2014 Index of Economic Freedom

Sri Lanka

overall score60.0
world rank90
Rule of Law

Property Rights40.0

Freedom From Corruption33.4

Limited Government

Government Spending86.3

Fiscal Freedom84.9

Regulatory Efficiency

Business Freedom74.4

Labor Freedom59.2

Monetary Freedom68.0

Open Markets

Trade Freedom73.6

Investment Freedom40.0

Financial Freedom40.0

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Quick Facts
  • Population:
    • 20.7 million
  • GDP (PPP):
    • $126.3 billion
    • 6.4% growth
    • 6.4% 5-year compound annual growth
    • $6,107 per capita
  • Unemployment:
    • 4.9%
  • Inflation (CPI):
    • 7.5%
  • FDI Inflow:
    • $775.5 million
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Sri Lanka’s economic freedom score is 60.0, making its economy the 90th freest in the 2014 Index. Its score is 0.7 point lower than last year, reflecting modest declines in five of the 10 economic freedoms including trade freedom, business freedom, labor freedom, and monetary freedom. Sri Lanka is ranked 17th out of 42 countries in the Asia–Pacific region, and its score is just below the world average.

Over the 20-year history of the Index, Sri Lanka’s economic freedom has been largely stagnant. Despite notable score improvements in trade freedom and fiscal freedom, overall progress has been stifled by declines in five areas of economic freedom, including a 30-point decline in financial freedom. In the absence of lasting progress toward greater economic freedom, Sri Lanka’s economy has been rated “mostly unfree” in recent years.

Notable reforms in past years have included the easing of foreign exchange controls and the reduction of both individual and corporate marginal income tax rates below 30 percent. Substantial challenges remain, however, in the struggle to promote sustainable economic development. Institutional weaknesses cannot be addressed without a firmer political commitment to reform. Sri Lanka continues to score below the world average in the area of rule of law as measured by freedom from corruption and the protection of property rights.

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Background

In May 2009, the Sri Lankan military defeated the rebel Liberation Tigers of Tamil Eeelam, ending 26 years of civil war and contributing to President Mahinda Rajapakse’s April 2010 re-election. The international outcry over the deaths of thousands of civilians in the final days of the war has largely died down. Agriculture, apparel, and tourism are the main economic sectors. Sri Lanka depends heavily on foreign assistance and remittances from workers, primarily in the Middle East. China has become a significant lender for infrastructure projects.

Rule of LawView Methodology

Property Rights 40.0 Create a Graph using this measurement

Freedom From Corruption 33.4 Create a Graph using this measurement

Official corruption worsened during the past year. The administrative framework does not promote integrity or punish corrupt behavior effectively. Increasing threats, intimidation, and political interference culminated in a significant assault on judicial independence in November 2012 when the parliament impeached the chief justice. A fairly reliable registration system exists for private property but is marred by fraud and forged documents.

Limited GovernmentView Methodology

The top individual income tax rate is 24 percent, and the top corporate tax rate is 28 percent. Other taxes include a value-added tax (VAT). Total tax revenue makes up about 12.4 percent of the gross domestic economy. Government spending is 21 percent of GDP, and public debt amounts to 78 percent of GDP. Government is subject to fiscal targets set under an IMF loan agreement.

Regulatory EfficiencyView Methodology

Launching a business takes eight days, and no minimum capital is required, but obtaining necessary licenses can take more than 150 days. Inefficiency in the labor market causes an imbalance between labor supply and demand. The government is heavily subsidizing small and medium enterprises, agriculture, and infrastructure projects, in part to repair damage from the 26-year civil war.

Open MarketsView Methodology

Sri Lanka’s average tariff rate is 5.7 percent. Government policies based on import replacement and agricultural self-sufficiency distort trade. Investment in several sectors of the economy is subject to government screening. The financial system, dominated by banking, remains vulnerable to state influence. The central bank is not fully independent. High credit costs continue to discourage more dynamic business activity.

Country's Score Over Time

Bar Graph of Sri Lanka Economic Freedom Scores Over a Time Period

Country Comparisons

Bar Graphs comparing Sri Lanka to other economic country groups

Regional Ranking

rank country overall change
1Hong Kong90.10.8
2Singapore89.41.4
3Australia82-0.6
4New Zealand81.2-0.2
5Taiwan73.91.2
6Japan72.40.6
7Macau71.3-0.4
8South Korea71.20.9
9Malaysia 69.63.5
10Kazakhstan63.70.7
11Thailand 63.3-0.8
12Azerbaijan61.31.6
13Samoa61.14.0
14Kyrgyz Republic 61.11.5
15The Philippines60.11.9
16Sri Lanka60-0.7
17Vanuatu59.52.9
18Mongolia58.9-2.8
19Fiji58.71.5
20Indonesia58.51.6
21Tonga58.22.2
22Cambodia57.4-1.1
23Bhutan56.71.7
24India55.70.5
25Pakistan 55.20.1
26Bangladesh 54.11.5
27Papua New Guinea53.90.3
28China52.50.6
29Tajikistan52-1.4
30Laos51.21.1
31Maldives512.0
32Vietnam50.8-0.2
33Nepal50.1-0.3
34Micronesia49.8-0.3
35Burma46.57.3
36Uzbekistan46.50.5
37Kiribati46.30.4
38Solomon Islands46.21.2
39Timor-Leste43.2-0.5
40Turkmenistan42.2-0.4
41North Korea1-0.5
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