2021 Index of Economic Freedom

Sri Lanka

OVERALL SCORE55.7
WORLD RANK131
Rule of Law

Property Rights45.4

Judicial Effectiveness46.8

Government Integrity39.5

Government Size

Tax Burden85.0

Government Spending88.4

Fiscal Health30.1

Regulatory Efficiency

Business Freedom75.2

Labor Freedom59.1

Monetary Freedom71.6

Open Markets

Trade Freedom47.0

Investment Freedom40.0

Financial Freedom40.0

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Quick Facts
  • Population:
    • 21.8 million
  • GDP (PPP):
    • $304.2 billion
    • 2.3% growth
    • 3.7% 5-year compound annual growth
    • $13,620 per capita
  • Unemployment:
    • 4.2%
  • Inflation (CPI):
    • 4.3%
  • FDI Inflow:
    • $758.2 million

Sri Lanka’s economic freedom score is 55.7, making its economy the 131st freest in the 2021 Index. Its overall score has decreased by 1.7 points, primarily because of a decline in trade freedom. Sri Lanka is ranked 28th among 40 countries in the Asia–Pacific region, and its overall score is below the regional and world averages.

Sri Lanka’s economy remained in the mostly unfree ranks this year. Seven of Sri Lanka’s 12 Index indicators are in the repressed category. To achieve greater economic freedom, the government would need to implement deep, broad, and well-institutionalized reforms to raise very low scores for property rights, judicial effectiveness, and government integrity. Debt reduction would also be required.

IMPACT OF COVID-19: As of December 1, 2020, 122 deaths had been attributed to the pandemic in Sri Lanka, and the economy was forecast to contract by 4.6 percent for the year.

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Background

The island nation of Ceylon off the southeast coast of India gained independence from the United Kingdom in 1948, and its name was changed to Sri Lanka in 1972. Following a constitutional crisis in 2018 and the deadly 2019 Easter bombings, former Defense Secretary Gotabaya Rajapaksa was elected president in 2019. A Sinhalese nationalist, Rajapaksa appointed his brother, former President Mahinda Rajapaksa, prime minister. It was former President Maithripala Sirisena’s attempt to appoint Mahinda Rajapaksa prime minister that sparked the constitutional crisis in 2018. The president’s party won a landslide victory in the 2020 parliamentary elections. Social unrest caused by religious and ethnic tensions continues to threaten political stability. The economy is based on exports of processed commodities and garments.

Rule of LawView Methodology

Property Rights 45.4 Create a Graph using this measurement

Judicial Effectiveness 46.8 Create a Graph using this measurement

Government Integrity 39.5 Create a Graph using this measurement

Property rights are generally recognized, but protection of secured interests can be weak. The property registration system is reliable, but fraud and forged documents cause problems. Although the Supreme Court is independent, corruption and politicization still plague the lower courts. Some anticorruption cases involving misappropriation of government funds have stalled because of political interference, lack of investigative capacity, and insufficient political will.

Government SizeView 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. The overall tax burden equals 11.9 percent of total domestic income. Government spending has amounted to 19.6 percent of total output (GDP) over the past three years, and budget deficits have averaged 5.9 percent of GDP. Public debt is equivalent to 86.8 percent of GDP.

Regulatory EfficiencyView Methodology

Business freedom has declined in Sri Lanka, in significant part because of problems in obtaining electricity. The labor force participation rate increased in 2019, indicating improvements in the labor market, particularly in tourism. According to the International Monetary Fund, subsidies and transfers consumed about 3.5 percent of GDP in 2020.

Open MarketsView Methodology

Sri Lanka has six preferential trade agreements in force. The trade-weighted average tariff rate is 19.0 percent, and 19 nontariff measures are in effect. Investment in several sectors of the economy remains restricted, and state-owned enterprises distort the economy. The financial sector, dominated by banking, remains underdeveloped with capital markets offering limited financing options. In 2020, temporary measures to restrict capital outflows were taken.

Country's Score Over Time

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Regional Ranking

RANK COUNTRY OVERALL CHANGE
1Singapore89.70.3
2New Zealand83.9-0.2
3Australia82.4-0.2
4Taiwan78.61.5
5Malaysia74.4-0.3
6Japan74.10.8
7South Korea740.0
8Kazakhstan71.11.5
9Thailand69.70.3
10Indonesia66.9-0.3
11Brunei Darussalam66.60.0
12Philippines64.1-0.4
13Kyrgyz Republic63.70.8
14Mongolia62.46.5
15Fiji62.2-1.2
16Samoa61.9-0.2
17Vietnam61.72.9
18Vanuatu60.5-0.2
19Papua New Guinea58.90.5
20China58.4-1.1
21Uzbekistan58.31.1
22Bhutan58.3-3.8
23Tonga57.5-1.3
24Cambodia57.30.0
25Bangladesh 56.50.1
26India56.50.0
27Solomon Islands56.53.6
28Sri Lanka55.7-1.7
29Tajikistan55.23.0
30Burma55.21.2
31Maldives55.2-1.3
32Laos53.9-1.6
33Afghanistan53-1.7
34Pakistan51.7-3.1
35Nepal50.7-3.5
36Micronesia50.4-1.6
37Turkmenistan47.40.9
38Timor-Leste44.7-1.2
39Kiribati44.4-0.8
40North Korea5.21.0
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