Export Performance

Earnings from exports grew by 6.5 per cent to US dollars 8,137 million in 2008 from US dollars 7,640 million in 2007. Exports, which recorded a healthier growth of 12.7 per cent during the first eight months of the year, suffered as a result of the contraction in global demand towards the end of the year, leading to a decline in growth to 6.5 per cent by the end of the year. The agricultural exports, which grew by 23.1 per cent to US dollars 1,855 million in 2008, provided the major impetus to growth during the year. Agricultural exports contributed to nearly 70 per cent of this, which is largely due to the attractive prices in the international market.

Agricultural exports were led by the tea sector recording earnings of US dollars 1,271 million in 2008, mainly due to higher prices of tea. Sri Lanka’s tea prices reached record levels during the first nine months of 2008, in the wake of rising demand from the United Arab Emirates (UAE) and the other Middle Eastern countries, amidst uncertainties of production in Kenya. The Middle Eastern nations and the CIS countries, which constituted the largest market for Sri Lanka’s tea exports, accounted for about 46 per cent and 23 per cent, respectively, of the total tea exports in 2008.

Tea prices at the Colombo Auction decreased since the third week of the September onwards, following intensification of the global financial turmoil. The situation was aggravated by the “wait and see” attitude taken by the buyers in anticipation of further price reductions. The high prices that prevailed during the first three quarters also compelled producers to supply lower quality tea to the auctions with a view to increasing quantity, resulting in a deterioration of the quality of the tea sold at the auction. The tea prices continued to plunge further to a level that the manufacturers and the green leaf suppliers could not even recover their costs and some stocks remained unsold at the auction. The government had to intervene in the market to stabilize the prices, by purchasing

the unsold tea through the Sri Lanka Tea Board (SLTB), which was re-sold in subsequent auctions in January 2009 when prices improved. Although the prices at the Colombo Auction deteriorated further towards the end of the year, they remained above those of other major Auction centres around the world. In order to ensure that the high quality associated with Ceylon Tea is maintained, the SLTB took measures to ensure that standards set out by them were adhered to by the green leaf suppliers as well as the tea manufacturers.

Minor agricultural products, which generated US dollars 287 million in 2008, are increasingly becoming an important source of export earnings for the country. Within the minor agricultural products, exports of fruits, vegetables and certain spices, such as cloves, recorded impressive growth in the first part of 2008 reflecting both price and quantity increases. Cinnamon and betel leaves, on the other hand, increased mainly due to the higher prices that prevailed in the international markets.

At US dollars 6,159 million, exports of industrial products recorded a modest growth of 3.2 per cent in 2008, partly due to the sluggish demand for apparel in the USA. This is attributed mainly to the heightened competition among several developing nations, the relatively higher cost of production, and the sharp depreciation of the euro and the UK pound against the US dollar, which have reduced the competitiveness of Sri Lanka’s exports to some extent. Industrial exports which grew by 4.8 per cent during the first three quarters declined by 1.3 per cent in the last quarter due to the lacklustre global demand as the crisis in the U.S. took on global proportions.

The apparel exports grew by a lower rate of 3.9 per cent to US dollars 3,469 million in 2008 compared to the growth rates of around 6 - 8 per cent achieved in the recent past. Nevertheless, the USA continued to be the largest single market for Sri Lanka’s exports, accounting for nearly 45 per cent of the garment exports. However, Sri Lanka’s share of apparel imports by the USA, declined in 2008.

The declining growth of the US market in recent years was offset to a certain extent by the sharp expansion in exports to the EU, the largest market for Sri Lanka’s exports of apparel. The growth in exports to the EU was supported by the GSP+ scheme, which provides duty free market access to Sri Lankan exporters. Amongst the members of the EU, the United Kingdom was the largest market for Sri Lanka, followed by Italy and Germany. Some manufacturers were affected by the uncertainty that prevailed towards the middle of the year regarding the future of the GSP+ scheme.

Earnings from most other categories of industrial exports such as petroleum products, rubber products and processed diamonds grew during the year 2008. With respect to the bunkering business, measures would have to be taken to increase the competitiveness and the efficiency of the service to consolidate its position in the South Asian region as the foremost ancillary service provider. Despite the progress made in the beginning of the year, the country’s exports of solid tyres and other products made from natural rubber were affected towards the latter part of the year by the cutbacks in production by large manufacturers, particulary the major automakers of the US and Japan. Despite the shortfall in demand for coloured gems for the jewellery industry, the demand for diamonds has shown an increase of 20.2 per cent in 2008. Although diamonds are not available in Sri Lanka, the country has established itself as a leading diamond processing centre with US dollars

418.7 million in export earnings, with about 6-8 per cent value addition. Sri Lanka has acquired a reputation for the high quality of diamond cutting in Antwerp where the most prestigious of diamond retailers reside. The Budget 2008 promoted the value addition to the gem industry by granting tax exemptions, allowing exporters to credit 50 per cent of foreign exchange earnings to foreign currency accounts for the importation of raw materials and charging a lower income tax of 2.5 per cent in place of the prevailing income tax.

