US State Department Highlights Adani Pullout and Investment Challenges in Sri Lanka's Inconsistent Economic Climate

The US State Department has characterized Sri Lanka's foreign investment policy as inconsistent and hampered by excessive regulations, legal ambiguity, and inefficient bureaucracy, citing the Adani Group's withdrawal from a $400 million renewable energy project as a significant example.

According to the 2025 Investment Climate Statements, while Sri Lanka shows signs of economic recovery with GDP growth reaching 5 percent in 2024, the investment environment continues to present substantial challenges for foreign investors.

Despite improved political stability following President Anura Kumara Dissanayake and his National People's Power (NPP) coalition's electoral victory in 2024, investors remain concerned about the party's historically Marxist and anti-Western orientation, even as they support the country's $3 billion IMF program.

Earlier this year, the Adani Group abandoned its wind project in Sri Lanka after prolonged negotiations spanning over two years. The company had offered a competitive tariff of 8.26 cents per unit, with payment to be made in Sri Lankan rupees, preventing any strain on the country's foreign exchange reserves.

Industry sources indicated that the conglomerate preferred to redirect its capital and management resources toward more promising markets like India, where renewable energy development is accelerating with more favorable regulatory conditions.

Reports suggest Sri Lanka demanded Adani lower its tariff to below 5 cents, which the company found economically unfeasible. Though Sri Lanka announced plans to tender the project at this reduced rate, it has yet to secure a developer willing to accept these terms.

Undeterred by this setback, Adani has continued expanding its renewable energy portfolio, currently operating over 15 GW of capacity with plans to reach 50 GW by 2030, positioning itself among the top three global renewable energy companies.

The total investment Adani had planned, including transmission infrastructure for the wind project, would have exceeded $1 billion.

The State Department noted that foreign direct investment in Sri Lanka remains limited, with most transactions ranging between just $3 to $5 million. Despite the government's ambitious $5 billion FDI target for 2025, experienced investors emphasize that policy stability, regulatory reform, and improved transparency must precede any significant increase in large-scale investments.

While US companies continue exploring opportunities in sectors such as ICT, energy, aviation, and defense, regulatory unpredictability, bureaucratic obstacles, and selective transparency continue to restrict broader participation.

The document highlighted that the government's capacity to foster an open investment environment remains constrained despite positive rhetoric. Investors consistently report difficulties in doing business, citing concerns about project reversals, regulatory shifts, slow decision-making processes, and inadequate support for established enterprises.

Both the IMF and local business associations emphasize the necessity for comprehensive structural reforms, including trade facilitation, digitization, and stronger governance mechanisms.

The implementation of foreign investment policies in Sri Lanka lacks consistency, with the Board of Investment struggling to function effectively as a "one-stop shop" due to authority fragmentation across multiple government departments, creating prolonged approval processes that frustrate potential investors.

Investors report difficulties in maintaining consistent and open dialogue with the BOI, while other significant impediments include unnecessary regulations, legal uncertainty, and poor bureaucratic responsiveness.

The stalled privatization of financially troubled state-owned enterprises, particularly the Ceylon Electricity Board, hinders the development of cost-effective energy supplies essential for industrial operations.

Foreign investors consistently report high transaction costs, unpredictable policies, and opaque procurement procedures in the Sri Lankan market.

While the NPP government publicly promotes its interest in attracting foreign investment, including President Dissanayake's January 2025 commitment to finalizing a $3.7 billion Sinopec oil refinery project adjacent to the Chinese-controlled Hambantota International Port, its actions have sent mixed signals to potential investors.

The government's attempt to renegotiate previously awarded contracts, as in the case with Adani Green Energy, and its decision to halt planned privatizations of state-owned enterprises in favor of internal reforms have created uncertainty in the investment community.

Many investors remain hesitant given these contradictory messages, particularly as some senior government officials continue to criticize private sector-led economic growth while publicly advocating state-owned collectivism as Sri Lanka's preferred economic model.