US State Dept Flags Sri Lanka's Difficult Investment Climate, Cites Policy Inconsistency

Sri Lanka's foreign investment policy is inconsistent and is marred by unnecessary regulations, legal uncertainty and poor bureaucratic responsiveness, the US Department of State said, citing Adani group's pullout of a USD 400 million renewable energy project in the island nation.

In its 2025 Investment Climate Statements, the department said Sri Lanka is showing signs of recovery from its 2022 economic crisis, with GDP growth hitting 5% in 2024 -- exceeding expectations. However, "the investment climate remains challenging".

This despite improved political stability following the sweeping 2024 electoral victory of President Anura Kumara Dissanayake and his National People's Power (NPP) coalition. While the NPP's support for the country's USD 3 billion IMF program has reassured some investors, concerns linger over its historically Marxist, anti-Western stance.

Earlier this year, Adani pulled out of a wind project in Sri Lanka, citing prolonged negotiations.

Adani tendered the most competitive tariff of 8.26 cents per unit, post-negotiation lasting over two years. While the tariff was in US dollars, Adani was to be paid in Sri Lankan rupee, thereby not causing any forex strain to the country.

Insiders said the conglomerate was better disposed to utilise the capital and management bandwidth in other more promising geographies like India where renewable energy projects are coming up fast and regulations are also more conducive.

Sri Lanka reportedly wanted Adani to lower its tariff to sub 5 cents, and Adani expressed its inability to do so, and the country publicly said it would tender the project at that price. The country is yet to find a single developer willing to undertake the project at that price.

Unfazed by the Sri Lankan setback, Adani has gone ahead and currently has over 15 GW of renewable energy capacity commissioned, which is rising to 50 GW by 2030, making it amongst top 3 global RE players.

Adani's investment, including for setting up the transmission infra for the wind project, would have been in excess of USD 1 billion.

"Foreign direct investment (FDI) remains constrained, with most transactions in the modest USD 3 to USD 5 million range," the State Department said.

"Despite the government's USD 5 billion FDI target for 2025, experienced investors emphasize that policy stability, regulatory reform, and improved transparency must precede any significant uptick in large-scale investments." It said US firms continue to explore opportunities in sectors such as ICT, energy, aviation and defence.

"However, regulatory unpredictability, bureaucratic hurdles, and selective transparency continue to limit broader participation," the document said.

"The government's institutional capacity to encourage an open investment environment remains limited despite positive rhetoric." Overall, "investors report that doing business remains difficult, frequently citing concerns about project reversals, regulatory shifts, slow decision making, and inadequate support for established businesses," it said, adding that the IMF and local business chambers stress the need for comprehensive structural reforms, including trade facilitation, digitisation, and stronger governance mechanisms.

Stating that Sri Lanka's implementation of foreign investment policies is "inconsistent", the document said the Board of Investment (BOI) struggles to function as a "one-stop shop" due to fragmented authority across multiple government departments, creating lengthy approval processes that frustrate potential investors.

Investors report challenges in having a consistent and open dialogue with the BOI.

"Other key impediments include unnecessary regulations, legal uncertainty, and poor bureaucratic responsiveness," it said.

The stalled privatisation of deficit-ridden state-owned enterprises, notably the Ceylon Electricity Board, hinders development of cost-effective energy supplies crucial for industrial operations.

"Foreign investors consistently report high transaction costs, unpredictable policies, and opaque procurement procedures," it said.

The NPP government publicly promotes a desire for inward investment. In January 2025, President Dissanayake committed to finalising a USD 3.7-billion Sinopec oil refinery project, the largest FDI project in Sri Lankan history, to be located adjacent to Chinese-controlled Hambantota International Port.

"In February 2025, however, Indian firm Adani Green Energy withdrew from a proposed USD 400 million, 484 MW Renewable Energy Wind Farm project in northern Sri Lanka, citing Sri Lankan government efforts to renegotiate a previously awarded contract," the US State Department said.

President Dissanayake's government sought lower unit prices for the electricity, which Adani Green found unviable after the project's prior approval under the previous government.

The NPP government also ceased the planned privatisation of many SOEs, choosing to implement turnaround reforms instead.

"Many potential investors remain reluctant to invest given these ongoing mixed messages. Some senior government officials regularly castigate private sector-led economic growth and publicly promote state-owned collectivism as the country's preferred investment model," it added.