The political and economic risk in Sri Lanka over the medium to long term depends on how the government manages the aspirations of the residents of the North-East, said the UK Foreign and Commonwealth Office's (FCO) 'Overseas Business Risk - Sri Lanka' report.

The report, updated and published on Wednesday, examines key security and political risks that UK businesses may face when operating in Sri Lanka.

"Looking to the medium-longer future, political and economic risk is tied to how successfully the government can manage the aspirations of residents in the North and East and the redevelopment of former conflict zones and containing the extreme religious groups," the report concluded.

Highlighting Sri Lanka's high debt and debt repayment, the report stated:

"Against a reasonably positive macro-economic background, significant areas of weakness are that the perceived environment for inward investment remains unstable, due to arbitrary political interventions in the market, such as the expropriation of assets bill in 2011, and that the labour market is both lacking in capacity and constrained by restrictive labour laws."

Whilst the level of corruption was described as "moderate" overall, the report stated that it was "high in public procurement".

"Allegations of corruption plague many government deals, the police, the inland revenue, customs - indeed almost every public body that businesses rely on to function fairly," the report read.

It further added: 

"The public sector is characterised by political appointments and overstaffing. In State Owned Enterprises under-qualified senior management is common. A Public Service Commission does exist to oversee the public sector but its powers are limited and its independence questionable.

Meanwhile, prosecutions of officials are rare with no senior figures having been taken to court whilst in power Public officials are not required to declare their assets and “conflict of interest” guidance is sketchy and unenforceable."

Analysing the risk of terrorist threat to UK businesses, the report stated:

"With the end of military conflict in May 2009, the threat from terrorism has all but disappeared for the short to medium term. Government forces are strongly in control of the former conflict zones and there is little scope for insurgency."