Since the end of the war, Sri Lanka has continuously struggled to attract Foreign Direct Investment (FDI), with annual averages falling below US$ 1.5 billion. With debt restructuring now complete, the country is prioritising investment-led growth. It is, therefore, no surprise that President Anura Kumara Dissanayake’s 2025 Budget speech placed significant emphasis on investment promotion and facilitation.
At the core of Sri Lanka’s new investment-driven growth strategy is the Economic Transformation Act No. 45 of 2024 (ETA). Introduced by the previous administration, the ETA repeals earlier national investment laws and establishes a new legal and institutional framework, effectively serving as Sri Lanka’s investment law. Under this Act, the Board of Investment ceases to exist, with its functions assigned to two new institutions: the Economic Commission and Zones Sri Lanka.
While the future of the ETA was uncertain post-election, the budget speech confirmed the government’s intent to implement the act with amendments and also to introduce a new Investment Protection Bill.
Sri Lanka is not alone in reforming investment laws to meet local and global challenges. In December 2024, the UN Conference on Trade and Development (UNCTAD) reviewed investment laws from 132 countries and identified emerging trends.
This week, the Centre for a Smart Future (CSF) released a policy brief which compares the investment-related provisions of the ETA against the global trends by UNCTAD and highlights seven preliminary observations. This article presents key insights from the CSF policy brief that can contribute to upcoming discussions on amending and implementing the ETA, as well as the introduction of new investment laws in Sri Lanka.
Limited emphasis on environmental sustainability
UNCTAD has noted a significant rise in the inclusion of sustainability objectives in investment laws enacted over the past decade. This integration takes various forms, with many laws incorporating sustainability into their preambles, objectives, or purposes, while others —such as Egypt — embed it within the definition of an investment. Some countries, such as Burkina Faso, also provide investment incentives specifically aimed at achieving sustainability-related outcomes.
The preamble of the ETA explicitly acknowledges sustainable development and the growing environmental challenges, while the National Policy sets a goal of achieving Net Zero by 2050. However, compared to Part I, environmental considerations and sustainability are less prominent in the investment-related provisions of Parts II and III.
These aspects are not strongly reflected in the objectives of the Economic Commission or the definition of an investment. Although the ETA identifies the promotion of “sustainable FDI” as one of the Economic Commission’s objectives, it remains unclear whether this refers strictly to economic sustainability or a broader concept that includes environmental concerns. As a result, unlike the prevailing global trend, the ETA does not establish a strong link between investment and sustainability
Greater focus on investor rights than obligations
The investment laws reviewed by UNCTAD display a notable shift in focus from primarily safeguarding investor rights — such as protections against expropriation and fair and equitable treatment — to also stipulating investor obligations. While only 14% of pre-1996 laws imposed investor obligations, this figure has risen to 57% in the past decade.
The ETA outlines investor rights in Chapter 9 titled investment guarantees. It ensures fair and equitable treatment and protection against unreasonable expropriation for all investments. Foreign investors are also granted national and most-favoured-nation treatment, along with the free transfer of payments in convertible currency.
In contrast, the ETA includes only the most commonly found obligations in investment laws, such as adherence to domestic laws, fiscal responsibilities, and disclosure of information. While the ETA prohibits bribery and corruption, more comprehensive investor obligations seen in recent international investment laws—such as corporate social responsibility (CSR), environmental protection, and human rights — are not meaningfully incorporated.
Instead, the ETA merely expresses an expectation that foreign investors will voluntarily adhere to internationally recognised standards on CSR, environmental sustainability, human rights, community relations, and labor practices. Furthermore, since the investor obligations specified in the ETA applies exclusively to foreign investors, the ETA is silent on the applicability of investment obligations to domestic investors. It remains unclear how the Investment Protection Bill proposed by the 2025 Budget Speech will interact with an amended ETA, and whether investor rights and obligations currently in the ETA will be transferred to the new law.
Limited coverage of investment incentives
UNCTAD has observed a significant increase in the inclusion of investment incentives within investment laws, with over 80 percent of post-2005 legislation incorporating such provisions. Fiscal incentives, particularly tax exemptions, are the most commonly featured. There is also a growing trend of incentives designed to support specific policy objectives, including technology and innovation, export development, the promotion of green sectors, and employment opportunities for women and youth.
Chapter 11 of the ETA is dedicated to investment incentives. However, it does not explicitly outline an incentive framework within the chapter itself. Instead, it aligns with policy shifts implemented since 2015, which integrated fiscal incentives directly into the country’s income tax legislation.
These changes were introduced in response to IMF recommendations aimed at strengthening the country’s tax statutes as part of broader revenue-based fiscal consolidation efforts.
Concerns over ETA’s approach to incentives include risks of ad-hoc implementation and lack of adaptability. The 2024 World Bank Development Update highlights Sri Lanka’s heavy reliance on discretionary incentives, with issues such as limited transparency, lack of cost-benefit analysis, and absence of sunset clauses.
As the Government moves to legislate the country’s investment framework for the short and medium term, understanding current global trends and best practices will be crucial. Insights gained from comparing the ETA’s investment provisions against prevailing global trends in investment law will help shape reforms that foster a more robust and investor-friendly environment
The writer is a Research Associate at the Centre for a Smart Future (CSF). CSF is an interdisciplinary policy think tank focussing on an inclusive and sustainable economic recovery for Sri Lanka. Visit csf-asia.org/knowledge-insights for more.
