SRI LANKA

Sri Lanka's economy is 58.3 per cent free, according to our 2008 assessment, which makes it the world's 90th freest economy. Its overall score is 1 percentage point lower than last year. Sri Lanka is ranked 14th out of 30 countries in the Asia–Pacific region, and its overall score is slightly lower than the regional average.

Sri Lanka scores well in fiscal freedom and government size. Income and corporate tax rates are moderate, and overall tax revenue is relatively low as a percentage of GDP. Total government expenditures equal slightly more than one-fifth of GDP, and state-owned businesses generate a small portion of total tax revenue.

Sri Lanka scores poorly in investment freedom, financial freedom, monetary freedom, and freedom from corruption. The government generally welcomes foreign capital, but formal restrictions and the security situation are deterrents. The financial system is small but growing and would benefit from greater transparency. Inflation is high, and the government directly subsidises a wide array of goods. The judicial system is not free of political interference and is subject to corruption as well as extensive delays.

Background

Sri Lanka, a democratic island nation, has been engulfed in civil war for over two decades. Current President Mahinda Rajapakse, elected in November 2005, has countered Liberation Tigers of Tamil Eelam attacks with force; over the past year, the fighting has increased in scale and intensity. Despite that, the economy has grown between 6 per cent and 7 per cent annually in recent years. Textile and garments account for the majority of export growth, but Sri Lanka remains a poor nation where most people are employed in agricultural industries. The large Sri Lankan diaspora remit around $1 billion annually to their homeland.

Business freedom - 71.5%

The overall freedom to start, operate, and close a business is relatively well protected by Sri Lanka's regulatory environment. Starting a business takes an average of 39 days, compared to the world average of 43 days. Obtaining a business license takes less than the world average of 234 days, but costs are high. Closing a business is relatively simple.

Trade freedom - 69.6%

Sri Lanka's weighted average tariff rate was 7.7 per cent in 2005. Import bans and restrictions, export controls, service market barriers, restrictive import taxes, import fees, import licensing, restrictive standards, non-transparent government procurement, weak enforcement of intellectual property rights, export subsidies, and corruption add to the cost of trade. An additional 15 percentage points is deducted from Sri Lanka's trade freedom score to account for non-tariff barriers.

Fiscal freedom - 73.5%

Sri Lanka has burdensome tax rates. The top income tax rate is 35 per cent, and the top corporate tax rate is 35 per cent, up from 32.5 per cent. Other taxes include a value-added tax (VAT), a property tax, and a tax on interest. In the most recent year, overall tax revenue as a percentage of GDP was 14.2 per cent.

Freedom from Government - 81.7%

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 24.7 per cent of GDP. Privatisation has reduced government participation in manufacturing, but the state remains involved in such sectors as finance and utilities.

Monetary freedom - 65.4%

Inflation is high, averaging 9.6 per cent between 2004 and 2006. Unstable prices explain most of the monetary freedom score. The government influences prices through regulation, state-owned enterprises, and subsidies for a wide array of goods. An additional 15 percentage points is deducted from Sri Lanka's monetary freedom score to account for policies that distort domestic prices.

Investment freedom - 30%

Foreign investment, although generally welcomed, is prohibited in non-bank lending, pawnbroking, and retail trade with a capital investment of less than $1 million (with some exceptions). Investment in several sectors is screened and approved case-by-case when foreign equity exceeds 40 per cent. Deterrents include the long-running civil war, bureaucratic inefficiency, and unpredictable economic policies. An intended one-stop shop lacks bureaucratic clout. Outward direct investment must be approved by the government. Residents and non-residents may hold foreign exchange accounts subject to requirements, including government approval in some cases. There are strict reporting requirements and limits on payments and transfers. Capital transactions are subject to many restrictions and government approval in some cases.

Financial freedom - 40%

Sri Lanka's financial system is extensively government-influenced and growing rapidly. Regulations permit 100 per cent foreign control of banks, insurance companies, and stockbrokerages. Reforms in 2004 helped to improve banking regulation and health. Regulations are largely consistent with international standards, but supervision and enforcement are insufficient. The central bank is not independent. The government influences the allocation of credit and uses half of domestic financial resources to finance government borrowing. Banking dominates the financial sector. The two largest commercial banks are state-owned, and the government opened a new development bank in 2006. The insurance sector is small, and the two largest companies control nearly three-fourths of the market. Capital markets are centered on the Colombo Stock Exchange, which is modern but relatively small and affected by the ongoing political violence.

Property rights - 50%

The judiciary is influenced by other branches of government, and extensive delays lead investors most often to pursue out-of-court settlements. Intellectual property rights come under both criminal and civil jurisdiction. International recording, software development, motion picture, clothing, and consumer product companies claim that lack of IPR protection damages their businesses.

Freedom from corruption - 31%

Corruption is perceived as significant. Sri Lanka ranks 84th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Anti-corruption laws and regulations are unevenly enforced. The police and the judiciary are viewed as the most corrupt public institutions. Corruption in customs clearance enables wide-scale smuggling of certain consumer items.

Labour freedom - 70.5%

Relatively flexible employment regulations could be further improved to enhance overall productivity growth and employment opportunities. The non-salary cost of employing a worker is moderate, but the rigidity of hiring and firing a worker creates a risk aversion for companies that would otherwise employ more people and grow.

— Courtesy: The Heritage Foundation

*          Population     19.6 million

*        GDP (PPP)  $90.2 billion

                    6.0% growth in 2005

                    5.3% 5-yr. comp. ann. Growth

                    $4,595 per capita

*          Unemployment          7.7%

*          Inflation (CPI)          10.6%

*        FDI (net inflow)          $234.0 million

*        Off. Dev. Assist.          $930.9 million

                    (6.9% from the U.S.)

*          External debt $11.4 billion

*          Exports        $7.9 billion

          Primarily textiles and apparel, tea and spices, diamonds, emeralds, rubies, coconut products, rubber manufactures, fish

*          Imports        $10.1 billion

          Primarily textile fabrics, mineral products, petroleum, foodstuffs, machinery and transportation equipment