World Bank: Sri Lanka’s Economic Recovery Strong but Incomplete, Structural Reforms Key

Sri Lanka’s economy is showing clear signs of stabilization after years of crisis, with growth projected at 4.6 percent in 2025, according to the latest World Bank Sri Lanka Development Update (SLDU) released today. However, the report — titled “Better Spending for All” — cautions that despite progress, the recovery remains fragile and uneven, with poverty still elevated and structural weaknesses continuing to constrain long-term growth.

The report highlights that while recent economic indicators are positive — including low inflation, improved fiscal discipline, and renewed investor confidence — the country’s economic output remains below 2018 levels, and many Sri Lankans have yet to feel the benefits of recovery in their daily lives.

“While Sri Lanka’s recent economic progress is encouraging, the recovery is uneven and incomplete,” said David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka. “To build a stronger, fairer economy that benefits all households, in a fiscally constrained environment, Sri Lanka needs the private sector to invest and create jobs — and ensure that every rupee of public money is well-spent.”

Growth Forecasts and Risks

The World Bank projects that Sri Lanka’s GDP will grow by 4.6 percent in 2025, supported by a modest rebound in industry and steady performance in services. Growth is expected to moderate to 3.5 percent in 2026, reflecting global economic uncertainty, fiscal tightening, and continued structural challenges.

Despite these gains, the report warns that risks remain high, including potential shocks from commodity prices, a slowdown in global demand, and domestic vulnerabilities linked to debt sustainability and weak household purchasing power.

Sri Lanka’s foreign reserves accumulation has slowed in recent months, and food prices remain high, disproportionately affecting low-income families. Poverty, though gradually declining, is still twice as high as in 2019, and an estimated 10 percent of the population lives just above the poverty line, leaving them vulnerable to economic shocks.

Uneven Recovery and Lingering Social Challenges

The World Bank’s analysis underscores that macroeconomic recovery has not yet translated into broad-based welfare improvements. Employment growth remains sluggish, particularly in rural and informal sectors, while malnutrition and food insecurity persist among children and vulnerable groups.

Although inflation has fallen to single digits, real wages remain depressed, and many households are still struggling to rebuild livelihoods lost during the financial crisis. The report also highlights that inequality has widened, with urban areas recovering faster than rural regions.

“Reducing poverty and inequality will require not just fiscal discipline but also inclusive growth strategies that expand job opportunities, improve productivity, and safeguard essential public services,” the report noted.

Strengthening Public Spending Efficiency

A major theme of the Better Spending for All report is the urgent need for fiscal reform and better-targeted public expenditure. With more than 80 percent of government spending currently allocated to public sector wages, social welfare programmes, and debt servicing, little remains for growth-oriented investments such as education, infrastructure, and healthcare.

The World Bank advises that, rather than attempting drastic spending cuts or expansions, Sri Lanka should focus on spending smarter — ensuring that existing funds are used more efficiently to generate greater economic and social impact.

“Public expenditure must be both efficient and equitable,” the report stated. “Maximizing the productivity of limited fiscal space is key to maintaining stability while supporting recovery.”

Key recommendations include:

• Public wage reforms: Rationalizing the wage structure, aligning salaries across government agencies, and introducing modern payroll management systems.

• Capital investment optimization: Prioritizing infrastructure projects near completion, strengthening project evaluation and monitoring, and increasing maintenance budgets for existing infrastructure.

• Better social spending targeting: Ensuring that welfare benefits reach those most in need through improved data collection and digital targeting systems.

• Fiscal transparency and accountability: Strengthening public financial management systems and ensuring citizen participation in budget processes.

Private Sector and Reform-Led Growth

The report emphasizes that private sector investment will be critical to sustaining growth in a constrained fiscal environment. The World Bank urges Sri Lanka to simplify regulations, reduce trade barriers, and modernize tax and labor laws to foster a more business-friendly climate.

Reforms in land administration, investment facilitation, and financial sector governance could also help unlock productivity and attract foreign investment. “The private sector must be at the center of Sri Lanka’s next growth phase,” the report notes, “especially in creating jobs for youth and women.”

The report further highlights the need for digital transformation and green economy initiatives, aligning with Sri Lanka’s commitment to achieve carbon neutrality by 2050. Encouraging investment in renewable energy, sustainable tourism, and technology-driven industries could help diversify the economy while advancing climate goals.

Regional Context: South Asia’s Growth Outlook

The Sri Lanka Development Update complements the World Bank’s South Asia Development Update (SADU), released concurrently under the theme “Jobs, AI, and Trade.” The regional report projects South Asia’s economic growth at 6.6 percent in 2025, one of the highest globally, but warns of a looming slowdown due to weaker global demand and trade disruptions.

The SADU highlights the potential of artificial intelligence (AI) and trade liberalization to drive employment and productivity across the region. For Sri Lanka, integrating into global value chains and leveraging AI for industrial and service sector modernization could unlock new sources of growth.

Looking Ahead

The World Bank’s analysis concludes that Sri Lanka’s path to sustainable recovery will depend on maintaining macroeconomic stability while accelerating structural reforms to enhance competitiveness and social resilience.

Key policy priorities include:

• Continuing fiscal and debt reforms to ensure stability;

• Promoting private investment and export diversification;

• Strengthening social protection systems to safeguard the vulnerable; and

• Building institutional capacity for better governance and policy implementation.

“Sri Lanka has made important progress in stabilizing its economy,” said Sislen. “But the next challenge is to translate that progress into inclusive, long-term growth that benefits every household.”

The report’s findings serve as both a recognition of the country’s recent achievements and a reminder that sustainable recovery requires persistence, reform, and resilience in the face of ongoing global uncertainty.