2015 Index of Economic Freedom

Sri Lanka

overall score58.6
world rank101
Rule of Law

Property Rights35.0

Freedom From Corruption37.0

Limited Government

Government Spending88.4

Fiscal Freedom85.0

Regulatory Efficiency

Business Freedom72.5

Labor Freedom58.7

Monetary Freedom68.2

Open Markets

Trade Freedom71.6

Investment Freedom30.0

Financial Freedom40.0

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Quick Facts
  • Population:
    • 20.8 million
  • GDP (PPP):
    • $136.0 billion
    • 7.3% growth
    • 6.7% 5-year compound annual growth
    • $6,531 per capita
  • Unemployment:
    • 4.2%
  • Inflation (CPI):
    • 6.9%
  • FDI Inflow:
    • $915.6 million
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Sri Lanka’s economic freedom score is 58.6, making its economy the 101st freest in the 2015 Index. Its score has decreased by 1.4 points since last year, with modest gains in freedom from corruption and the management of government spending outweighed by declines in half of the 10 economic freedoms, including investment freedom, property rights, and trade freedom. Sri Lanka is ranked 21st out of 42 countries in the Asia–Pacific region, and its score is just below the world and regional averages.

The return to relative political stability has precipitated a rise in Sri Lanka’s economic freedom. Over the past five years, economic freedom on the island has advanced by 1.5 points, with improvements in half of the 10 factors led by double-digit gains in fiscal freedom.

Overall, however, the foundations of economic freedom remain weak. Property rights are hard to enforce because of fraud, and a weak judiciary fails to mediate disputes effectively. Government industrial policies distort trade and shelter domestic industry from competition. The central bank is not fully independent, raising the fear of inflation and monetized government deficits.

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Background

In May 2009, the Sri Lankan military defeated the rebel Liberation Tigers of Tamil Eelam (LTTE), ending a 26-year civil war and contributing to President Mahinda Rajapakse’s April 2010 re-election. In March 2014, the U.N. Human Rights Council adopted a resolution mandating a comprehensive investigation into human rights violations by both the government and the rebels. In September 2013, for the first time in 25 years, Sri Lanka held elections for its Northern Provincial Council, a step that can be seen as an effort to begin addressing grievances of the Tamil community. Agriculture, apparel, and tourism are the main economic sectors. Sri Lanka depends heavily on foreign assistance and remittances from workers abroad, primarily in the Middle East. China has become a significant lender for infrastructure projects.

Rule of LawView Methodology

Property Rights 35.0 Create a Graph using this measurement

Freedom From Corruption 37.0 Create a Graph using this measurement

The government’s populist rhetoric and harsh treatment of critics since 2013 have raised concerns about the erosion of democratic institutions. Some observers charge that the president’s authoritarian rule (he and his family control approximately 70 percent of the national budget) has led to a lack of transparent and inclusive policy formulation. Judicial independence has weakened significantly.

Limited GovernmentView Methodology

Sri Lanka’s top individual income tax rate is 24 percent, and its top corporate tax rate is 28 percent. Other taxes include a value-added tax. Overall tax revenue equals 12 percent of domestic production. Public expenditures account for 19.7 percent of the domestic economy, and government debt is equivalent to approximately 80 percent of gross domestic product.

Regulatory EfficiencyView Methodology

With no minimum capital required, launching a business takes nine procedures and less than a week. The cost of completing licensing requirements has been reduced, but it still takes more than five months on average. Labor regulations are rigid, though enforcement can be lax. An extensive system of price controls and subsidies distorts most sectors of the economy.

Open MarketsView Methodology

Sri Lanka’s average tariff rate is 6.7 percent. Imports are further impeded by government policies designed to promote import substitution and agricultural self-sufficiency. Investment levels in several sectors of the economy are capped. Despite some improvement, nonperforming loans remain a problem. The state continues to influence the allocation of credit, and the non-banking financial sector remains underdeveloped.

Country's Score Over Time

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

Country Comparisons

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Regional Ranking

rank country overall change
1Hong Kong89.6-0.5
2Singapore89.40.0
3New Zealand82.10.9
4Australia81.4-0.6
5Taiwan75.11.2
6Japan73.30.9
7South Korea71.50.3
8Malaysia 70.81.2
9Macau70.3-1.0
10Brunei Darussalam68.9-0.1
11Kazakhstan63.3-0.4
12Thailand 62.4-0.9
13Philippines62.22.1
14Samoa61.90.8
15Kyrgyz Republic 61.30.2
16Vanuatu61.11.6
17Azerbaijan61-0.3
18Tonga59.31.1
19Mongolia59.20.3
20Fiji590.3
21Sri Lanka58.6-1.4
22Indonesia58.1-0.4
23Cambodia57.50.1
24Bhutan57.40.7
25Pakistan 55.60.4
26India54.6-1.1
27Bangladesh 53.9-0.2
28Maldives53.42.4
29Papua New Guinea53.1-0.8
30China52.70.2
31Tajikistan52.70.7
32Vietnam51.70.9
33Laos51.40.2
34Nepal51.31.2
35Micronesia49.6-0.2
36Solomon Islands470.8
37Uzbekistan470.5
38Burma46.90.4
39Kiribati46.40.1
40Timor-Leste45.52.3
41Turkmenistan41.4-0.8
42North Korea1.30.3
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