IMF Policies Seen as Major Barrier to Attracting FDIs to Sri Lanka

Despite modest gains in foreign direct investment inflows, growing frustration within Sri Lanka’s business community suggests that International Monetary Fund (IMF) restrictions — particularly on taxation — are undermining the country’s ability to attract global investors.

Sri Lanka is estimated to have attracted approximately US$1.1 billion in Foreign Direct Investments (FDIs) in 2025, nearly double the US$614 million recorded in 2024. While this marks a numerical improvement, analysts and industry stakeholders argue that the country remains largely uncompetitive as an investment destination due to rigid tax policies shaped by IMF conditions.

Concerns intensified following the announcement by Arjuna Herath, Chairman of the Board of Investment (BOI), that he will step down by the end of this month — less than 16 months into his tenure. Although no official reason has been given, speculation has arisen that the resignation may be linked to the BOI’s limited autonomy in offering incentives to investors.

Under the current IMF programme, any tax incentive proposed by the BOI beyond existing provisions requires IMF approval, which officials say is rarely granted. The IMF has consistently viewed tax concessions as “revenue leakage,” rejecting proposals even when the government argues they could deliver broader economic benefits.

A Deputy Minister involved in IMF discussions revealed that revenue-related proposals are often evaluated in isolation, with little consideration given to long-term growth, employment generation or spillover effects across the wider economy. This approach, critics argue, has constrained the government’s ability to use fiscal tools strategically to stimulate private sector investment.

The 2026 Budget further highlighted this tension. Rather than offering meaningful tax relief, the government lowered the VAT registration threshold for businesses from Rs.60 million to Rs.36 million per annum, increasing the tax burden on small and medium enterprises.

Although headline economic indicators remain relatively stable, dissatisfaction is brewing beneath the surface among business leaders, who believe the government has become overly dependent on IMF directives. Many argue that Sri Lanka currently offers no compelling incentive for global industrialists or multinational corporations to relocate or expand operations in the country.

Adding to investor unease, the government has announced plans to introduce a property tax by 2027, a move widely viewed as unpopular, particularly at a time when Treasury revenues are reportedly strong.

Furthermore, indications suggest that Sri Lanka may continue its engagement with the IMF even after the completion of the current four-year programme next year, raising concerns about the absence of a clear post-IMF economic strategy.

Analysts warn that prolonged policy rigidity and a lack of structural reform clarity could erode market confidence and public trust, potentially weakening the administration far earlier than expected if investor sentiment continues to deteriorate.