People, culture and language

An island nation strategically located in the Indian Ocean, Sri Lanka is considered the regional hub of South Asia. It has a population of 19 million and the average annual population growth rate of 1.2 per cent, is considered to be the lowest amongst all the South Asia Association for Regional Cooperation (SAARC) countries.

Buddhism is the main religion accounting for 69 per cent of the population while Hindus represent 15 per cent, Christians 8.5 per cent, and Muslims 7.5 per cent.
The two main languages are Singhalese and Tamil but English is widely spoken and is the language of commerce and business in Sri Lanka. At 91 per cent, the literacy rate is the second highest in Asia after Japan.

Sri Lanka is a multi-ethnic, multi cultural and multi religious society. The influence of the Portuguese, Dutch and British colonisation together with local cultural influences has made it one of the most cosmopolitan centres in Asia. The population can be divided into four major ethnic groups: Singhalese (74 per cent of the total population) Tamils (12.6 per cent) Moors (seven per cent) and Tamils of Indian origin (for 5.5 per cent). Other minority groups include the Burghers (Dutch/Portuguese origin) and North Indians.

Economic and financial climate
In 1977, Sri Lanka adopted policies to liberalise and deregulate its economy becoming the first country to commence free market reforms in the South Asian region. Despite more than 18 years of continued civil unrest, there’s been steady economic growth and the Gross Domestic Product (GDP) rate has averaged between 5-6 per cent per annum, which could be attributed to the liberal economic policies followed by successive governments. Inflation has been falling steadily over the past few years and is now in the region of 7–8 per cent per annum.

2001 was a difficult year for Sri Lanka as unfavourable global economic conditions exacerbated domestic uncertainties that negated the positive projections made at the start of the year. The situation was worsened by the escalation of civil war and severe drought conditions affected the economy as a whole. For the first time since independence Sri Lanka had a negative GDP growth rate of 1.4 per cent. However, with the ongoing peace efforts and cessation of hostilities the economy is back on track and the International Monetary Fund has projected the GDP growth rate for 2002 would be in the region of 3–4 per cent.

A recent study undertaken by the World Bank and Index of Economic Freedom on policy environment and investor competitiveness ranked Sri Lanka 39th among 150 nations – well ahead of Pakistan, India and Bangladesh. The annual per capita income of approximately A$1624 is the highest among all South Asian countries.

The Sri Lankan Government is the main policy maker when it comes to the formulation of Public Investment Programmes (PIP) to revitalise and develop the economy and accelerate structural reforms. The more recent PIP programmes have concentrated on developing new infrastructure facilities, including information technology and improving the nation’s competitive advantage and productivity by encouraging diversification in its industrial and manufacturing base by promoting exports.

The private sector is considered the growth engine of the nation and since 1987 the government has embarked on a privatisation programme whereby 40–60 per cent equity in several government-owned entities has been sold off. Many more government companies are pegged for privatisation. The private sector has also been encouraged to play a lead role in infrastructure development and the provision of utilities particularly in the telecommunications, power generation, port development and distribution of liquefied petroleum gas sectors. Other reforms include the simplification of the tariff structure to a two-band system, the cutting back of subsidies, reductions in the cost of import licences, introduction of tax incentives, reduction of interest rates and liberalising exchange controls.

Agriculture (including forestry and fisheries) is an important part of the Sri Lankan economy. This sector, which basically comprises the cultivation of agricultural crops for domestic and export purposes, contributes approximately 23 per cent to the GDP and 20 per cent to the country’s export income. Over the past decade Sri Lanka’s agricultural sector has changed from the cultivation of subsistence crops to value added production using improved technology and modern techniques.

The privatisation of the plantation sector in 1992 has resulted in the introduction of better management techniques, technology and increased productivity that has yielded substantial dividends for the economy. Sri Lanka is one of the world’s largest producers of tea, nearly 90 per cent of which is exported. It’s also one of the world’s leading producers of natural rubber. Domestic use of rubber by the industrial sector accounts for nearly 56 per cent of total production and today Sri Lanka is considered to be a global producer of quality industrial rubber tyres and surgical gloves – the latter by Ansell (a large Australian multinational company).
Manufacturing is another dynamic sector that accounted for nearly 21 per cent of GDP in 2000. Successive governments have continued to promote the diversification of the economy through rapid industrialisation particularly in export-oriented industries. Medium and large-scale factories account for 84 per cent of Sri Lanka’s industrial output and over the years private sector ownership has also been actively encouraged.

The services sector accounts for more than 50 per cent of GDP and the main contributors are communications and tourism. The communications sector has grown by 40 per cent per annum of the past three years. Sri Lanka has valuable deposits of quality mineral sands, ceramic raw material, silica sand and precious and semi-precious stones even though it accounts for only two per cent of GDP.

