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Srilanka

Sri Lanka
Score Rank
Financial Standards Index 21.67 out of 100 77
Business Indicator Index 6.73 out of 12 71

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Overall Standards Summary

Sri Lanka achieves low overall compliance with international standards and codes, with a score of 20 out of 100 in our Standards Compliance Index. The highest level of compliance reached under any category is "enacted". There are four standards at the "insufficient information" level and three at the "no compliance" level. Sri Lanka does not subscribe to the International Monetary Fund's Special Data Dissemination Standard, but it does participate in the less rigorous General Data Dissemination System. Sri Lanka's Monetary and Fiscal Transparency practices are both assessed to have enacted the international best practice requirements. Accounting and auditing practices in Sri Lanka are being brought in line with international standards, and Sri Lanka Accounting Standards are expected to be fully compliant with International Financial Reporting Standards by 2011. Progress has also been made in regards to corporate governance requirements with the Rules on Corporate Governance for Listed Companies having been incorporated into the Colombo Stock Exchange Listing Rules.

Choose a standard for a detailed compliance report:
12 Key Standards for Sound Financial Systems

Compliance Level
Special Data Dissemination Standard
NC
Code of Good Practices on Transparency in Monetary Policy
EN
Code of Good Practices on Transparency in Fiscal Policy
EN
Effective Insolvency and Creditor Rights Systems
II
International Financial Reporting Standards
ID
Principles of Corporate Governance
II
International Standards on Auditing
ID
Anti-Money Laundering/Combating Terrorist Financing Standard
ID
Core Principles for Systemically Important Payment Systems
II
Core Principles for Effective Banking Supervision
II
Objectives and Principles of Securities Regulation
ID
Insurance Core Principles
NC
II = Insufficient Information | NC = No Compliance | ID = Intent Declared | EN = Enacted | CP = Compliance in Process | FC = Full Compliance

Macroeconomic Policy and Data Transparency

NCSpecial Data Dissemination Standard

In 2002, the International Monetary Fund (IMF) published its most recent Data Module Report on the Observance of Standards and Codes (ROSC) for Sri Lanka. At that time, it noted that Sri Lanka did not subscribe to the IMF's Special Data Dissemination Standard (SDDS), but did participate in the less rigorous General Data Dissemination System. The ROSC data module reported that Sri Lanka's authorities had declared their desire to achieve the necessary compliance level to permit SDDS subscription, and the ROSC offered a series of recommendations designed to help Sri Lanka achieve that goal. The 2007 IMF Article IV Consultations report notes that while Sri Lanka's data programs are sufficient to permit surveillance and program monitoring, they remain deficient in certain areas. As a result, the IMF notes that Sri Lanka still has not achieved SDDS eligibility.

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ENCode of Good Practices on Transparency in Monetary Policy

According to the 2006 Oxford Analytica (OA) report on Sri Lanka's monetary transparency, the country has achieved an overall rating of "Enacted" for this standard. The Central Bank of Sri Lanka (CBSL) is governed by the Monetary Law Act as amended through 1998 as well as the Monetary Law (Amendments) Act of 2002, but OA finds that this legislation could still stand improvement, particularly with regard to reducing the confusion inherent in the CBSL's current mandate to fulfill multiple and potentially competing monetary policy goals. However, recent efforts to further amend or replace the Monetary Law Act have been stalled in the current government. On the other hand, the CBSL has recently completed a program of modernization and reorganization that aims to improve the monetary policy formulation, reporting, and data dissemination processes. OA notes that fiscal policy considerations still tend to dominate Sri Lanka's monetary policy. At present, Sri Lanka does not subscribe to the IMF's SDDS but participates in the less rigorous General Data Dissemination System. While the CBSL has been steadily working toward SDDS compliance, subscription has been delayed.