Import Performance

Expenditure on imports grew by 24.0 per cent to US dollars 14,008 million compared to US dollars 11,296 million in 2007. The sharp increases in international commodity prices led imports to grow by 33.7 per cent during the first three quarters of 2008. Imports decelerated signifi cantly thereafter with the changes in global economic conditions. The soaring commodity prices had an unfavourable impact on import expenditure until September 2008, when all major categories of imports grew very rapidly. Prices of most commodities, including petroleum, exhibited a series of historical highs during this period. The largest contribution to this growth came from intermediate goods, primarily due to the higher expenditures incurred on petroleum imports, whose share as a percentage of total imports had increased from 22 per cent in 2007 to 24 per cent in 2008. However, towards the end of year, the global economic crisis led to a substantial decline in global demand for petroleum and other commodities, which caused prices to plummet. The unexpected decline in prices led to a significant decline in import expenditure in the last quarter.

Petroleum imports, which grew by 61.4 per cent during the first three quarters, declined by 25.6 per cent in the fourth quarter due to the signifi cant price swing in the international market. The resulting reduction in expenditure on petroleum and other imports led growth in imports to decelerate very rapidly, to record a flat rate in the last quarter.

Import expenditure incurred on intermediate goods increased by 28.0 per cent to US dollars 8,341 million, contributing about 67 per cent towards the import growth in 2008. Apart from petroleum, a noteworthy increase in expenditure on fertiliser imports was recorded in 2008, led by the higher prices that prevaliled in the international markets and the increased volumes generated by the fertiliser subsidy. Over 50 per cent of imported fertilisers comprised of Urea in 2008, which is used extensively by the paddy farmers in Sri Lanka. The favourable trends in agricultural prices have prompted farmers to cultivate marginal lands, adding pressure on the fertiliser requirement. Imports of textiles and clothing, of US dollars 1,702 million in 2008, depicted a modest increase of 4.3 per cent over that of 2007, reflecting the slow growth of apparel exports.

Expenditure on consumer goods imports increased by 27.3 percent to US dollats 2,549 million in 2008. Within the consumer goods category, expenditure on food and drinks, increased significantly reflecting the high prices of wheat, milk, sugar and rice that prevailed before the commodity price bubble burst. Wheat import volumes declined marginally by 3.5 per cent in 2008. Import expenditure on motor vehicles recorded a higher growth of 16.2 per cent in 2008, which was attributed to the issuance of duty free vehicle import permits to public servants since 2007, which was subsequently withdrawn in April 2008.

The continued growth in the investment goods category, which recorded a growth of 10.9 per cent to US dollars 2,979 million in 2008, was led by increases in building materials. This could be attributed to the numerous large-scale infrastructure development projects undertaken across the country. Favourable developments in the foreign aid utilisation rate, better utilisation of foreign

Despite the favourable prices fetched by agricultural exports, the rise in international commodity prices, particularly petroleum, led the terms of trade to deteriorate signifi cantly by 10.6 per cent in 2008.

The prices of exports grew by 6.1 per cent in 2008. The monthly average price of tea exported from Sri Lanka continued to rise and reached the highest ever recorded level of US dollars 4.28 per kilogram in September, 2008. However from end September, they took on a declining trend as the emergence of recession ended the price boom. The lower demand for Ceylon Tea emanated mainly from the income effects of the unexpected decline in oil prices on the major oil exporting countries, which are the main buyers of Ceylon Tea. Demand from the rest of the world was affected by the global recession, which aggravated the situation. The average price of tea exported from Sri Lanka fetched US dollars 3.98 per kilogram in 2008, compared to the average price of US dollars 3.29 per kilogram obtained in 2007. As with tea, natural rubber exports drew attractive prices during the first eight months of 2008. The highest export price of US dollars 3.24 per kilogram was recorded in July 2008 after which it was on a declining trend. The average export price of rubber, stood at US dollars 2.57 per kilogram in 2008, compared to the average price of US dollars

2.12 per kilogram in 2007. This remarkable increase reflects increasing crude oil prices which raised the cost of producing synthetic rubber and the strong demand for tyre production, especially from China,

the world largest rubber consumer and tyre exporter. However, the decline in price of oil later on in the year was reflected in lower synthetic rubber prices. The export prices of coconut and other agricultural products such as cinnamon, pepper, cloves and tobacco, also increased in 2008.

