By Asoka S. Seneviratne –

“The great advances of civilization have never come from government bureaus. They’ve come from individuals pursuing their own interests — the private sector, not the public sector.” ~ Milton Friedman (Nobel Laureate in Economics)

As Sri Lanka’s economy stabilizes after a prolonged period of contraction and uncertainty, the next decisive phase must be to mobilize private-sector investment as the central driver of growth. Fiscal consolidation, debt restructuring, and improved governance have laid the foundation—but it is enterprise, innovation, and private initiative that must now propel the nation forward.

The government has proven that discipline and reform can restore confidence. The challenge now is to translate stability into sustained, inclusive growth of around 7 percent annually—a level necessary to generate employment, raise incomes, and reduce poverty. Achieving this is ambitious but realistic—if and only if the private sector becomes the true engine of growth.

Foreign Direct Investment (FDI) will be a crucial component. With large external debt repayments due beyond 2027, Sri Lanka needs not just more investment, but better investment—targeted, strategic, and growth-enhancing. The government must therefore adopt a bold FDI policy framework that sets a clear, measurable target—such as US$10 billion in FDI inflows within two years—supported by strong incentives and efficient facilitation. In other words, incentives should be carefully structured and proportional to the scale of investment. Larger investors who bring substantial (i) capital, (ii) technology, and (iii) employment opportunities together capable of using local raw materials extensively should receive commensurate levels of facilitation and benefits. In short, the above is the focus and strategy.

This strategy establishes a tiered incentive framework—where firms are rewarded not merely for investing, but for the magnitude and strategic impact of their investment. Simply put, the greater the investment volume, the more comprehensive the incentive package.

It should be noted that Vietnam has set a target of US$15 billion annually and has achieved it through a Tailor-made incentive package as explained above. Furthermore, the State’s role should shift from controller to strategic enabler—creating an ecosystem that reduces risk, simplifies bureaucracy, rewards productivity, and ensures policy consistency. With the proper measures, Sri Lanka can transform its private sector from a cautious observer into a confident partner in national development.

1. Investment Climate Reform and Regulatory Simplification

The single most powerful signal a government can send to investors—local and foreign—is clarity and consistency. Sri Lanka’s current regulatory framework remains (i) complex, (ii) fragmented, and (iii) slow-moving. Investors routinely face delays of several months for basic approvals, discouraging both entrepreneurship and innovation.

The government must urgently launch an Investment Climate Reform Program to eliminate red tape and restore predictability. A One-Stop Investment Facilitation Agency (OSIFA) should integrate all key approval functions—land acquisition, environmental clearances, tax registration, and utility connections—under a single digital portal.

This portal must operate under a “30-day approval guarantee” and automatically escalate unresolved cases to higher authorities. Regulatory procedures should be digitized, time-bound, and fully transparent. Furthermore, a Comprehensive Regulatory Review Commission, with private-sector participation, should be appointed to modernize outdated laws and recommend annual updates to ensure competitiveness.

The aim is simple: no investor should need more than 30 days to start a business in Sri Lanka. This is achievable—and it will send a clear message that the country is open, efficient, and serious about private enterprise.

2. Strategic FDI Attraction Framework

For decades, Sri Lanka’s FDI inflows have remained below regional benchmarks.   A recent World Bank update shows that Sri Lanka’s FDI inflows as a share of GDP have been well below both the regional average and the peer group of “lower‐middle-income” economies.   UNCTAD data: In 2023, Sri Lanka’s inward FDI was reportedly US$ 713 million, and in 2024 around US$ 761 million.   A report from Oxford Business Group noted that Sri Lanka averaged around 1.2 % of GDP in FDI inflows over a five-year span, while some regional peers like Vietnam reached 4.9 %, Malaysia 3.1 % and Indonesia 3.0%.

The reason lies not in lack of potential but in lack of strategy. The country must move from generic promotion to targeted investment attraction aligned with national priorities.

The proposed Strategic FDI Framework 2026–2028 should identify five key sectors:

1. Renewable energy and green hydrogen

2. Agro-processing and food exports

3. Manufacturing and industrial technology

4. IT, digital services, and knowledge outsourcing

5. Tourism and logistics

Each of these sectors should have a dedicated FDI package that includes:

* Performance-based tax incentives tied to exports, employment, technology transfer, and extensive use of local raw material

* Fast-track land and infrastructure access within designated investment zones

* Customs and VAT rebates for input imports

* 100% repatriation rights for profits and dividends (i.e. legal protection and guarantees)

To ensure coordination, the Board of Investment (BOI) should be restructured into a performance-based, professional body led by sector specialists, with measurable quarterly targets. A National FDI Task Force, chaired by the President, should monitor progress and remove institutional bottlenecks.

The goal is to attract US$10 billion in quality FDI within two years, with long-term spillover effects in jobs, technology, and exports. With strategic alignment and presidential oversight, Sri Lanka can transform itself from a peripheral destination to a preferred investment hub in the Indian Ocean.

