The International Monetary Fund’s (IMF) restrictions on granting tax exemptions have stalled the implementation of several key Foreign Direct Investment (FDI) projects in Sri Lanka.
To address the issue, the government is preparing new legislation to introduce a tax policy aligned with IMF guidelines, aiming to broaden the country’s revenue base.
Earlier this year, Sri Lanka signed a Memorandum of Understanding (MoU) with China’s Sinopec for a US\$ 3.7 billion investment in an oil refinery project in Hambantota. Additional large-scale FDI projects, including those in the Colombo Port City, are also in the pipeline.
However, little or no progress has been made in executing these major projects due to limitations on offering tax holidays, a measure previously used to attract investment.
Some Chinese-backed projects have also encountered delays due to geopolitical concerns, which the government is cautiously working to navigate.
Despite these challenges, Sri Lanka recorded US\$ 203 million in realised FDI during the first quarter of 2025—a 90% increase compared to the same period in 2024. The government aims to attract US\$ 1.8 billion in FDI by the end of the year.
IMF Mission Chief for Sri Lanka, Evan Papageorgiou, who recently led a review team to the country, emphasized the importance of strengthening tax exemption frameworks, improving tax compliance, broadening the tax base, and enhancing public financial management.
He noted that raising fiscal revenues is essential for maintaining macroeconomic stability and meeting the medium-term primary balance target of 2.3% of GDP—a critical element in restoring Sri Lanka’s debt sustainability.
Papageorgiou stressed that the 2026 budget must be backed by strong revenue measures and appropriate expenditure plans in line with IMF programme parameters.
He also highlighted the importance of upcoming legislation on public-private partnerships, state-owned enterprises, procurement, and public asset management aligning with the Public Financial Management Act and global best practices.
Additionally, he called for maintaining cost-recovery energy pricing to limit fiscal risks and ensure the financial stability of utility providers.
At the same time, Papageorgiou underscored the need to protect the poor and vulnerable through better-targeted, adequately funded social support programmes.l
