07th April 2025: Sri Lanka’s economic recovery faces significant foreign direct investment (FDI) setbacks as the 44% tariff imposed by the Trump administration threatens the country’s vital apparel export sector. The recent news coupled with the withdrawal of India’s Adani Group from key energy projects signals a loss of high-value FDIs. At a time when Sri Lanka is racing to rebuild investor confidence following the 2022 economic crisis, these growing uncertainties do not help in securing much-needed external capital inflows to drive sustainable economic growth.
The apparel industry, which accounts for over 43%of Sri Lanka’s exports and 7% of its GDP[1], stands to be severely impacted by the proposed tariffs. The United States remains Sri Lanka’s largest single export market, with apparel goods making up the majority of those exports.
Exporters fear U.S. orders could plummet in volume as Sri Lankan-made apparel becomes dramatically more expensive for American importers and lead to a sharp reduction. Industry experts have cautioned that the tariff could result in approximately 350,000[2] jobs at risk in the apparel manufacturing sector.
Experts have noted that the tariff effectively eliminates Sri Lanka’s competitive edge in the US market as Sri Lankan manufacturers will be forced to either accept significantly reduced margins or lose business to competitors in countries such as Vietnam or Bangladesh.
Compounding these challenges is the recent withdrawal of India’s Adani Group from a major infrastructure project in Sri Lanka. The conglomerate had committed to investments worth approximately 1 billion million in a the Wind Power Project and related transmission infrastructure The project, besides bringing in FDI, would also have displaced over $200 million of fossil fuel imports annually.
The withdrawal comes amid ongoing disputes regarding tariff rates and follows extensive scrutiny from Sri Lanka’s current administration. While official statements cite the project was ‘financially unviable’, and despite obtaining most approvals, the company cited delays, including unresolved environmental clearance and an ongoing Supreme Court case as reasons for the withdrawal.
The development is more than simply the loss of direct investment but draws concerns from other international investors regarding Sri Lanka’s investment climate, potentially affecting future FDI opportunities at a time when the country desperately needs capital inflows.
The combined effect of these two developments could significantly impact Sri Lanka’s economic recovery, putting additional pressure on foreign exchange reserves. The withdrawal of major FDI projects creates a void in planned infrastructure development and delays leading to potential economic multiplier effects.
[1] https://www.trade.gov/country-commercial-guides/sri-lanka-market-overview
[2] https://lankasara.com/news/sri-lankas-garment-industry-at-risk-due-to-44/
