Overview

CONTEXT

Sri Lanka is a lower middle-income country with a total population of 21.0 million people and a per capita income of USD 3,924 in 2015. Following a 30 year civil war that ended in 2009, Sri Lanka’s economy has grown at an average 6.4 percent between 2010-2015, reflecting a peace dividend and a determined policy thrust towards reconstruction and growth. Sri Lanka’s economy transitioned from a previously predominantly rural-based agriculture economy towards a more urbanized economy driven by services. In 2015, the service sector accounted for 62.4 percent of Gross Domestic Product (GDP), followed by manufacturing (28.9 percent), and agriculture (8.7 percent).  The country ranked 73rd in Human Development Index in 2015 and has comfortably surpassed most of the MDG targets set for 2015.

Strong economic growth in the last decade has led to improved shared prosperity and an important decline in poverty. Extreme poverty remains low, as the  $1.90 (PPP 2011) poverty rate fell half a percentage point, from 2.4 to 1.9 percent between 2009/10 and 2012/13. The real per capita consumption of the bottom 40 percent increased 2.2 percent annually between 2006/07 and 2012/13, and improved living standards are reflected in rising asset ownership,  declining shares of food consumption, and a rise in reported household per capita income among the poor. However, moderate poverty remains a challenge. In 2012/13, nearly 15 percent of the population lived on less than $3.10 per day. Pockets of poverty persist in the North, East, Estate Sector and Moneragala district where equality of opportunities in terms of access to services and linkages to the labor market are weaker.

As Sri Lanka aspires to become a higher middle-income country, it will need to adjust its development model. Growth in the last five years is in substantial part due to a “peace dividend”. Going forward, economic growth will likely require continued structural changes towards greater diversification and productivity increases and a reduction in the role of agricultural employment from its present share of a third of the population. Although Sri Lanka has excelled in overcoming human development challenges typical to a low-income country, its service delivery systems in education, health and other areas must now adjust to face new and changing demands typical of a middle income country. To accommodate these increasing demands, the government needs to increase fiscal revenues in the medium term, which at present is low vis-à-vis its own historical standards as well as international standards. Imperatives to improve social safety nets will increase owing to an aging population that has passed its demographic peak. Finally, increasing affluence and information will lead to higher expectations for the state to perform in order to facilitate growth, provide a higher level of services, and demonstrate increasing responsiveness to a more demanding citizenry.

Taking cognizance of the changing development priorities, the government policy statement presented in November 2015 envisioned promoting a globally competitive, export-led economy with an emphasis on inclusion. It identified generating one million job opportunities, enhancing income levels, development of rural economies and creating a wide and strong middle class as key policy priorities. The policy statement proposed reducing the fiscal deficit to 3.5 percent of GDP by 2020. Also, it discussed far reaching reforms with a view to improve performance of the SOE sector and enhance trade and FDI. 

Last Updated: Oct 04, 2016

STRATEGY

The overarching aim of the World Bank Group’s Country Partnership Framework (CPF), for FY17-20 is to support Sri Lanka’s transition to a middle-income country. The  a strategic plan that defines the World Bank Group’s engagement with its partner countries, outlines objectives to support the government in achieving its articulated vision  and incorporates feedback from stakeholders from around the country, including government, the private sector, academics and civil society organizations.

The CPF sets out a program of knowledge work, technical assistance and investments to support the Government of Sri Lanka in implementing its reforms to eradicate poverty and achieving shared prosperity. The Bank’s strategy can be grouped into the following 3 strategic priorities:

·         Improving Macro-Fiscal Stability and Competitiveness - To help the country transition to a more robust, competitive, and globally integrated economy and create better-paying private-sector jobs for the bottom 40 percent of the population.

·         Promoting Inclusion and Opportunities for All - To support the government’s objective to better distribute the benefits of the country’s growth to all citizens, particularly the most vulnerable and marginalized. Remediating the concentration of poverty in urban areas and increasing female labor force participation through education are also priorities of the inclusion agenda.

·         Boosting Green Growth, Improving Environmental Management, and Mitigating Natural Disasters and the Effect of Climate Change - To help improve the country’s capacity to mitigate the environmental impacts of economic transformation and better manage Sri Lanka’s resources natural resources.

