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Sri Lanka Overview

Almost five years after the end of the three-decade civil conflict, Sri Lanka is now focusing on long-term strategic and structural development challenges as it strives to transition to an upper middle income country. Key challenges include ensuring that growth is inclusive, realigning public spending and policy with the needs of a middle income country, ensuring appropriate resource allocations for the various tiers of government, and enhancing the role of the private sector, including provision of appropriate incentives for increasing productivity and exports.

The Sri Lankan economy has seen robust annual growth at 6.4 percent over the course of 2003 to 2012, well above its regional peers.  Following the end of the civil conflict in May 2009, growth rose initially to 8 percent, largely reflecting a “peace dividend”, and underpinned by strong private consumption and investment. While growth was mostly private sector driven, public investment contributed through large infrastructure investment, including post war reconstruction efforts in the North and Eastern provinces. Growth was around 7 percent in 2013, driven by a rebound in the service sector which accounts for approximately 60 percent of GDP. With nearly 2 million Sri Lankans living abroad, overseas employment has contributed with foreign exchange and remittances in the order of 10 percent of GDP in 2013. Overall, unemployment at 4 percent is low, although youth unemployment (ages 15-24) at around 17.3 percent and low female labor force participation at 30 percent do pose a challenge. 

Economic prosperity has been broadly shared. Real per capita consumption of the bottom 40 percent grew between 2002 and 2009 by an average of 4.3 percent annually, compared to 2.6 percent of the top 60 percent. As a result, inequality in per capita consumption expenditure fell during this period, as reflected by a decline in the Gini coefficient from 0.41 to 0.36. Shared prosperity has been associated with dramatic declines in poverty. Among rural, urban and estate sectors, poverty reduction has been particularly dramatic in the estate sector, where it however remains highest at 11 percent.

Sri Lanka has met the Millennium Development Goal (MDG) target of halving extreme poverty and is on track to meet most of the other MDGs, outperforming other South Asian countries. Whereas South Asia as a whole is on track or an early achiever for nine of the 22 MDG indicators, Sri Lanka manages this for 15 indicators. Among the targets achieved early are those related to universal primary education and gender equality. Sri Lanka is expected to meet the goals of maternal health and HIV/AIDs. Progress on reaching the goals related to malnutrition and child mortality is, however, slower. Indicators are mixed on the environment: while Sri Lanka is an early achiever on indicators of protected area, ozone depleting substance consumption, safe drinking water and basic sanitation, it has stagnated or is slipping backwards on forest cover and CO2 emissions.

Sri Lanka experienced a big decline in poverty between 2002 and 2009 – from 23 percent to 9 percent of the population. Despite the very positive story of poverty reduction and shared prosperity, important development challenges remain in Sri Lanka.  Pockets of poverty continue to exist, specifically in the districts of Batticaloa (in the Eastern Province), Jaffna (in the Northern Province), Moneragala (in Uva Province) and in the estate sector.

An estimated 9 percent of Sri Lankans who are no longer classified as poor live within 20 percent of the poverty line and are, thus, vulnerable to shocks which could cause them to fall back into poverty.

Climate-related hazards pose a significant threat to economic and social development in Sri Lanka. Extreme variability of rainfall is the defining feature of the country’s climate. With climate projections indicating a rising rainfall trend in the wet zone and decreasing rainfall trend in the dry zone, the risks associated with water-related climate variability are expected to intensify. Less and less frequent precipitation in the already dry areas could increase the frequency and duration of droughts while higher and more variable rainfall is expected to increase the frequency and intensity of floods, affecting monsoon-dependent areas in particular. Climate change is expected to significantly impact agriculture, water resources, energy, environment and fisheries in Sri Lanka.

Last Updated: Mar 31, 2014

The Government strategic vision is laid out in the Mahinda Chintana document of 2010. The strategy describes three clear goals: doubling per capita income through sustained high investment; shifting the structure of the economy; and ensuring inclusive growth, improvement in living standards and social inclusion.

Sri Lanka is currently an IDA/IBRD blend country and the World Bank Country Partnership Strategic objectives are aligned to support the country achieve its development goals.

