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Outlook

Faster-than-expected macroeconomic stabilization has improved the short-term growth outlook to 4.4 percent in 2024. Continued implementation of structural reforms will, however, be key to raising the medium to long-term growth potential. Poverty (below $3.65 per person per day, 2017 PPP) is expected to decline gradually but remain above 20 percent until 2026. Inflation is likely to remain below the central bank¡¯s target of 5 percent in 2024, and gradually increase towards the medium-term target as demand picks up. The current account is projected to remain in surplus in 2024, driven by tourism and remittances, and with the restriction on importing personal vehicles only being phased out from 2025. Debt restructuring and continued fiscal consolidation are expected to reduce the overall fiscal balance in the medium term.

While recent economic performance has been sound, macroeconomic stability remains fragile and is predicated on the consistent implementation of key fiscal, financial, and monetary policies. Given limited fiscal and external buffers, however, downside risks remain high. These include a protracted or insufficiently deep debt restructuring, policy uncertainty (including direction and pace of policy reform and the potential fiscal impact of electoral promises), and medium-term scarring effects of the crisis. Financial sector risks need to be carefully monitored as elevated non-performing loans and high exposure to the sovereign hinder financial sector stability. Poverty outcomes will hinge on reform design and sequencing, as well as the adequacy and targeting of compensating transfers. Inequality is estimated to remain high and increases in stunting and malnutrition are expected to increase spatial and intergenerational inequalities in the absence of compensating mechanisms and sustained growth. On the upside, a strong and sustained implementation of the structural reform program could boost confidence and attract fresh capital inflows.

Recent economic developments

The economy grew by 5 percent in the first quarter of 2024, driven by a rebound in the industrial sector ¨C particularly in construction and food and beverage manufacturing ¨C as well as strong performance in tourism-related services. Private consumption remained weak as household disposable incomes continued to be depressed. Labor force participation continued to decline (from 49.9 percent in the first quarter of 2023 to 47.1 percent in the first quarter of 2024). Food insecurity was widespread, with 23.7 percent of households being food insecure and 26 percent of households consuming an inadequate diet in 2023.

Headline inflation, measured by the Colombo Consumer Price Index, remained in the low single digits throughout 2024 (0.5 percent in August 2024), supported by downward adjustments in administered prices, currency appreciation, and improved supply conditions, whilst demand remained subdued. With inflation well below target, the central bank maintained an accommodative stance, cutting policy rates by 75 basis points (bps) between March and July 2024 (a cumulative 725 bps reduction since May 2023), pushing commercial bank lending and deposit rates downwards. Despite this, growth in credit to the private sector remained sluggish at 6.9 percent in July 2024.

The merchandise trade deficit increased by 18.3 percent in the first seven months of 2024 as import demand gradually recovered. However, increased tourism receipts (66.1 percent) and remittances (11 percent) in the first eight months, the continued suspension of debt servicing, and inflows from development partners contributed to a balance of payment surplus during this period. As a result, usable official reserves increased to US$4.5 billion (equivalent to 3 months of imports) by the end of August 2024, and net foreign assets of the banking system turned positive in May 2024 for the first time in four years. With improved foreign exchange liquidity, the rupee appreciated by 7.3 percent between January and August 2024.

The primary surplus, achieved in 2023, strengthened further in the first six months of 2024, as new measures, including an increase in the VAT rate and removal of VAT exemptions, led to a 42.6 percent increase in tax revenues, while expenditures remained tightly controlled. The overall fiscal deficit declined as the interest bill fell, driven by lower borrowing costs.