The prices of imports grew by 18.7 per cent in 2008. Driven by strong US consumption and soaring demand from China, India and other emerging economics, which have been the mainstay of recent global growth, commodity prices reached their higest levels in decades by 2008, as supply could not keep up with demand. The sharp increase in crude oiI prices spilled over into other primary commodities, including food and metals, the prices of which continued to rise sharply until mid 2008. Import price of crude oil increased significantly in line with the world market until July, 2008 to record the highest average import price of US dollars 134.34 per barrel and then declined sharply to US dollars 46.27 per barrel by December, 2008. The average import price of wheat was almost US $ 454.59 per metric ton in October, 2008, recording the highest level since the mid 1970s. Sugar prices too have increased in the international market in 2008 compared to last year. Sugar production declined in 2008 as grain production displaced sugar in several countries. However, towards the end of 2008, prices suddenly collapsed in the face of a global financial crisis and economic downturn, delivering what many refer to as the most significant commodity price swing of the century.

The Western countries continued to be the main destination for Sri Lankan exports in 2008 while the Asian countries dominated Sri Lanka’s imports. While the USA and the UK remained the largest export destination countries, Singapore, Iran and China followed India as the foremost import-originating countries.

Among the major export destinations, the USA, the most important market for Sri Lanka, accounted for 23 per cent of exports. Exports to the USA declined by 5.1 per cent mainly due to the reduction in apparel exports. Apparel exports to the USA declined by 5.4 per cent in 2008. Exports to the European Union increased by 12.5 per cent in 2008. Within the European Union, exports to

the UK, which is also Sri Lanka’s second largest export destination, increased significantly by 7.1 per cent in 2008 while exports to Italy and Beligium-Luxembourg increased by 12.7 per cent and 6.3 per cent respectively. Exports to most countries in the euro region increased due to the tariff concessions given under the GSP+ scheme. India, which was the third largest export destination in 2007, moved down to the fifth position in 2008 in view of a 18.8 per cent decline in exports to India. Exports to India consisted mainly of vegetable fats, spices, rubber products and gems.

However, in terms of imports, India continued to be the largest source of imports, as imports from India grew by 31.9 per cent in 2008, accounting for nearly 25 per cent of Sri Lanka’s imports in 2008 compared to 23 per cent share of imports in 2007. Driven by higher imports, total trade with India exceeded US dollars 3.9 billion in 2008 highlighting the unique position India holds as the major trading partner country. The main imports from India included refined petroleum products, sugar, motorcycles and auto-trishaws, copper wires, etc. Singapore and Iran followed as the second and third largest import source countries, reflecting growth rates of 11.1 per cent and 41.5 per cent, respectively in 2008. They account for 8.9 per cent and 8.5 per cent of total imports. Main imports from Singapore comprised of fertiliser, petroleum products and unwrought gold. The major import from Iran consisted of crude oil. China and Hong Kong also remain significant import source countries for Sri Lanka, holding shares of 7.8 per cent and 5.0 per cent of imports, respectively.

Direction of Trade

Exports by Destination

Main statutory provisions

The principal law applicable to foreign investment is BOI Law No. 4 of 1978 and amendments introduced in 1980, 1983, and 1992 and Regulations made under the Act.

The BOI Act provides for two types of investment approvals:

BOI Facilitation

The BOI provides advice and assistance at each stage of the investment process and we can help you in the following ways:

As a potential investor, undoubtedly you will have many questions about the business and regulatory environment and the many attributes Sri Lanka has to offer.

This document provides a blueprint of the country’s vast investment potential, the various types of direct investment possible, the process involved, the incentive schemes available, and how your investment plans are facilitated through the BOI. Another source of information is the website of the Board of investment (BOI).

Pioneering South Asia’s economic liberalization, Sri Lanka for over two decades has followed free market policies and has evolved a business-friendly policy environment favourable to investment and economic growth. Over the years, successive governments of this country have continued to liberalise many areas of the economy to pave the way for international investment. As a result Sri Lanka remains one of the most attractive investment destinations in the Asia-Pacific region.

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

In addition, trade barriers are falling throughout the region. The seven countries which comprise the South Asian Association for Regional Cooperation (SAARC) have resolved to progress towards a South Asia Free Trade Agreement (SAFTA) over the next 5 years. Sri Lanka already has a free Trade Agreement with India and Pakistan. Cordial diplomatic and economic ties are maintained with all countries in the region.

Skilled Workforce

Sri Lankan labor is reputed for its precision, quality and productivity. We have an educated and energetic workforce whose trainability is among the best in comparable investment a location. Skilled and semi skilled workers are available at highly competitive wage rates. English is both widely understood and spoken.