Political climate
In Sri Lanka the president is the official head of state. The current president Mrs Chandrika Bandaranaike Kumaranatunga was directly elected for a period of six years and has wide-ranging executive powers that include the appointment of the prime minister and the cabinet of ministers.

The unicameral National State Assembly (NSA) is the supreme and sole legislative body. The NSA comprises of 225 seats with 196 filled by direct election and the balance allocated to parties on proportional representation for a period of six years.
The two main parties are the United National Party and the Peoples Alliance (made up of the Sri Lanka Freedom Party, Communist Party. Other parties include the Sri Lanka Muslim Congress, Tamil United Liberated Front Janatha Vimukthi Party a leftist group and the Ceylon Workers Congress that represents plantation workers.

Sri Lanka has had a written constitution since gaining independence in 1948. A new constitution was adopted in 1977 where sovereignty, the executive, the fundamental rights of the people, and legislative and judicial powers were clearly outlined.

Trade statistics
Trade between Sri Lanka and Australia has been increasing steadily over the past decade. Australian imports to Sri Lanka include:
wheat
dairy products
cotton fabric
processed food products
fresh fruits and vegetables
Sri Lanka has an open trade policy and protective tariffs have been progressively dismantled. This, coupled with the nation’s industrialisation policies, has led to a gradual shift in the import structure in favour of intermediate goods (eg. textiles, petroleum) and investment goods as against consumer goods (eg. wheat, sugar, motor vehicles and electrical equipment).
Today, intermediate goods account for nearly 52 per cent of total imports while investment and consumer goods account for 27 per cent and 21 per cent, respectively. The demand for capital goods such as machinery, transport equipment and building materials for the development of Sri Lanka’s infrastructure is on the increase.

Japan supplies the largest percentage of Sri Lanka’s imports, mainly motor vehicles, spare parts and textiles, followed by India, the Republic of Korea, Taiwan, USA and the UK. Wheat accounted for 31 per cent of imports from the USA and other products included textiles, tools and accessories for the textile industry.

Relationships with other countries
Sri Lanka has friendly relations with all countries and is an active member of regional groups such as the South Asia Association for Regional Cooperation, Indian Ocean Rim Association for Regional Cooperation, and the Bangkok Agreement.

Sri Lanka has a free trade agreement with India that came into effect in March 2000, whereby certain goods manufactured and traded between the two countries could either enter duty free or at substantially reduced duty rates provided there is 35 per cent value addition in the transformation process. A similar free trade agreement is on the cards between Pakistan and Sri Lanka.

Tariffs, regulations and quotas
The Sri Lanka Government has liberalised import and export procedures. Import licenses are required for only a few specified items due to health and security reasons. These products include firearms and ammunition, drugs and pharmaceutical products, precious metals, alcohol, toxic and hazardous chemicals, pesticides meats and fresh produce. The import of illegal drugs is strictly prohibited. There are no export controls on most items other than coral and shells, wood and wood-based articles, ivory and antiques, which have been imposed due to environmental protection and the preservation of antiques.

All import/export documentation is in English. Labelling of all products and packages should be according to international standards and demarcated in indelible ink and in bold lettering. The handling points, weight and pressure points (centre of gravity) should also be indicated for containerised cargo to ensure secure and careful handling of shipments.
The Sri Lanka Health Ministry will impose a ban on genetically modified (GM) foods including products using GM ingredients. Licences will be required for import items such as:
soya-based products
maize/corn
tomato and tomato-based products
potato and potato products
bakers’ and brewers’ yeast
cheese and micro-biological starter cultures
Valid certification from the exporting country’s health authorities clearing the product of any GM ingredients will be required.