Challenges

The economy has stabilized since late 2023 following the deep economic crisis. Sri Lanka defaulted in 2022 amid unsustainable debt and depleted reserves, driven by macroeconomic mismanagement and long-standing structural weaknesses, and exacerbated by exogenous shocks. However, reforms implemented since 2022, including cost-reflective utility pricing, new revenue measures, a return to prudent monetary policy, and domestic debt restructuring, have helped regain macroeconomic stability. After contracting by 7.3 percent in 2022, the economy grew in the last two quarters of 2023, limiting the annual contraction to 2.3 percent. Inflation moderated to single digits in mid-2023, down from a peak of 69.8 percent in September 2022. The rupee appreciated by 10.8 percent in 2023 after sharply depreciating by 81.2 percent the year before. Due to the recovery of tourism receipts and remittances and increased inflows from development partners, usable official reserves increased to US$3.0 billion (equivalent to 2.1 months of imports) by end-2023, compared to US$500 million at end 2022. In June 2024, the International Monetary Fund successfully completed the second review of the Extended Fund Facility program. Despite progress, external debt servicing remains suspended while negotiations with external creditors continue. Household budgets remain stretched due to tax and price increases, as well as jobs and income losses. Real wages contracted by 16.9 and 22 percent between 2021 and 2024, in the private and public sectors, respectively. Food insecurity remains high, and poverty has nearly doubled to 23.4 percent in 2024. Sustained implementation of key structural reforms ¨C related to fiscal and debt management, the financial sector, social assistance, state-owned enterprises, and trade and investment ¨C will determine the prospects for medium-term growth and poverty reduction.

Last Updated: Oct 10, 2024

ľ¹ÏÓ°Ôº Group and Sri Lanka

ľ¹ÏÓ°Ôº Group has been a trusted development partner for Sri Lanka for over seven decades. Throughout the 70-year partnership, Bank Group¡¯s financing, analytical work, and advisory services have contributed to Sri Lanka¡¯s developmental roadmap, balancing opportunistic engagements with a long-term focus on fiscal sustainability, competitiveness, and the country¡¯s transition to a green, resilient, and inclusive recovery.

As of June 2024, the World Bank has approved US$2.31 billion in lending to support 14 IDA and IBRD projects including one multi-Donor Trust funded project. Approx. 52 percent of these commitments are dedicated for sustainable development and infrastructure (urban, climate resilience, agriculture, , transport, and water); 20 percent for human development (education, health, and social protection); and 28 percent for Equitable Growth, Finance and Institutions ( (Macroeconomics, Trade and Investment, Finance, Competitiveness and Innovation and Governance). In addition, the total amount of active trust fund resources amounts to US$64.82 million and consists of 27 active grants.

Country Strategy

ľ¹ÏÓ°Ôº Group¡¯s engagement in Sri Lanka is guided by its Country Partnership Framework (CPF) for Sri Lanka based on the country¡¯s medium and long-term development priorities. These priorities are identified through the Bank¡¯s Systematic Country Diagnostics (SCD) and analytics, consultations with stakeholders, and the Bank's comparative advantage.

WBG Country Partnership Framework (FY2024 to FY2027) was approved on June 28, 2023. The CPF will focus on economic stabilization, structural reforms, and protection of the poor and vulnerable in the short term, in pursuit of green, resilient, and inclusive development in the longer term. Due to the prevailing uncertainty, the CPF¡¯s two-phased approach will offer flexibility to adapt depending on the country¡¯s macro-economic situation and progress of reforms. To improve the focus of the program, the CPF has been narrowed to a set of five objectives contributing to two aspirational high-level outcomes (HLOs), which will guide WBG¡¯s engagements. The proposed HLOs are (i) Economic Stabilization and Private Sector Job Creation; and (ii) Protected and Enhanced Human and Natural Capital. Enhancing Resilience is a cross-cutting theme. Through the CPF, the WBG will strive to help Sri Lanka build back better and embark on a post-crisis growth path, with an eye on the long-term.

The design and priorities of the CPF are guided by the most recent SCD Update (2021), dialogue with stakeholders, and lessons from past engagement. ľ¹ÏÓ°Ôº, IFC, and MIGA will continue to collaborate closely in implementing major shifts to address the country¡¯s needs.