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ENCode of Good Practices on Transparency in Fiscal Policy

OA's 2006 Fiscal Transparency report for Sri Lanka gives an overall rating of "Enacted" for this standard. This assessment is largely due to the 2003 passage of the Fiscal Management Responsibility Act (FMRA), which provides the legal framework necessary to meet internationally accepted transparency practices. However, OA found that, especially in recent years, the implementation and enforcement of FMRA provisions have been incomplete. The government has ignored legally mandated targets for deficit reduction and the reduction of public debt. These failures are explained, in part, by the recovery costs occasioned by the tsunami of December 2004, but have also been exacerbated by increased government spending on infrastructure and public welfare programs. The IMF's General Data Dissemination System website discloses a substantial set of plans for improvement in its provision of official data, including its fiscal reporting, but notes that many of these plans will require technical or financial assistance.

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Institutional and Market Infrastructure

IIEffective Insolvency and Creditor Rights Systems

Two writers for the Organization for Economic Cooperation and Development (OECD), Messrs. Batra and Neelakanaden, as well as the 2008 U.S. Department of Commerce "Country Commercial Guide" note that the primary legislation governing Sri Lanka's insolvency regime are the Companies Act and the Insolvency Ordinance. The OECD sources find that, overall, Sri Lanka's legal system, in terms of both laws and institutions, is well regarded, but all three sources find that the insolvency regime in particular is lacking in a number of areas. All make specific mention of the weakness in handling the reorganization of troubled businesses, for example. Supervision of liquidators is lacking, according to Mr. Batra, and Mr. Neelakanaden noted that cross-border insolvency judgments by foreign courts are enforceable in Sri Lanka only when the country of judgment enjoys reciprocal relations with the Sri Lankan courts. The available information on Sri Lanka's insolvency practices is primarily descriptive, and there is insufficient publicly available information regarding Sri Lanka's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank. However, Batra in his report notes that Sri Lankan authorities have requested that the World Bank conduct an assessment of the country's insolvency system with a view to reforming it.

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IDInternational Financial Reporting Standards

During a 2004 World Bank assessment, the Sri Lankan accounting and auditing standard-setter - the Institute of Chartered Accountant of Sri Lanka (ICASL) - informally expressed its commitment to adopting International Financial Reporting Standards (IFRSs) promulgated by the International Accounting Standards Board by 2005. However, its intentions were formalized only in August 2007. According to Deloitte's IAS Plus website, at an international conference sponsored by the South Asian Federation of Accountants in Colombo, Sri Lanka, the ICASL president announced that its board had approved a policy that would bring the Sri Lankan standards in line with IFRSs; in fact, the Sri Lanka Accounting Standards (SLASs) will be fully compliant with IFRSs by 2011. As of 2008, Sri Lankan business entities follow SLASs, a majority of which, according to the World Bank, comply with the international standards. However, gaps exist due to non adoption of certain international standards and introduction of alternative accounting methods not permitted by IFRSs. The World Bank, therefore, recommended use of IFRSs without any modifications. Other weaknesses were also found with regard to weak regulatory capacity and enforcement mechanisms. The World Bank recommended building regulatory capacity, strengthening enforcement mechanisms, and initiating legal reforms. It also called for improving education and training and upgrading the licensing procedures for accountants and practicing auditors. With regard to small and medium-size enterprises (SMEs), the World Bank notes that the ICASL issued a standard for small and medium-size enterprises in 2003, which incorporates a simplified version of accounting and disclosure requirements for SMEs.

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IIPrinciples of Corporate Governance