There are more than 1200 standards governing manufactured products, agricultural commodities, industrial raw materials and production processes set and enforced by the Sri Lankan Standards Institute. Sri Lanka has also adopted International Standards Organisation ISO 9000 standards for quality management and assurance, ISO 10011 standards for management audits and ISO 14000 series for environment procedures.
Sri Lanka has a three-band import tariff schedule based on the harmonised system of classification. The three bands are 5 per cent, 10 per cent and 25 per cent. In addition a surcharge of 20 per cent on import duty is also payable.
Import tariffs are waived for export-oriented companies, IT related projects and special infrastructure projects approved by the Board of Investment. The following imports also exempt from duty are:
textiles, yarn and other intermediate goods for the garment export industry
gold
gems
computers and software
telecommunications equipment
sports equipment
medical and dental equipment
agricultural seeds
machinery for use in the agricultural and fisheries industries
The government has introduced a two-band value added tax on all products and services:
Lower rate of 10 per cent on essential goods and services such as power, petroleum, essential foodstuff, fertiliser, pharmaceuticals and medical equipment, including industrial, agricultural and fishing equipment.
Standard rate of 20 per cent on all other goods and services.
The retail trade sector will be brought under the VAT system in 2003.
Labour laws and staffing
Sri Lanka is a member of the International Labour Organisation. The nation’s Department of Labour is responsible for the administration and enforcement of all labour laws. The Shop and Office Act stipulates working hours, overtime rates and holidays while other regulations govern minimum age, work hours, maternity benefits, social security, safety and health standards and workers’ compensation.
The labour force of 6.7 million people is considered highly literate with nearly 70 per cent concentrated in the southwest of the island. The minimum wage for unskilled workers ranges from US$50–100 per month and most workers prefer permanent full-time employment to casual or part-time work. Two-thirds are male, one-third female and both are entitled to equal remuneration and terms of employment. The average worker has eight years of basic education and a fair knowledge of English. The minimum employment age is 18 years and the retirement age is 55 years.
In a factory, office or shop, the typical working week is 45 hours. Any excess would be treated as overtime where penalty rates apply. It is statutory that employers contribute 12 per cent of an employee’s gross earnings to the Employment Provident Fund while the contribution from the employee is eight per cent. Employers also contribute three per cent of the earnings to the Employees Trust Fund.
Annual leave entitlements include seven days casual leave and 14 days vacation leave while medical leave is generally granted for 14–21 days at the discretion of the employer. Women are granted 84 days maternity leave for her first two children and 42 days for her third – all with full pay.
Although the right to unionise and collective bargaining is recognised by the authorities and employers, only around 15 per cent belongs to a union. Most foreign-owned operations and other large local industrial companies conduct negotiations with the assistance of the Employers Federation.

Investment laws
The Sri Lankan Government actively canvasses for foreign investment, which is permitted in most sectors, while most foreign exchange controls have been progressively dismantled. Up to 100 per cent foreign equity is permitted in the banking, insurance sectors and infrastructure development activities, while shipping, travel and freight-forwarding agencies are limited to 40 per cent. Tax and financial incentives have been granted to key sectors such as export, agriculture, IT related and large scale infrastructure-related projects to encourage private sector investment and involvement - both local and foreign in these areas.
The Sri Lanka Government offers a wide range of incentives for investors available to foreign and domestic investors without preference – provided the investment is undertaken through a company incorporated in Sri Lanka. Successive governments cannot change the incentives granted and commitments made by the Board of Investment.

Setting up a local office
Companies incorporated outside Sri Lanka may register a branch office in the country, subject to conditions, in order to establish an industry or a branch office for trade. Application forms are available from the Office of the Registrar of Companies.
Companies incorporated outside Sri Lanka may also apply to establish a liaison office for the purpose of market intelligence, planning and coordinating business promotion; technical support and quality control; sourcing raw material and manufactured products. The company must not engage in any import, export, trade or investment in Sri Lanka and must give a written undertaking on application that they will not do so in the future. The establishment of a liaison office needs to be registered with the Sri Lanka Registrar of Companies.
Infrastructure and telecommunications
Sri Lanka’s infrastructure is considered the best in South Asia. The Port of Colombo is one of the most efficient in the region. It has two modern container terminals equipped with state-of-the-art technology and an annual cargo handling capacity of 1.8 million, 20-foot equivalent units. The port has grown at an annual compound rate of 20 per cent per annum over the past 10 years and this trend is expected to continue. Efforts are currently underway to expand the Port of Colombo and build new ports in the south and eastern parts of the country.
Though small by international standards, the Bandaranaike International Airport is modern with a capacity to process up to three million passengers and 100,000 metric tonnes of cargo annually. There are daily connections to the Middle East, Europe, Asia and the subcontinent. With the assistance of the Japanese Government plans are underway to expand and develop the existing facilities to increase the present passenger handling capacity and double the cargo handling capacity. These improvements will include a new duty free complex, additional parking aprons, radar control systems, and new passenger and cargo handling terminals
Sri Lanka has a fairly well developed national road and rail network and plans are underway to modernise the existing systems and construct four new major highways. The electrification of the railway is also under consideration.
The telecommunications sector is another area that has seen much development in the past few years especially with the privatisation of Sri Lanka Telecom (SLT) in 1997. Currently there are land-based facilities operated by SLT, two wireless loop operators, pay phone operators, cellular operators (including Telstra, Hutchinson), and data and voice operators. The number of new telephone installations increased by 35 per cent to 40 per cent over the past three years and this trend is expected to continue.
Government efforts to promote the information technology sector will also see the introduction of wider bandwidth and high-speed links, new licences for another international gateway, fixed wire operator, Internet hub, cable television networks, transmission networks and a range of other services. The cost of telecommunications isn’t considered to be competitive when compared to the rates in Australia.
Sri Lanka is overly dependent on hydropower for electricity and recent drought conditions have resulted in a grave and critical power shortage, necessitating the exploration of alternate sources. The government is encouraging private sector participation in this area.