Facilitating sustained private and public investment:

The country aspires to achieve the goal of doubling of per capita income to $4,000 by 2016 from an estimated US$3,194 in 2013, but faces three particular macroeconomic challenges. Sustaining an 8 percent-plus annual growth to meet this goal will require:

(i)             fostering private sector development and greater private investment;

(ii)             increasing exports to generate jobs and managing the current account deficit; and

(iii)             further addressing fiscal imbalances and reversing the declining trend in revenue collection.

Such growth would need to be driven by a high investment rate of above 40 percent of GDP, which seems ambitious given the country’s 31 percent level in 2013.

Shifting the structure of the economy:

The second goal is shifting the structure of the economy to be more knowledge-based, globally integrated and competitive, environmentally friendly, internally integrated and increasingly urban.  Sri Lanka has a solid base for achieving this goal, with a well educated population and a wealth of environmental assets.  Challenges going forward include providing systems and incentives to give the labor force the types of skills needed for a knowledge economy, establishment of economic policies that encourage competitiveness, stronger efforts on environmental sustainability and adaptation to climate change, and modernizing infrastructure systems to integrate the disparate parts of the country and meet the needs of an increasingly urban population. 

Ensuring improvement in living standards and social inclusion:

Thanks to a long history of attention to access to basic services, Sri Lanka excels for its income level on most social indicators. Malnutrition, however, is an exception.  As Sri Lanka becomes a middle income country, new challenges are emerging (e.g. a rapidly aging population) and improving the quality of services will be a major issue going forward.  While increasing the quality of services, the Mahinda Chintana aims to ensure that benefits are equitably shared across all segments of the population and that social inclusion is a priority.

In addition, the World Bank supports the country’s emerging challenges and needs with a combination of technical support, knowledge products relevant to lending and the use of IDA/IBRD lending.

Strengthening Sri Lanka’s resilience to natural disasters and climate change has become a priority for the country’s development agenda. Climate-related hazards pose a significant threat to economic and social development in the country. The World Bank Group is well placed to assist Sri Lanka in increasing both its physical and fiscal resilience to climate and disaster risk, through adaptation enhancing investments and a Catastrophe Deferred Draw-Down Option (CAT-DDO) which is a contingent credit line that provides immediate liquidity to IBRD member countries in the aftermath of a natural disaster. A comprehensive program of support in this area is proposed in the upcoming progress report of the Country Partnership Strategy.

Last Updated: Mar 31, 2014

The World Bank has been supporting Sri Lanka’s development for close to six decades, having accompanied the country as it has grown to join the ranks of middle-income countries.

Progress in achieving the Country Partnership Strategy (CPS) objectives and advancing national development goals has generally been encouraging, as highlighted further below.

Facilitating sustained private and public investment:

Improvements in the investment climate are evolving, as evidenced by Sri Lanka’s absolute progress recorded in the Doing Business indicators.  Work is underway to enhance the quality of corporate financial reporting which is expected to help build investor confidence. Analytical work is also underway to deepen the understanding of the constraints to foreign direct investment.

Finance and Private Sector Development

Access to finance for small and medium enterprises (SMEs) and farmers has been expanded through World Bank Group support. A credit line and risk-sharing facility for long term funding for SMEs has been provided by the World Bank, along with technical assistance to support capacity building efforts in the banking sector and improve the SME lending culture in the country. This has been complemented by IFC’s support to strengthen the financial infrastructure, such as a secured transaction registry and e-payment systems, and through training client financial institutions to increase access for the underserved. IFC’s investment in financial intermediaries, including subordinated debt from IFC’s Asset Management Company for the Commercial Bank of Ceylon (US$75 million), a long-term loan for the National Development Bank (US$24 million), and equity and debt funding for institutions promoting financial inclusion, has primarily targeted support for SMEs.

A trust-funded Warehouse Receipts Financing project is also helping to catalyze collateralized lending by commercial banks to farmers, complemented by IFC’s agri-finance which includes the development of weather-index based insurance with Sanasa Insurance Company to protect crops from losses due to floods and droughts. In the first phase, Sanasa provided insurance to over 15,000 small farmers. Together, these initiatives are reducing banks’ risks and, thereby, farmer financing costs, and facilitating farmers’ access to finance and liquidity.

Accountability and transparency in the use of public funds have been enhanced. Audit methodology introduced under the Public Sector Capacity Building Project has already been applied to all public enterprises and is due to be rolled out to audits of externally funded projects, shifting the focus from compliance-based transactions to risk-based audits of financial statements.