The ICASL developed the voluntary "Code of Best Practice on Corporate Governance" in March 2003. This Code was issued jointly by ICASL and the Securities Exchange Commission (SEC) in consultation with the Colombo Stock Exchange (CSE) with the purpose of strengthening the corporate governance framework in Sri Lanka. Nonetheless, weaknesses exist and according to the 2008 U.S. Country Commercial Guide, in general, improvements are required in corporate governance, accountability and public disclosure. In recent years, Sri Lanka has been taking initiatives in this regard. For instance, the SEC and the ICASL, in consultation with the CSE, issued a draft code on corporate governance in 2006 to be subsequently incorporated into the CSE Listing Rules. Among other things, this code contains provisions on the protection of minority rights. A 2005 Asian Development Bank report notes that given the large number of companies listed on the CSE, the enforcement of the Code will help ensure the protection of minority rights. More recently, a 2007 article in the Sunday Times (of Sri Lanka) confirmed the incorporation of the Rules on Corporate Governance for Listed Companies into the CSE Listing Rules. These rules are mandatory for all listed companies, effective April 2008 and will be enforced by the CSE. In addition, Sri Lanka introduced a new Companies Act in 2007 which addresses some of the gaps and weaknesses present in the old legislation. Sri Lanka also intends to adopt International Financial Reporting Standards by 2011. In sum, the available information is indicative of Sri Lankan commitment to and initiatives in the field of corporate governance, but it does not address the overall quality of Sri Lanka's corporate governance framework nor its compliance with the Organization for Economic Cooperation and Development's Principles of Corporate Governance.

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IDInternational Standards on Auditing

According to the assessment of accounting and auditing practices in Sri Lanka conducted by the World Bank in 2004, Sri Lanka Auditing Standards (SLAuS) are in line with the International Standards on Auditing (ISAs) effective as of 1998. A 2006 ICASL self-assessment explains that Sri Lanka adopts pronouncements issued by the International Auditing and Assurance Board (IAASB) as national standards with minor modifications to reflect the local legal environment. However, as mentioned earlier, SLAuS listed on the ICASL website have been effective beginning on or after January 1, 1998. The IAASB subsequently revised a majority of ISAs and according to a comparison of Sri Lankan auditing standards with international standards issued by the South Asian Federation of Accountants (SAFA), as of July 2006, the revised and amended ISAs were under review for adoption by the ICASL. With regards to the overall financial reporting framework, the World Bank recommended strengthening regulatory capacity and enforcement mechanisms along with improving professional education and training. The assessment also recommended introducing independent oversight of the audit profession and upgrading the licensing procedures for accountants and practicing auditors.

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IDAnti-Money Laundering/Combating Terrorist Financing Standard

The Asia/Pacific Group on Money Laundering (APGML) conducted a mutual evaluation of Sri Lanka's Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regime against the Financial Action Task Force's (FATF) 40+9 recommendations and special recommendations in 2006. In its assessment, the APGML concluded that Sri Lanka is fully compliant with 3, largely complaint with 4, partially compliant with 24, and non-compliant with 18 recommendations and special recommendations. The main laws addressing the Sri Lankan AML/CFT framework - the Prevention of Money Laundering Act and the Financial Transactions Reporting Act came into force in 2006 during the APGML evaluation, and therefore the assessors were unable to assess the effectiveness of these laws. Moreover, the Sri Lankan Financial Intelligence Unit was established in July 2006 following the assessment. Therefore, at the time of the assessment, Sri Lanka's AML/CFT regime was at a nascent stage and there had been no history of investigations or prosecutions of money laundering under the newly introduced legislation. The report, however, identified some major weaknesses in the existing AML/CFT regime. For example, the APGML report assigned a rating of partially compliant for Sri Lanka against the FATF's recommendation on the criminalization of money laundering. In this regard the report notes that not all FATF designated offenses were included as predicate offenses to money laundering. Similarly, the APGML report rated Sri Lanka as partially compliant with special recommendation II on the criminalization of terrorist financing. The report also finds the country non compliant with several recommendations relating to preventive measures in the financial sector, especially in terms of customer due diligence and suspicious transactions reporting. Subsequent to the APGML report of 2006, there is no further publicly available information addressing Sri Lanka's AML/CFT regime with the FATF recommendations.