3. Empowering Small and Medium Enterprises (SMEs)

While FDI captures headlines, the true strength of a nation lies in its small and medium enterprises. SMEs account for nearly 75% of employment and 50% of GDP in Sri Lanka—but they remain constrained by high interest rates, limited credit access, weak technology, and fragmented market linkages.

The government must introduce a National SME Empowerment and Competitiveness Program (N-SECP) with three pillars:

* Finance – A low-interest SME credit line supported by development banks, with partial credit guarantees for new entrepreneurs and women-led enterprises.

* Technology – Creation of regional SME technology centers offering product design, packaging, and digital training.

* Market Access – Integration of SMEs into supply chains through subcontracting partnerships with large firms and FDI ventures.

An SME Innovation Fund, co-financed by the government and international partners, should be launched to promote R&D, automation, and value addition.

If nurtured properly, SMEs will not just grow—they will multiply. Each successful small enterprise becomes a job creator, a taxpayer, and a stabilizing force in the local economy. Empowering SMEs is not charity—it is strategic nation-building.

4. Export Diversification and Value Addition

Sri Lanka’s export basket remains narrow, heavily dependent on garments, tea, and remittances. To sustain high growth, the country must move up the global value chain through diversification and value addition.

A National Export Diversification Strategy (NEDS) should be implemented to develop new export clusters in high-value industries such as:

* Processed foods and organic agricultural products

* High-tech apparel and textile innovation

* Digital and financial services

* Gem and jewellery finishing

8Boat building and marine services

Each export cluster must be supported by a dedicated infrastructure zone—with logistics, customs, testing labs, and warehousing facilities—to minimize costs and delays.

Trade facilitation reforms sho5. Infrastructure and Energy for Competitivenessuld prioritize digitized customs clearance, export credit insurance, and fast VAT refunds to exporters. At the same time, Sri Lanka must actively leverage trade agreements with ASEAN, RCEP, and the EU to access broader markets.

By focusing on value rather than volume, Sri Lanka can increase export earnings, strengthen the rupee, and reduce vulnerability to external shocks.

No economy can grow at 7 percent without reliable infrastructure. Energy shortages, port congestion, and transport inefficiencies impose hidden costs that undermine competitiveness. The government should therefore prioritize infrastructure modernization as the foundation of private-sector growth.

The creation of a National Infrastructure Pipeline (NIP)—listing priority projects for the next 10 years—can help attract both domestic and international investors through Public-Private Partnerships (PPPs). Projects should cover ports, expressways, industrial parks, renewable energy, and logistics hubs.

In energy, the focus must shift toward renewable generation and efficiency. Solar, wind, and LNG-based projects should be expanded under transparent PPP models. The private sector should be empowered to generate and sell renewable energy directly to the grid at competitive tariffs.

Upgrading industrial zones with reliable utilities, waste management, and digital connectivity will further enhance productivity. Smart Infrastructure Zones—where power, water, and data are integrated digitally—can become magnets for advanced industries.

In essence, infrastructure is not just concrete and steel—it is the lifeline of competitiveness.

6. Governance, Policy Stability, and Anti-Corruption Framework

Even the best-designed policies fail without trust and integrity. The private sector invests where governance is predictable and corruption is minimal. Thus, institutional credibility must be placed at the center of economic reform.

A Public Procurement Transparency Act should be enacted to ensure that all government contracts above a defined threshold are published online, including tender evaluations and awarded prices. The Commission to Investigate Allegations of Bribery or Corruption (CIABOC) must be strengthened by granting it financial independence, prosecutorial powers, and performance metrics.

Equally important is policy consistency. Investors should not be forced to second-guess tax rates or exchange policies. A National Policy Council, chaired by the President and comprising senior ministers and business leaders, can ensure that key policies—especially on trade, taxation, and investment—remain stable for a minimum of five years.

By institutionalizing transparency and predictability, the government will send a clear message: Sri Lanka is a rules-based economy where integrity drives growth.

Summary and Conclusion

Sri Lanka has reached a pivotal turning point. The foundation for recovery has been laid; now comes the test of transformation. Achieving 7 percent growth is not about chasing numbers—it is about restructuring the economy toward private-sector-led expansion, anchored in productivity, innovation, and global competitiveness.

The six proposed policy and incentive packages—ranging from investment reform and FDI attraction to SME empowerment, export diversification, infrastructure modernization, and governance—offer a coherent roadmap. They are not theoretical aspirations but practical, implementable solutions that can deliver results within two years.

President Anura Kumara Dissanayake’s reform agenda provides the political stability and integrity needed to implement such measures decisively. If executed with determination, Sri Lanka can convert its fragile recovery into lasting resilience.

As I have emphasized throughout this paper:

“Economic sovereignty begins when the private sector becomes a partner in national progress—not a spectator.”

Now is the time to act—to empower enterprise, attract investment, and transform Sri Lanka into a model of disciplined, inclusive, and private-sector–driven growth.

*The writer, among many, served as the Special Advisor to the President of Namibia from 2006 to 2012 and was a Senior Consultant with the UNDP for 20 years. He was a Senior Economist with the Central Bank of Sri Lanka (1972-1993). He can be reached via asoka.seneviratne@gmail.com