Sri Lanka graduated from  (IDA), the Bank Group¡¯s soft lending arm, in FY2017, lending from the International Bank for Reconstruction and Development (IBRD) which  accounted for an increasing share of World Bank commitments to the country. Considering the dire economic crisis in Sri Lanka in 2022, the World Bank worked closely with the government to explore the most viable financing arrangement within the World Bank¡¯s mandate to provide optimal level of support for the Sri Lankan people. Effective December 5, 2022, Sri Lanka has been reclassified as an IDA Gap country ¨C an IDA-only borrower with a GNI per capita above IDA¡¯s operational cut-off ($1,255 in FY23) for more than two consecutive years but lacking IBRD creditworthiness.  As an IDA Gap country, Sri Lanka will have access to IDA concessional resources on blend terms.

Last Updated: Jun 30, 2024

ľ¹ÏÓ°Ôº Group supports Sri Lanka¡¯s efforts to meet its development goals. Highlights include:

Education

ľ¹ÏÓ°Ôº is helping the development of human capital across all levels of education and training. The  is supporting children from disadvantaged households to access early childhood development and foundational learning opportunities. project, seeks to promote learning outcomes in English and Mathematics, develop the socio-emotional skills of students, and enhance teacher performance.  is helping increase enrollment in priority disciplines for economic development, improve the labor market of degree programs, and promote research and development and innovations for economic growth. Support from the Bank¡¯s existing education projects is currently being finalized to provide school meals and tuition waivers for preschool children from vulnerable households as a response to Sri Lanka¡¯s economic crisis.

Key Results:

• About 1.5 million children, half of whom are girls, have benefitted directly from the ECD Project, along with teachers, parents, community members, and government officials.
• About 1.3 million school children, half of whom are girls, have directly benefitted from the GEM project direct interventions to enhance learning.
• Approximately 70,000 university students have benefited from direct interventions supported by the AHEAD project to enhance learning. Around 60 percent of these students are female.

Link to Results Brief

Health

The Bank¡¯s US$200 million commitment in  supports the increased utilization and quality of primary healthcare services, with an emphasis on the detection and management of Non-Communicable Diseases in high-risk population groups. The  (ERHSP) has been supporting the government¡¯s efforts to respond to the COVID-19 pandemic and the economic crisis. The project mainly focuses on strengthening the capacity of national and sub-national institutions to address immediate needs and equip them to handle future public health emergencies, and social measures through the provision of scaled-up cash and in-kind transfers for the elderly, persons with disabilities and patients with chronic kidney disease from low-income households in response to COVID-19. An additional financing of $267.7 million, were approved in 2021 to provide scaled-up social protection measures to vulnerable communities, and to support vaccine procurement and deployment, including the purchase of Pfizer vaccines to achieve the planned coverage in Sri Lanka.

A further US$21.6 million has been disbursed to the Ministry of Health as a response to Sri Lanka¡¯s economic crisis to support the purchase of essential medicines, medical supplies, and nutritional supplements urgently needed to strengthen health resources.

Key Results:

• US$21.6 million medicines and medical supplies distributed to all public hospitals at no cost, based on need, estimations, and disease patterns to ensure sufficient supplies to combat the COVID-19 pandemic and other life-threatening diseases during the economic crisis.
• As of January 2022, the Primary Healthcare System Strengthening project had strengthened 139 Primary Medical Care Institutions (PMCIs) across the country improving the accessibility and quality of services.
• In recent years, substantial analytical work has informed government policies. This includes an assessment of the system for financing health care and the impact COVID-19 has had on health financing, human capital development, and an assessment on the pandemic preparedness of the health system.
• The project has supported the national non-communicable diseases program to digitize the information system at healthy lifestyle centers in the country. 