Supporting the structural shifts in the economy:


Progress is being made to better align Sri Lanka’s skills base and education system with the needs of its labor market. With World Bank support, enrollment in Advanced Technological Institutes offering job-oriented programs has already increased. Steps are also being taken to enhance the quality of Sri Lanka’s higher education institutions.

Sri Lanka has made great strides toward becoming an electronically enabled society. Interaction among government agencies and between government and citizens has been significantly transformed. Citizens throughout the country are more technologically literate. Sri Lanka has made notable achievements in using ICT for development with the footprint of activities spanning the nation, from urban centers to rural areas. The legal framework has been enhanced, and capacity building has strengthened the local ICT industry in terms of training, certification, and business linkages. Standards have been developed to promote interoperability (the ability of making systems and organizations to work together) while local language content and local language enablers have been put in place to promote universal usage.

The longstanding E-Lanka Development project has contributed to these achievements supporting, amongst other things, the growth of ICT access in rural areas as well as ICT literacy.

·         Over 700 telecenters have been established, used by around 51,000 people per month on average.

·         Over 70,000 private sector employees in the knowledge industry and SMEs have been trained and certified under the project.

·         High profile e-applications for key government services, such as pensions, birth certificates, and revenue licenses, have been developed for citizens, and e-government applications being supported continue to grow.

·         Online service usage has increased by 7.2 million people.

·         Government-wide infrastructure, such as Lanka Gate, has also been established.

·         Building on the increasing technological awareness, IFC has partnered with a leading telecommunications company and two commercial banks to distribute an online SME Toolkit, accessed by over 100,000 unique visitors to date.

Urban Development

Urban development was a new area of engagement for the World Bank, supported by the first IBRD loan to Sri Lanka to regenerate Sri Lanka’s urban areas. The Metro Colombo Urban Development project is currently helping the Colombo Metropolitan Region to address obstacles to realizing its full economic potential, including inadequate infrastructure and services and significant vulnerability to flooding. A number of complementary studies and South-South exchanges have been launched in connection with the project. Studies have focused on solid-waste landfill, wetland management, private participation in waterfront development, and strategic city development. Further support is being extended to the Colombo Metropolitan Region through the Colombo Green Growth technical assistance program, which provides a holistic framework and incentive mechanism for participating municipalities and ministries to propose, plan, and implement environmentally and socially sustainable and resilient urban development projects and policies. GFDRR trust-funded analytical work has built Government capacity to analyze risk and develop risk mitigation strategies for disaster prone urban areas and provided the technical foundation for the new engagement in disaster risk financing. Complementing the IBRD loan and related studies, IFC is financing an innovative municipal waste-to-energy project for the Western Province.


Two World Bank projects are currently helping to address deferred maintenance and contribute to better quality and safer roads: the Road Sector Assistance Project and the Provincial Roads Project. The latter has been helping the Government to improve access to socioeconomic centers in the Eastern, Northern and Uva Provinces, through the sustainable management of improved road infrastructure and substantial reductions in travel time. The Road Sector Assistance Project has been instrumental in increasing the level of funding channeled to rehabilitation and maintenance of national roads, as institutionalized in a Road Maintenance Trust Fund. Funding for maintenance has increased by approximately 345 percent, contributing to a drop in the percentage of national roads in poor and bad condition from 52 to 35 percent. The project has also boosted the capacity of the construction industry, catalyzing behavioral reforms in maintenance practices and environmental safeguards. 

Improving living standards and social inclusion:


Sri Lanka’s achievements in education have been impressive over the past, including universal access and participation in primary education, high enrollment in secondary education, and gender parity in general education. The primary education net enrollment rate is 99 per cent, the primary education completion rate is over 95 per cent, and gender parity in the education system is high compared with many other South Asian countries with an equal proportion of girls and boys enrolled in primary education and a slightly higher number of girls than boys in secondary education. Accelerated progress and further reforms in education are now needed for the country to achieve its vision of becoming a knowledge society. Of central importance in this regard are enhancing the quality of education and improving learning outcomes, as well as the relevance and absorption capacity of higher education.

The Transforming the School Education System project, complemented by an AusAID trust fund, is promoting equitable access to secondary education, working to improve the quality of education and strengthen governance and delivery of education services. Several innovative reforms have been supported by the project, including the establishment of a system for conducting national assessments of learning outcomes, school-based management, and school-based teacher development.