The IDA-IBRD portfolio consists of 15 projects with a total net commitment of nearly USD 1.9 billion. Urban operations account for 21 percent of the overall portfolio, followed by water (16.5 percent) and resilience to climate and disaster risk (13 percent).  The education (13 percent) and health (10 percent) sectors also continue to be core sectors for Bank support. The World Bank Group’s program of support to Sri Lanka continues to benefit from close coordination and collaboration with development partners.

Last Updated: Oct 04, 2016

The World Bank Group 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 higher middle-income countries.

The IDA-IBRD portfolio consists of 15 projects with a total net commitment of nearly USD 1.9 billion. Urban operations account for 21 percent of the overall portfolio, followed by water (16.5 percent) and resilience to climate and disaster risk (13 percent).  The education (13 percent) and health (10 percent) sectors also continue to be core sectors for Bank support. The World Bank Group’s program of support to Sri Lanka continues to benefit from close coordination and collaboration with development partners.

Sri Lanka is expected to graduate from IDA financing at the end of the IDA17 cycle. As part of the ongoing IDA18 replenishment discussions to conclude in December 2016, consideration is being given to possible IDA transitional support for graduating countries like Sri Lanka.

Growth Performance and Prospects

Sri Lanka’s macroeconomic performance deteriorated in 2015. Net outflows from the government securities market and sluggish FDI inflows presented a challenging external landscape despite low oil prices and increased tourism.

Growth in the last five years is in substantial part due to a “peace dividend” that included significant reconstruction efforts since the end of the 25-year civil war in 2009. Going forward, economic growth will likely require continued structural changes in the economy towards greater diversification and productivity increases and a reduction in the role of agricultural employment from its present share of a third of the population

Sri Lanka’s growth held steady at 4.8 percent in 2016, boosted by the construction and services sectors and resumption of the Colombo Port City real estate project. Weak exports, flooding, and a deceleration in private investment weighed on activity.

Sri Lanka became an IFC member country in 1956. Since then, IFC has invested over $1 billion in the country. In fiscal years 2014-2016, IFC made cumulative long-term finance investment commitments totaling $273 million. As of June 30, 2016, IFC’s committed portfolio stood at over $228 million.

Poverty and Shared Prosperity

Sri Lanka’s headcount poverty rate has declined dramatically, falling from 23 percent in 2002 to 7 percent in 2012/13.3 This impressive performance has largely been driven by an increase in labor income, which was supported by four beneficial trends: a gradual structural transformation out of agricultural employment; increased urbanization and agglomeration associated with the growth of key urban centers; a rise in international prices for food and tea; and strong domestic aggregate demand.

Despite the very positive story of poverty reduction and shared prosperity, important development challenges remain in Sri Lanka. Pockets of severe poverty continue to exist, specifically in the districts of Mullaitivu, Mannar (both in the Northern Province), and Moneragala (in Uva Province), where headcount poverty rates exceed 20%. The World Bank Group is supporting government efforts to improve living standards and increase social inclusion and equitable access to public services in identified areas.

To help the country improve its overall competitiveness, the World Bank is providing development policy financing for Competitiveness, Transparency, and Fiscal Sustainability. In July 2016, the Bank approved financing support to Sri Lanka Country Snapshot 5 help the Government’s reform agenda in providing a more stable macroeconomic and policy environment that is critical to strengthening the country’s competitiveness.

Fiscal Sector

The World Bank has been helping the government assess the composition of its public expenditures as it looks to align its spending with the needs of a middle-income country and improve the efficiency by which it uses public resources for service delivery, particularly in the education and health sectors. A Public Expenditure Review completed in June 2014 provides an analytical basis for the government to use public resources more effectively and in ways that promote economic growth and reduce poverty. World Bank analytic and advisory activities have also been outlining alternative financing arrangements for public infrastructure and services (including public-private partnerships) and the pros and cons of the various options. The experiences of other middle-income countries have informed this exercise.

The World Bank has also been responding to the government’s request for support to enhance the country’s public financial management systems. Initiatives the World Bank has supported include:

  • Strengthening the Auditors General’s Office by introducing modern audit practices in financial, performance and investigative audit as well as institutional changes to sustain these initiatives;
  • Introducing public sector accounting standards aligned with international standards to public sector institutions; and
  • Preliminary work to professionalize public sector accountants.

Further to this, the World Bank carried out a review of the country’s public financial management systems using the Public Expenditure and Financial Accountability methodology, helping to identify strategic areas for improvement. Among the areas identified for strengthening were: monitoring and reduction of payment arrears; oversight of aggregate fiscal risk; public access to key fiscal information; taxpayer registration and tax collections; internal auditing; procurement procedures and predictability in the availability of funds. An ongoing Institutional Development Fund grant to strengthen the Institute of Chartered Accountants is providing an important opportunity to build capacity in the private sector with a view to improving private sector transparency and accountability.

