ECONOMYNEXT – Japanese firms operating in Sri Lanka were most concerned about political or social instability, followed by unclear government policy management, and currency volatility, according to a survey by the Japan External Trade Organization.
The latest survey showed that the most frequently cited risks to investment in Sri Lanka were ‘political or social instability’ (83.9 percent), followed by ‘unclear government policy management’ (71.0 percent) and currency volatility’(45.2 percent).
Increased labor costs (41.9 percent), and ‘high employee turnover rate’ (35.5 percent), were next.
Specifically, Japanese companies in Sri Lanka highlighted ‘sudden import restrictions and abrupt changes in tax rates’, ‘increase in fixed costs due to hikes in corporate tax and utility tariffs’, ‘overseas migration of young talents’, JETRO said.
Power outages, too much time to obtain import licenses and residence visas, and risk of supply chain disruption due to import restrictions, were also cited.
Sri Lanka ran into a series of currency crises from around 2011 as the central bank printed money to target a mid-corridor rate running an ‘abundant reserve regime’ which shifted in a more explicit floor rate in 2020 with ‘ceiling’ rates ordered for Treasury bill yields.
The floor rates were abandoned in April 2022 and import controls were abandoned. However, in October warnings were made that the abundant reserve regime was coming back with the pursuit of an explicit single policy rate.
Japanese auto firms were among those hardest hit by the import controls from the abundant reserve regime.
Low labour costs (54.8 percent) were cited among the best advantages for investing in Sri Lanka.
“Labor costs for Japanese companies in Sri Lanka are in line with Myanmar, Laos, Pakistan and Bangladesh, demonstrating Sri Lanka’s competitiveness in the Asia-Oceania region,” JETRO said.
Fewer ‘linguistic/communication problems’ (41.9 percent), ‘market scale, growth potential’ (38.7 percent), ‘tax incentives’ (22.6 percent), ‘ease in recruiting local staff’ (22.6 percent), ‘good living environment for Japanese expatriates’ (22.6 perent) and ‘plentiful land/offices, low land/rent prices’ (22.6 percent) were also ranked high. (Colombo/Feb13/2025)