Taxation
Sri Lanka and Australia signed a double taxation agreement in 1991 whereby Australian companies operating in Sri Lanka receive a concessionary or zero tax breaks in Australia if they have paid taxes in Sri Lanka. In addition, reduced rates are levied on dividends (15 per cent), interest and royalty payments (10 per cent).

All Sri Lankan businesses are subject to taxation unless they have been exempted under special provisions for a specific period , eg. if they are companies approved by the Board of Investment. Both resident and non-resident companies are liable for a corporate income tax of 35 per cent with an additional surcharge of 20 per cent. Non-resident companies are also subject to an additional tax of 33.33 per cent on remittances of profits – limited to 11.11 per cent of taxable income.

Dividends declared from tax exempt profits are tax-free in the hands of the shareholder during the tax holiday period and one year thereafter. A withholding tax of 15 per cent is generally payable on all dividend income other than quoted public companies, though non-resident shareholders of public quoted companies would be subject to this tax.
Residents are taxed on a sliding scale from 10 per cent up to a maximum of 35 per cent while expatriate employees are taxed at a concessionary rate of 15 per cent for the first five years and thereafter are subject to the same rates as residents. Expatriates employed in flagship companies with investments of US$50 million or more would not be subject to any personal income taxes for five years.

Non-nationals aren’t subject to transfer tax on shares purchased on the stock market. The removal of stamp duty on all share market transactions, the abolition of capital gains tax, and exemption from income tax/capital gains on sale of debt and listed securities are some of the measures established to stimulate the stock market.

Finance
Sri Lanka is the first country in South Asia to liberalise the financial services, insurance and banking sectors. Since 1994 current account transactions have been exempt from exchange control regulations and there are moves towards further liberalisation. Accordingly, remittance of dividends, capital and royalty payments and stock market returns can be repatriated through any commercial bank.

The Central Bank is solely responsible for the implementation of the country’s monetary policy. It also issues legal tender and acts as a banker, supervisor and lender of last resort to all commercial banks. All commercial banks are highly competitive and offer a wide range of services. They are eligible to operate foreign currency banking units, assist local companies with foreign currency loans, and to conduct offshore banking for projects approved by the Board of Investment. The two development banks provide a range of services including medium/long-term project financing although foreign currency lending is not permitted. The rate of interest ranges from 16–25 per cent for rupee financing while for foreign borrowings the rate would be one or two per cent of the London Interbank Offered Rate.
The Colombo Stock Exchange, though small by international standards, is the most efficient in the region. Around 240 companies are listed. Daily transactions are recorded in investors’ accounts through a central depositary system. The debt market in Sri Lanka is still in its infancy and only a few leading local companies and financial institutions have raised capital through credit instruments such as commercial paper, corporate bonds and debentures. In 1999 Duff and Phelps set up the first credit rating agency in Sri Lanka.
The accounting and financial systems are based on the British Standards and the Institute of Chartered Accountants of Sri Lanka is vested with the authority to set accounting standards and procedures. Typically the financial year is from 1 April to 31 March. The major international firms such as PricewaterhouseCoopers, and Ernst & Young are all represented in Sri Lanka and a number of competent local accounting companies are also prevalent.
Marketing your products or services
Australian companies entering Sri Lanka should employ the services of a local agent or representative with a good network of connections in the same or a related field. A minimum investment of US$1 million is required from companies wishing to set up their own retail marketing outlets.
Product launches, press briefings and advertising, along with regular meetings with existing suppliers and prospective new suppliers should be carried out on a regular basis. Wherever possible promotional brochures and flyers could be disseminated.

Exporting online
The use of the Internet and e-communities has become an important tool in Sri Lanka and most businesses or companies conduct research and correspondence via the Internet. The large and forward-looking companies have their own websites.
Transport and distribution logistics
Sri Lanka’s strategic location at the centre of east/west maritime and air routes makes a gateway to the Middle eastern and Indian subcontinent regions. Some of the largest international freight forwarding, shipping and courier companies such as Scanwell, Fed Ex, DHL and Mersck operate in Sri Lanka. The documentation for cargo is generally handled by the shipping agent/freight forwarder and cargo is released within 24-hours if documentation is in order.