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IICore Principles for Systemically Important Payment Systems

Sri Lanka has two systemically important payment systems, the LankaSettle System, the integrated Real-Time Gross Settlement (RTGS) and Scripless Securities Settlement System (SSSS) operated by the Central Bank of Sri Lanka (CBSL), and the Cheque Imaging and Truncation (CIT) System operated by LankaClear. The CBSL is charged with the oversight of both these systems. Sri Lanka has been taking substantial steps to update and modernize its payment systems and upgrade the legal framework governing them. It has also chalked out a five-year road map (2007-2010) to modernize the payment system infrastructure in the country and help it meet international standards. In 2007, the International Monetary Fund (IMF) conducted a Financial Sector Assessment Program (FSAP) Update for Sri Lanka as a follow up to an unpublished 2002 FSAP. The 2007 FSAP Update makes positive observations on the improvements made in the Sri Lankan payments system, stating that the LankaSettle RTGS system that was launched in 2003 is technically well functioning and reliable. However, the FSAP Update does not provide any compliance rating for Sri Lanka against the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems (CPSIPS). Nor does it assess the CIT system, which is designated by the CBSL as systemically important. An article by Ranee Jayamaha notes that the 2005 Payment and Settlement Systems Act allows the CBSL to review the SIPS periodically to ensure that their design and operation meet international standards and best practices. Nevertheless, none of the reports mentioned above provide sufficient information addressing Sri Lanka's actual compliance with the CPSIPS.

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Financial Regulation and Supervision

IICore Principles for Effective Banking Supervision

In 2007, the IMF conducted a Financial Sector Assessment Program (FSAP) Update for Sri Lanka as a follow up to its 2002 unpublished FSAP. The Update assessed Sri Lanka's compliance on the basis of the 2006 Basel Committee for Banking Supervision (BCBS) methodology and not on that of the 1998 methodology. The key recommendations of the 2002 FSAP - as enumerated in the 2007 FSAP Update - included, inter alia, the restructuring of the banking system and the modernization of the legal framework. The 2007 FSAP Update finds that the Sri Lankan authorities have initiated a major legal and regulatory reform program to achieve progress in the implementation of the 2002 FSAP recommendations. As part of this reform, banking supervision has been strengthened, the legal framework refined, market infrastructure enhanced, and financial soundness indicators have improved. However, banks have become more vulnerable to liquidity and interest rate shocks, and the restructuring of weak state commercial banks has not been successfully achieved. The 2007 FSAP Update recommends improving banks' risk-management systems, implementing risk-focused supervision, and strengthening the capital position of the weak state banks to enable successful Basel II implementation by the Central Bank of Sri Lanka (CBSL). Also consolidated supervision needs to be implemented and financial sector legislation made more streamlined and comprehensive. Moreover, information provided on the banking supervisor's (the CBSL) website indicates that the CBSL bases its supervisory practices on international standards set forth by the BCBS. However, neither the FSAP Update, nor other publicly available third party sources directly address Sri Lanka's compliance with the BCBS' Basel Core Principles for Effective Banking Supervision.

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IDObjectives and Principles of Securities Regulation

The Securities and Exchange Commission (SEC) of Sri Lanka, the country's securities sector supervisor, has been taking small steps to develop its capital markets as well as the regulatory framework and its supervisory capacity. In 2004, it became a signatory to the International Organization of Securities Commission (IOSCO) Multilateral Memorandum of Understanding. This implies that IOSCO's screening committee considered that the SEC had the legal capacity to provide effective cooperation to and coordinate with foreign regulators. In 2005, the SEC conducted a self-assessment of its compliance with the IOSCO Principles with the assistance of an IOSCO team and concluded that it was partly compliant with the Principles. The SEC also identified steps required to be taken in order to move towards full compliance with the IOSCO Principles. The self-assessment is not publicly available but is mentioned in a 2005 SEC annual report. The SEC has undertaken several reforms of the capital markets and its regulation and supervision with technical assistance from the Financial Sector Reform and Strengthening Initiative. The outcomes of those projects have been mixed but signal Sri Lanka's intent to move in the right direction. A 2007 IMF report also indicates that Sri Lanka has, in some respects, met its 2002 Financial Sector Assessment Program recommendations for the securities sector.

