Evolution of minimum wages legislation in Sri Lanka: From 2000 to 2024

Can employers sustain this hike in light of Sri Lanka’s current economic reality?

Fair wages are essential to the financial security of workers, but can employers sustain a wage hike in a fragile economy? This article explores key milestones in Sri Lanka’s minimum wage legislation from 2000 onwards, examines the population below the poverty line, and discusses whether businesses can absorb the recent increases amidst the country’s economic challenges, including debt obligations and import restrictions.

1. Early legislative efforts: Budgetary Relief Allowance of Workers Act, No. 36 of 2005

In 2005, Sri Lanka introduced the Budgetary Relief Allowance of Workers Act, No. 36 of 2005, which required private sector employers to provide a monthly relief allowance of Rs. 1,000. While this was a modest step compared to modern standards, it helped support workers, particularly those in low-income sectors like plantations and textiles.

2. National Minimum Wage Act, No. 3 of 2016

In 2016, the National Minimum Wage of Workers Act, No. 3 of 2016, established a statutory minimum wage across private sector industries, setting a minimum monthly wage at Rs. 10,000 and a daily wage at Rs. 400. This affected sectors where wages were traditionally low, such as apparel, retail, and agriculture. The Budgetary Relief Allowance of Workers Act, No. 4 of 2016 provided an additional Rs. 2,500 monthly, leading to an effective minimum wage of Rs. 12,500 per month and Rs. 500 per day.

3.National Minimum Wage Amendment Act, No. 12 of 2021

The 2021 amendment increased the minimum monthly wage to Rs. 12,500 and the daily wage to Rs. 500. However, sectors such as tourism, hospitality, and retail were already facing significant strain due to the economic slowdown brought by the COVID-19 pandemic. This wage increase was crucial but came at a difficult time for industries struggling with revenue shortfalls.

4. The National Minimum Wage of Workers (Amendment) Act No. 48 of 2024: A 40% increase

The most recent amendment in 2024 further raised the minimum monthly wage to Rs. 17,500 and the daily wage to Rs. 700—a 40% increase from the previous rates. This represents a significant increase but brings up a key question: Can employers sustain this hike in light of Sri Lanka’s current economic reality?

How many people are below the poverty line in Sri Lanka?

As of 2023, approximately 25% of Sri Lanka’s population is living below the poverty line due to the combined effects of the COVID-19 pandemic, inflation, and economic crisis. This is a sharp increase compared to pre-pandemic levels when the poverty rate hovered around 9-12%. With a population of around 22 million, this means that roughly 5.5 million people are living in poverty, making wage hikes a critical issue for supporting vulnerable populations.

How many are working in the private sector subject to minimum wage decisions?

The private sector in Sri Lanka employs about 6.5 million people, with the majority being subject to the Minimum Wages Board decisions. This includes workers in sectors like manufacturing, agriculture, services, construction, retail, and plantations, which together account for a significant portion of the country’s workforce. These sectors often rely on low-skilled labour, which is the primary group affected by minimum wage legislation.

Challenges facing employers: Can they sustain the hike?

In recent years, Sri Lanka has faced multiple economic shocks that make it difficult for companies to absorb the wage hike. Key challenges include:

COVID-19: The pandemic caused widespread business closures, reduced demand, and disrupted supply chains across industries, particularly in tourism, hospitality, and retail.

Political instability: Ongoing political unrest and uncertainty following the 2022 crisis led to disruptions in business operations and a loss of investor confidence.

Economic crisis and debt obligations: With Sri Lanka being declared bankrupt in 2022, many businesses are now facing the challenge of repaying loans with higher interest rates due to the currency depreciation. Companies struggling with debt obligations may find it difficult to absorb the 40% wage hike, as it adds additional operational costs to already burdened financial structures.

Currency depletion and import restrictions: Until recently, Sri Lanka imposed severe import restrictions due to a shortage of foreign currency reserves. These restrictions made it challenging for companies to acquire necessary raw materials, especially in sectors reliant on imports such as manufacturing, pharmaceuticals, and construction. While these restrictions have eased, many businesses are still grappling with supply chain disruptions and increased import costs. Given this economic backdrop, certain sectors may find it difficult to absorb the wage increase. These include:

Tourism and Hospitality: Heavily reliant on international travel and hit hard by both the pandemic and political instability, this sector is still in recovery mode and may struggle with additional wage burdens.

Retail and Apparel: Already facing supply chain disruptions and lower consumer spending due to inflation, retailers and garment manufacturers may find it challenging to sustain operations with higher labour costs.

Plantations: Historically low wages in this sector have been a point of contention, but the increase may exacerbate cost pressures, especially given the sector’s reliance on low-margin products like tea and rubber.

Sectors that may manage the increase

Some sectors, however, may be in a better position to handle the wage increase:

IT and Technology services: With an increasing demand for digital services both locally and internationally, the tech sector is relatively insulated from the domestic economic crisis and can absorb higher wages.

Financial services: Banks and financial institutions, while impacted by the currency crisis, have relatively stable income streams and can better adjust to wage increases.

Export-oriented manufacturing: Companies that export goods and services may benefit from the devaluation of the Sri Lankan Rupee, making their products more competitive globally. This could allow them to handle higher wage costs, especially in sectors like textiles and garments.

Was the wage increase politically motivated?

The timing of the wage increase, coming close to an election cycle, has raised questions about its motivations. Historically, wage increases have involved consultations with stakeholders, including trade unions and employer associations. However, in this case, there is speculation that the 2024 wage hike was influenced by political considerations, aimed at gaining favour with the working class ahead of upcoming elections.

According to reports from business leaders and industry experts, while the wage increase is necessary for supporting workers, there is concern that the decision may not have fully accounted for the economic realities businesses are facing. As one stakeholder from the Sri Lanka Apparel Exporters Association mentioned in an interview, “While we understand the need to raise wages, the timing and scale of the increase, given the economic environment, will place significant pressure on smaller businesses.” The Ceylon Chamber of Commerce also expressed concerns, noting that “increases of this scale should be phased in over time, allowing businesses to adjust and recover from the economic crisis.”

The road ahead

The 2024 wage hike represents a balancing act between ensuring fair pay for workers and allowing businesses to remain sustainable. As Sri Lanka moves forward, it will be critical for policymakers to engage with stakeholders and consider both economic realities and worker needs. While sectors like IT and finance may manage the wage hike, others such as tourism, plantations, and apparel may face significant challenges. 

With 6.5 million private sector workers impacted by these changes and a 25% poverty rate, this wage increase is a crucial step for worker welfare but must be carefully managed to avoid overwhelming businesses still recovering from the country’s economic turmoil and debt burdens.

(The writer was a former Industrial Relations Advisor at the Employers Federation of Ceylon and is currently a Consultant Counsel for a top-tier law firm in Colombo, practicing in the areas of Labour and Criminal Law. He also acts as a legal consultant to several private and public listed companies in Sri Lanka.)