Link to Results Brief

Social Protection

ľ¹ÏÓ°Ôº is playing a pivotal role in the reform of Sri Lanka¡¯s social safety net through the  The project is developing an Integrated Welfare Management System (IWMS), a central online portal that will serve as a ¡°one-stop shop¡± for Sri Lanka¡¯s welfare programs. The new IWMS will generate information that can be used to better identify and deliver the support for households, reduce overlaps, and eliminate leakages in welfare programs. The Project has also supported drafting the National Social Protection Strategy and the Graduation Strategy.

Further, in the backdrop of Sri Lanka¡¯s economic crisis the World Bank is supporting Government to ensure that the poorest and most vulnerable people receive adequate support. Under the Bank¡¯s Contingent Emergency Response Component (CERC) US$145 million has been provided to increase the real income of the poor and vulnerable households heavily impacted by the economic crisis.

Key Results:

• Over 3.1 million beneficiaries of country¡¯s main social assistance cash transfer programs (Samurdhi, Chronic Kidney Disease patients¡¯ allowance, Elderly allowance, and Disability allowance) provided cash transfers for three months (May-July) to mitigate the impacts of the economic crisis.
• Development of an active Social Registry Information System, populated with approximately 2.5 million households. The data is currently being updated.

Agriculture

Around 80 percent of agricultural land is under smallholder production, with around 1.65 million smallholder farmers operating on less than 2 hectares each with limited opportunities to diversify into higher-value products. ľ¹ÏÓ°Ôº program responds to these challenges by addressing long-standing issues around productivity, private investment, value chains, policy reform, ensuring food security and building climate resilience. A core principle of the program is private sector-led smallholder agricultural transformation, supporting public institutions to create the necessary conditions, stimulating private finance, and enhancing sustainability of solutions. 

 is connecting smallholder farmers to markets through the introduction of modern technologies and business models that strengthen value chain linkages. With additional finance from the European Union, ASPM is scaling-up its work with farmer clusters in five new districts. These investments are generating increased farmer incomes, new jobs, and export revenue that are important for crisis response in the short-run and for long-term economic recovery.

 is introducing new approaches to the rehabilitation and management of traditional irrigation tanks and tank cascades including farm-level improvements that raise smallholder productivity, market participation, and climate resilience. To help mitigate the economic crisis, CSIAP is rapidly scaling up support for CSA practices such as nutrition sensitive homestead gardens.

Key Results:

• ASMP matching grants and farmer demonstrations have so far generated around US$141 million in new export earnings and at least US$8.6 million in foreign exchange savings from import substitution.
• From every rupee invested in ASMP matching grants, the project has mobilized an additional two rupees in private development finance that is helping Government to maximize finance for development.
• Through uptake of climate smart agriculture technologies, smallholder in CSIAP hotspot areas recorded a 13 percent improvement in income during COVID-19 lockdowns compared to a 19 percent drop for households not participating in the project.

Link to Results Brief

Climate change and Disaster Risk Management

The annual average fiscal loss associated with disasters in Sri Lanka, floods, droughts, landslides, storm surges, and cyclones, is estimated to be more than US$380 million. Climate change is further aggravating disaster risks, particularly flooding, rain triggered landslides, and coastal inundation. Significant modification of strategies, infrastructure, systems, and practices will be needed to withstand the effects of climate change and multiple natural and man-made hazards; COVID-19 pandemic, marine hazards and the ongoing economic crisis. ľ¹ÏÓ°Ôº program in Sri Lanka responds to these challenges by improving government capacity for early warning and disaster response, as well as planning and implementation of mitigation and adaptation measures.

The Sri Lanka Climate Change Action Plan in the South Asia Climate Roadmap 2021-2025 identifies four priority areas for advancing climate change action in Sri Lanka: i) Infrastructure Resilience; ii) Integrated Landscape Management for Agriculture, iii) Water Resources, and Forests; and iv) Clean Energy and Resilient Livelihoods.

The intends to support a more strategic approach to medium and long-term climate resilience challenges by improving warnings of high impact weather, hydrological hazards and develop multipurpose water infrastructure for climate resilience. This three-phase program focuses on enhancing the capacity of the Government to deliver improved weather and climate forecasting and early warning; and to reduce flood risks in the lower Kelani basin (between Hanwella and Kaduwela).