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NCInsurance Core Principles

In its 2007, FSAP Update the IMF commended the Sri Lankan authorities for the progress achieved in their regulatory and legal reforms, including strengthening insurance supervision. Sri Lanka has introduced a modern risk-based supervisory framework, has updated solvency and reporting requirements for both the life and non-life insurance sectors, privatized state-owned insurance firms, and removed tariff controls on fire and motor insurance. However, as the Update notes, there is still room for improvement. Lack of supervisory resources of the Insurance Board of Sri Lanka (IBSL), Sri Lanka's insurance sector supervisor, its weak enforcement powers and insufficient capacity hamper implementation of the reforms. The IMF also noted that offshore businesses of Sri Lankan insurers are not subject to the IBSL's supervision, and consumer protection funds are not being utilized in a targeted fashion. The new law that requires insurance companies to place a percentage of their reinsurance business with the National Insurance Trust Fund goes against the market-based reform initiative. A 2008 report by the Central Bank of Sri Lanka, nonetheless, mentions an imminent revision of the main insurance sector law, the Regulation of the Insurance Industry Act, that, inter alia, is expected to strengthen the IBSL's supervisory powers and capacity, especially pertaining to corrective measures and enforcement, increase minimum capital requirements for insurers, introduce fit and proper testing of directors of firms and brokers as well as introduce the appointment of institutional insurance agents.

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Business Indicators

With an overall score of 6.73 out of 12, Sri Lanka is progressing toward standard on the economic, legal, and political indicators that make up our Business Index. Sri Lanka is a market-based mixed economy. Overall government spending is reported as moderate. In the most recent year government's spending equaled 24.7% of GDP, and the government's involvement in manufacturing has been cut back through privatization- though the government maintains a strong presence in number of industries. Sri Lanka promotes foreign investment and provides incentives for countries that meet minimum investment, export, and, in some cases, employment criteria. The legal system protects property rights, but political interference in the judicial system is a problem. Political instability may be a cause of concern for foreign investors. Corruption is also an obstacle, as reflected in Sri Lanka's ranking of 94th out of 179 countries in Transparency International's 2007 Corruption Perceptions Index.

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Global Indices & Quick Facts

Sri Lanka is generally ranked in the 3rd and 4th quintile in the global indices benchmarking political, economic, business, and human capital climates, as shown below. Its ranking in the 2nd quintile in the Bertelsmann Transformation Index is the exception. Sri Lanka's “Partly Free” rating in the Freedom House Index reflects the deterioration of political rights and civil liberties accompanying the prolonged war with the rebel Tamil Tigers, which has now ended. High levels of violence, political intimidation, and harassment of the media have been noted. Apart from political instability, the most problematic factors for doing business include inflation and corruption, as highlighted by the Global Competitiveness Index and the Freedom House Corruption Perception Index. Bertelsmann further reports that Sri Lanka has excellent prospects for further developing a market economy, given its demonstrated ability to withstand significant shocks.

Name Year Rank Score Quintile
Bertelsmann Transformation Status Index 2010 48/128 6.17/10 2
Heritage Foundation Economic Freedom Index 2010 120/179 54.6% 4
Economic Freedom of the World Index 2009 105/141 6.1/10 4
World Economic Forum Global Competitiveness Index 2009 79/133 4.01/7 3
Milken Institute Capital Access Index 2009 69/122 4.21/10 3
World Bank Ease of Doing Business Index 2009 105/183 N/A 3
UNDP Human Development Index 2009 102/177 0.76/1 3
Transparency International Corruption Perceptions Index 2009 97/180 3.1/12 3
Freedom House Index 2009 Partly Free 4/7

Credit Ratings

B+/Stable Fitch

Not rated Moody's

B/Positive Standard & Poor's

Macroeconomic Data

2009 GDP (Current Prices): 38.5 billion USD (IMF)

2009 GDP (Per Capita): 1,903 USD (IMF)

2010 GDP (Growth Forecast): 5% (IMF)


2009 Inflation (CPI): 4.6% (IMF)

2008 Unemployment: 5.2% (CIA)


2008 Foreign Direct Investment

FDI (Inward): 0.8 billion USD (UNCTAD)

FDI (Outward): 0.10 billion USD (UNCTAD)


2007 Official Development Assistance

ODA (Received): 589 million USD (OECD)

ODA (Disbursed): N/A million USD (OECD)

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