The high construction costs in Sri Lanka are discouraging new investments, especially in hotels and energy projects, as rising material and power expenses cut into profits, according to Board of Investment (BOI) Chairman Arjuna Herath.
Sri Lanka’s soaring building costs discourage hotel and energy investors, warns BOI Chairman Arjuna Herath
Sri Lanka’s hospitality and construction industries—vital contributors to national growth—are struggling to attract new investors as high construction costs in Sri Lanka and surging energy prices reduce potential returns. The Board of Investment (BOI) Chairman, Arjuna Herath, recently acknowledged that the nation’s elevated building and energy expenses are limiting the profitability of new ventures and deterring much-needed foreign capital.
Herath explained that while there is steady investor interest, the financial yields no longer justify large-scale investments in hotels and infrastructure. “One of the problems that investors are facing at this moment in the hospitality side is the yields,” he said. “The investments may not be very lucrative, given that the cost of construction and energy cost are high—and that is a limiting factor.”
Despite these hurdles, Herath noted that the country continues to attract moderate levels of investment, particularly in tourism and energy. However, the overall cost structure remains one of the biggest barriers to achieving long-term growth.
Import Policies Driving High Building Costs
Economists and industry analysts trace high construction costs in Sri Lanka to years of protectionist trade policies that restrict imports and inflate local material prices. Key construction inputs such as steel, tiles, and cement are heavily taxed, a system that expanded during the two Rajapaksa administrations when free trade was discouraged and import substitution policies took root.
This protectionist approach was intended to strengthen local industries but instead created monopolies that drive up prices. Studies show that excessive import duties granted to a few domestic businesses have made building in Sri Lanka far more expensive than in neighboring countries. The ripple effect extends beyond commercial construction—ordinary citizens also struggle to afford homes due to these inflated costs.
Luxury developments often enjoy tax exemptions, while average wage earners face the full burden of duties on materials. A 2023 study revealed that these policies effectively favor the upper tier of the housing market, deepening inequality and slowing overall construction activity.
Government’s Efforts to Address Cost Barriers
Herath confirmed that stakeholder groups have repeatedly raised the issue with policymakers. “Representations have been made by various stakeholder groups,” he stated. “We have also channeled them to the Ministry of Finance to look at the tax structures across these industries. The government is actively looking at that.”
The administration’s focus, he added, includes revising tariffs and import duties to make construction more competitive while simultaneously addressing energy expenses that further strain business operations. Herath emphasized that both fiscal and regulatory reforms are essential to attract sustainable, long-term investment.
Energy Costs: Another Obstacle for Investors
Energy pricing remains one of Sri Lanka’s most pressing economic challenges. The nation’s dependence on imported fossil fuels exposes it to global market volatility, directly affecting operational costs for hotels, factories, and construction projects. “On energy cost, the President has been very clear on this,” Herath said. “We want to reduce the energy cost.”
Renewable energy investments are emerging as a potential solution. The Ceylon Electricity Board (CEB) has already issued tenders for new generation plants under competitive bidding, receiving promising offers from both local and international firms. Renewable energy development, Herath added, could soon become one of Sri Lanka’s top investment categories, helping stabilize electricity costs and attract greener, more cost-efficient projects.
Paving the Way for Renewed Investor Confidence
The BOI is working to remove broader barriers to investment, including bureaucratic inefficiencies and policy uncertainty. Current efforts include streamlining approvals for mining, energy, and tourism projects to enhance ease of doing business.
Experts agree that reducing high construction costs in Sri Lanka, liberalizing imports, and encouraging renewable energy are key to restoring investor trust. Without such reforms, high expenses will continue to stifle economic progress and limit opportunities for both foreign and local entrepreneurs.
Analysts also highlight the broader social benefits of reform: lowering building costs would help middle-income families access affordable housing, stimulate employment in construction, and spur innovation in the materials sector.
If the government successfully implements cost-reduction measures and renewable energy initiatives, Sri Lanka could reemerge as a competitive investment hub in South Asia—offering not only scenic appeal but also economic stability for global investors seeking long-term opportunities.