hard by falling global tea prices in 2015, however, with the average price of bulk tea falling from LKR572.17 ($4.12) to LKR523.83 ($3.77) per kg between July 2014 and July 2015, while average prices for tea packets fell from LKR596.76 ($4.30) to LKR559.62 ($4.03). Average total tea prices declined by 7% between July 2014 and July 2015, while volatility in key export markets saw the value of tea packet exports to Iraq decline by 18.6%, to Syria by 42.5% and to Russia by 11.6%. Tea packet earnings for exports to Turkey simultaneously rose by 47.7%, and to Libya by 104%, according to the EDB. As a whole, export earnings for tea in 2015 fell 18% to $1.3bn.


Approximately 70% of locally grown rubber in Sri Lanka is processed by local manufacturers, while the segment employs an estimated 300,000 people. Today the market produces almost all kinds of natural rubber, including ribbed smoke sheet, latex crepe, sole crepe, scrap crepe, all grades of technically specified rubber, specialty rubbers and latex concentrates. Annual production of natural rubber stands at an estimated 98,000 tonnes and Sri Lankan natural rubber remains highly in-demand.

Sri Lanka ranks among the world’s 10 largest rubber producers, and stands as the seventh-largest exporter of natural rubber. However, following strong growth from 2009-11, when rubber exports peaked at $1.1bn, the industry has been in steady decline, down to $787m in 2015 (see analysis). Much of this is due to the decline in global commodities prices, which fell to a six-year low in mid-2015 as a result of weakening demand in China. “Buyers right now are taking a wait-and-see approach because of the drop in commodities prices. We’ve dropped our tyre export prices by almost 30% over the past year, from between $3.10 and $3.20 per kg to between $2.30 and $2.40,” Ravi Dadlani, vice-president of sales and marketing at CEAT Kelani Holdings, told OBG.


Outside of the apparel and agriculture sectors, the gemstones and jewellery segment stands as Sri Lanka’s largest value-added industrial strength. The country is home to more than 70 varieties of coloured stones out of 200 worldwide, and stands as one of the five largest gem-bearing nations globally, with a long history of gemstone manufacturing leading it to become a major regional centre for imported gemstone processing, particularly for diamonds, which are not found locally. With 80% of Sri Lanka’s 65,000-sq-km landmass considered gem-bearing, the country boasts the highest density of gemstone deposits globally, with an estimated 12,500 small-scale gem mines operating across the island, largely concentrated within the Ratnapura district, and more than 6500 new licences issued by the National Gem and Jewellery Authority (NGJA) in 2013. According to the EDB, the industry employs approximately 600,000 miners, cutters, polishers, dealers, designers, manufacturers, craftsmen and salespeople, making it one of the largest single employers.

EDB data showed that earnings from gems, diamonds and jewellery exports have struggled since reaching a peak of $608m in 2008, declining again to $242m in 2015. Much of this is due to the overall economic slowdown in Asia, with China over the last few years driving prices for luxury goods. The NGJA called for new investment in local gem processing facilities in March 2015, in a bid to reduce exports of raw stones and increase value addition in the industry by 35%. By 2020 the government hopes to see gemstone exports increase to $1bn. “Gems are the first to be affected by a crisis and the last to recover, though there is always a niche market,” Ahsan Refai, managing director of retailer Zam Gems, told OBG.


While falling commodities prices and international volatility have created challenges for Sri Lanka’s robust export industries, the sector’s outlook remains optimistic, with government policies aimed at improving industrialisation and attracting investment. Despite external challenges and a shortage of skilled labour, expansion into the underserved north-east will help the nation meet an anticipated spike in export demand, driven by reinstatement of GSP+ agreements with the US and the EU. Although government targets for industrial and export growth remain bold, the country’s strong track record of delivering high-quality, value-added niche products has put it on course to meet its FDI and export goals.

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The Report: Sri Lanka 2016

Industry & Retail chapter from The Report: Sri Lanka 2016