Emphasis is placed on developing Sri Lankan’s human resources. According to data published by the World Bank, Sri Lanka has the highest life expectancy (71 years) highest literacy rate (92%) and lowest infant and child mortality rates among the designated low income countries. Sri Lanka also has the lowest rate of population growth in the developing world (1.3%). We also have the lowest urbanization rate within this group. This situation is the result of extensive investment in public education and welfare by successive post-independence governments-Education is free from kindergarten to university. Health facilities are also free. Universities and technical colleges are geared towards the needs of industry.

Today, investors will find an intelligent, educated and energetic workforce that is comfortable with modern production techniques and has a level of trainability that is among the best in the region.

In fact we believe we have the best quality workforce available at this income and wage level.

Quality of Life

According to the World Bank, Sri Lanka’s indicators for quality of life in terms of gross domestic product (GDP) per capita, adjusted to reflect purchasing power parity is over US$ 3400 per year, and therefore, relatively high. The figure is higher than Philippines and more than double that of India.

Furthermore, according to the 1997 Index of Economic Freedom, Sri Lanka is ranked 29th out of 150 developed and developing countries.

The country’s scenic beauty and bio-diversity are ranked among the best in the world. Sri Lanka also has eight world heritage sites as classified by UNESCO-an indication of the country’s rich cultural heritage.

The quality of life is the highest in the South Asian region. A cosmopolitan living environment, abundant recreational facilities, a culture dated back 5000 years, unparalleled natural beauty and an equable climate throughout the year make Sri Lanka a pleasant place in which to live.

Business Climate:

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

The Sri Lankan government is business-friendly and is actively pursuing a policy of economic liberalization with emphasis on private sector investment. The private sector plays a vital role in traditional areas of public investment such as telecommunications, energy and transport. So far, many enterprises are in the process undergoing privatization.

Transparent Investment Laws

The country’s investment laws are transparent and automatic across a wide range of sectors. Under the terms of the Board of Investment Law, the BOI has wide ranging authority to grant exemptions from various laws including Inland Revenue, Customs and Exchange Control.

It is significant that when a qualifying investment project enters into an agreement with the BOI, the incentives granted to the project company are valid for the life of the enterprise. The applicable incentives granted to the project company are valid for the life of the enterprise. The applicable incentives enshrined in the Agreement cannot be changed by successive governments. This is the fundamental strength of the BOI Agreement, which few other countries can offer, or match.

Generous Tax Incentives

BOI Facilitation

The Board of investment of Sri Lanka is structured to function as a central facilitation point for investors, providing advice and assistance at every stage of the investment process. It is the only organization an investor needs to contact.

Investment Incentives (Industry-wise) Under Section 17 of BOI Law

Target Investments

Training Activities/Institutions:

Incentives will be provided for career or job oriented educational and training institutions engaged in Tertiary, Technical, Vocational, Skill Development, Business and Management, Post-graduate & Continuing education programs.

All courses should comply with minimum training period and international or local accreditation.

Areas identified for training are as follows:

Reserved or Regulated Areas for Foreign Investment

Following the practice of most countries, Sri Lanka also has a list of business activities, which restrict foreign investment and require approval by other statutory agencies. The degree of restriction varies across different areas of investment.

A comparative study among other Asian countries shows that our list of restricted activities is relatively small. The government is committed to reducing this list further to broaden opportunities for foreign investors.

Areas Totally Reserved for Sri Lanka

Foreign investment is not permitted in the following areas:

1. Money lending
2. Pawn-broking
3. Retail trade investment with a capital of less than One Million US Dollars
4. Coastal fishing

Areas Subject to Automatic or Conditional Approval

Foreign investments in the areas listed below will be approved limited to 40% Foreign ownership in excess of 40% will be approved on a case by case basis by the BOI.

1. Production of goods where Sri Lanka’s exports are subject to internationally determined quota restrictions
2. Growing and primary processing of tea, rubber, coconut, cocoa, rice, sugar and spices
3. Mining and primary processing of non renewable natural resources
4. Timber based industries using local timber
5. Fishing (deep sea fishing)
6. Mass communications
7. Education
8. Freight forwarding
9. Travel agencies
10. Shipping agencies

Regulated Areas

Foreign investment in the areas listed below will be approved by the respective Government agency or BOI (upto the percentage of foreign equity specified by BOI). The BOI assists potential investors by referring applications to the appropriate agency and approval is usually straight forward.

1. Air transportation
2. Coastal shipping
3. Industrial undertakings in the Second Schedule of the Industrial Promotion Act No. 46 of 1990, namely
   - any industry manufacturing arms, ammunitions, explosives, military vehicles and equipment aircraft and other military hardware.
   - any industry manufacturing poisons, narcotics, alcohols, dangerous drugs and toxic, hazardous or carcinogenic materials
   - any industry producing currency, coins or security documents
4. Lare scale mechanized mining of gems
5. Lotteries

All other sectors other than the above limitations are opened for 100% foreign owned investment.

Sri Lanka