The Higher Education for the Twenty-First Century Project is supporting Sri Lanka to initiate higher education reforms, strengthening the skills of academic staff for student-centered learning and increasing learning opportunities for students in courses relevant to the labor market, such as English and ICT skills. The project is also building research capacity at the universities through Ph.D. programs and competitive research grants. In addition, the project is focusing on higher quality education services, including through a Qualification Framework covering all stages of education and training and a Quality Assurance Framework covering public and private higher education institutions.


Sri Lanka has better health indicators than most developing countries and many lower-middle-income countries, yet malnutrition and non-communicable diseases (NCDs) still need to be addressed. Malnutrition affects 22 percent of children under the age of five, and with an aging population and a shift in the disease profile, NCDs account for 85 percent of the total burden of the disease. Until now, the public sector in Sri Lanka has delivered health care at low cost with high levels of productivity and efficiency. While the model of extensive public provision has served Sri Lanka well, the country now finds itself at a crossroads. Tackling child malnutrition through a multi-sector approach and treating and managing the NCDs for the elderly will require longer term and more expensive services relative to previous interventions.

The JSDF trust-funded Local Level Nutrition Interventions project is helping to address the nutritional problems of the resettled population in the Northern Province. Surveys already indicate improvements in nutrition outcomes, through supplementary feeding of targeted pregnant and lactating mothers, infants and young children and through community-based nutrition activities to reinforce the health and nutrition behavioral change.

The Second Health Sector Development project (approved in FY13) is designed to improve the performance standards of the public health system to better respond to the challenges of malnutrition and NCDs. Funds disbursed under the project are linked to the achievement of agreed results. Analytical and advisory work has been helping to advance the health agenda, with a review of the private health sector analyzing private financing and provision of health services and identifying options for the Government to further tap into the private sector’s potential in the health sector. A health public expenditure review is helping the Government to assess the efficiency and equity of health spending in the country.

Rural Development

In the area of rural development and livelihoods support, an existing portfolio of four projects, set out in the previous Country Assistance Strategy (FY09-FY12) are supporting the restoration of livelihoods and community development in the conflict-affected North and East. As these projects approach completion and the country focus shifts from post-conflict reconstruction to an emphasis on equitable access and social inclusion across the entire country, new projects under the current CPS are nationwide in design. They are expected, nonetheless, to benefit citizens in the lagging regions. Activities focused on conflict-affected areas have included the Emergency Northern Recovery project, the Community Livelihoods in Conflict Affected Areas project, the AusAID trust-funded North East Water and Sanitation project and the North East Local Services Improvement project, which will also benefit from additional AusAID financing.

These projects have supported over 2,000 villages, assisting beneficiaries through income generation activities, community infrastructure, rural roads, water supply, irrigation schemes, social services, access to finance, and skills development. The projects have also helped over 400,000 people displaced by the civil conflict in the North to return to their places of origin, far exceeding the target of 100,000. Over 270,000 households have seen their incomes increase by at least 30 percent, exceeding the target of 213,000. With World Bank support, local authorities in these areas are delivering services and local infrastructure to their citizenry in a more responsive and accountable manner. Budgets are increasingly being prepared in a participatory manner and expenditures and procurement decisions being publically disclosed. IFC has provided complementary assistance for rural development and inclusive growth, supporting farmers and micro small and medium enterprises (MSMEs) in particular. This includes an ongoing project to develop crop insurance in Sri Lanka, investments in the financial and retail sectors to provide farmers with agri-finance and linkage opportunities, and several projects with leading financial institutions to increase access to finance for smaller businesses.

Social Protection

The World Bank has also supported Government efforts to improve living standards and increase social inclusion. The trust-funded Supporting People with Disabilities project is making progress on advancing the economic integration of vulnerable groups, and a GPOBA-funded grant piloting approaches to sustainable affordable sanitation services to under-served low-income groups in the Colombo Metropolitan region has already provided connections to almost 300 households. Technical assistance has also been provided to the Ministry of Labor on its gender strategy, based on recent analytical work on women’s labor force participation. This has helped to shed light on why women, although well-educated compared to men, participate less in and are often paid less for employment. Work with youth organizations has also yielded results, through the establishment of an online platform for youth collaboration to support their voice and active involvement in development issues.

Last Updated: Mar 31, 2014


Sri Lanka: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments

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