Key Results:

• The $152m IDA financed   (CRIP) benefitted 11.5 million people in 22 out of 25 districts in Sri Lanka. The project¡¯s irrigation rehabilitation efforts alone benefited 216,933 farming families served by 172,491 ha in 11 districts.
• CRIP improved resilience of communities and assets though rehabilitation and improvement of 38 bridges, 640 culverts and small bridges, 2,448 km of highways, and 154.95 km of provincial roads, including landslide and rockfall locations, rural roads and bridges which restored the transport connectivity of 1,799,000 people.
• Additionally, the project supported school safety interventions for 28,801 students and approximately 500 staff in 18 schools in the Central Province by mitigating landslide risks in targeted high-risk schools. 
• The multi-hazard early warning system of CRes MPA program under development, has been adapted to include warnings for biological threats similar to the COVID-19 Pandemic and marine hazards. The project will continue to adapt to enhance economic performance post-COVID-19 through enhanced meteorological services for building climate and economic resilience in Sri Lanka.

Water

Water touches every aspect of development and links with nearly every Sustainable Development Goal (SDG). Through three inter-related pillars of sustaining water resources, delivering services, and building resilience, the World Bank has played a key role in Sri Lanka¡¯s water security. The Project provides over US$200 million to increase access to piped water services and improved sanitation to underserved households urban, rural and plantation areas. The Project provides over US$65 million to improve the safety of dams and irrigation functionality and improve Sri Lanka¡¯s water management institutions.

Key Results:

• 560,000 poorest people in urban, rural and estate areas in seven districts directly benefited from access to improved water sources and sanitation under the Water Supply and Sanitation Improvement Project.
• 136,292 people received training on water supply, sanitation and hygiene (WASH).
• 41 schools, four public institutions and seven convenience centers provided with flush toilets and handwashing facilities, where such facilities were previously inadequate. These sanitation facilities support girls' school attendance through access to facilities which provide dignity, safety and comfort for menstrual hygiene management.
• Construction of 24,048 toilets for households with persons of special needs, female-headed households and vulnerable households in plantation estates through demand-driven grants. These households previously shared unsanitary facilities or did not use a toilet at all.
• 27 laboratories at water treatment plants and two mobile laboratories equipped with over 200 water quality testing kits and training to support Community-Based Organizations (CBOs). These mobile labs have been instrumental in addressing poor quality of drinking water and have facilitated water testing at over 1,200 CBO-managed water systems in rural Sri Lanka.  

Link to and Blog

Transport

ľ¹ÏÓ°Ôº is improving accessibility and connectivity to social and economic opportunities, especially for the poor and vulnerable in remote areas of the country by providing safe and resilient road and public transport infrastructure and creating employment opportunities. The Project for Sri Lanka aims to provide safe, efficient, and climate resilient connectivity and strengthen agricultural supply chains to empower project communities in selected districts of Sri Lanka. The  is supporting the Government of Sri Lanka¡¯s efforts to strengthen road asset management at the national level and improve provincial roads in all the nine provinces of the country. The project is supporting the operationalization of the Sri Lanka Road Asset Management System (SLRAMS) and will sustain the investments by strengthening institutional capacities for better asset management and integrated urban transport planning.

Key Results:

• Sri Lanka Road Asset Management System (SLRAMS) operationalized at the Road Development Authority (RDA) which will ensure the best use of scarce resources in road investments and reduce costs for planning, developing and maintaining roads.
• Around 200kms of provincial roads rehabilitated across the country improving assess and connectivity to social and economic opportunities.
• Over 30,000 people in the Western and Southern provinces alone are estimated to have benefited from the road improvements in FY21.
• Around 1000km of rural roads have been identified under the Inclusive Connectivity and Development Project, for rehabilitation to improve safety, resilience and connectivity.

Last Updated: Oct 06, 2022