Economic freedom: How Sri Lanka fares

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 monetised government deficits.
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 Rajapaksa’s April 2010 re-election. In March 2014, the UN 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 Law
Property Rights 35.0 Down
Freedom from Corruption 37.0 Up
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% of the national budget) has led to a lack of transparent and inclusive policy formulation. Judicial independence has weakened significantly.
Limited Government
Government Spending 88.4 Up
Fiscal Freedom 85.0 Up
Sri Lanka’s top individual income tax rate is 24%, and its top corporate tax rate is 28%. Other taxes include a value-added tax. Overall tax revenue equals 12% of domestic production. Public expenditures account for 19.7% of the domestic economy, and government debt is equivalent to approximately 80% of gross domestic product.
Regulatory Efficiency
Business Freedom 72.5 Down
Labour Freedom 58.7 Down
Monetary Freedom 68.2 Up
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 Markets
Trade Freedom 71.6 Down
Investment Freedom 30.0 Down
Financial Freedom 40.0 Unchanged
Sri Lanka’s average tariff rate is 6.7%. 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.

(Source: 2015 Index of Economic Freedom, published by The Heritage Foundation and The Wall Street Journal)