Additional World Bank assistance, to be provided on a “just-in-time” basis, will support government efforts to further strengthen public financial management and corporate financial reporting.

Financial Sector

Limited in both scope and depth, the country’s financial sector is neither a major source of funding nor a significant vehicle for long-term investment and savings. State Owned Financial Institutions (SOFIs) have a major influence on the financial sector. SOFIs dominate the banking and insurance sectors. However, government ownership has not translated into enhanced financial inclusion, access to finance for SMEs or financial innovation.

Access to finance is a major constraint in both urban and rural areas for corporate as well as small- and medium-sized enterprises (SMEs). SMEs in Sri Lanka were severely affected by the credit crunch arising from the global financial crisis and the country’s protracted civil conflict. Despite declining interest rates and improved liquidity in the financial sector since 2010, access to finance for SMEs continues to remain significantly constrained.

Microfinance institutions have played a major role in broadening financial inclusion but the sector has major shortcomings. It is estimated that there are more than one thousand microfinance institutions in the country. Most of them remain unsupervised and thus, while they are deemed to serve an estimated 10 million people, their adequacy and sustainability and the fairness of their practices may not be at par with good international practices.

The World Bank Group has been actively supporting efforts to increase access to finance for SMEs and for the poor. The World Bank carried out a development Financial Sector Assessment Program (FSAP) at the request of the government, offering recommendations to address identified constraints. The FSAP provided a number of recommendations to enhance the ability of the financial sector to respond to the needs of enterprises and the population at large. At the request of the Government the WBG collaborates with financial authorities on implementing the FSAP’s recommendations through a program that ultimately aims at enhancing financial inclusion and financial sector efficiency.

Education

Sri Lanka’s achievements in education have been impressive, 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%, the primary education completion rate is over 95 percent, 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.

The World Bank is helping to identify and address the particular challenges to skills development in Sri Lanka. The work informed a Skills Development Project, approved in May 2014, which aims to expand the supply of skilled and employable workers by increasing access to quality and labor market–relevant training programs. World Bank support for the education sector is also being extended through the Transforming the School Education System project. This project promotes equitable access to secondary education, working to improve the quality of education and strengthen governance and delivery of education services.

Health

The World Bank has been supporting Sri Lanka’s health sector through analytical work and credits from the International Development Association since the late 1980s.

Sri Lanka’s health system has a long track record of strong performance. For at least 50 years it has achieved much better outcomes in maternal and child health and infectious disease control than would have been predicted by its income level. The remarkable success in reducing maternal and infant mortality to very low levels (30 per 100,000 and 8 per 1,000 live births, respectively) is partially the result of effective and integrated maternal and child health services for the last half century.

A national health sector program is also currently being supported under a $200-million Second Health Sector Development Project (approved in FY2013), designed to improve the standards of performance of the public health system and enable it to better respond to the challenges of malnutrition and NCDs. The project also is supporting innovation, results monitoring, and capacity building in the health sector.

Rural-Urban Transition

Sri Lanka has been one of the countries in South Asia that has experienced rapid urbanization. Sri Lanka is in the midst of a structural transformation away from agriculture. Agriculture accounted for approximately 10 percent of GDP in 2014, down from 19.9 percent of GDP in 2000. Industry and services sectors have been growing, accounting for 32.5 percent and 57.5 percent of GDP, respectively.

Sri Lanka’s economic growth has been primarily driven by the Colombo Metropolitan Region (CMR), which currently generates 45 percent of the country’s GDP and is home to 28 percent of its population. Sustainable growth and long-term prosperity are expected to result from a more balanced distribution of economic opportunity that in addition to Colombo also includes other major urban centers such as Kandy, Galle, and Jaffna. The World Bank is supporting Sri Lanka implement its urbanization and rural-urban integration agenda. The Metro Colombo Urban Development Project, approved in 2013, is assisting the Colombo Metropolitan Region to upgrade basic urban infrastructure and to implement an innovative integrated urban flood control and urban wetland management approach. The Strategic Cities Development Project and the Additional Financing to the project (approved May 2016) are expanding the approach to urban infrastructure upgrading to Kandy, Galle and Jaffna—three strategic city regions in the center, south, and north, and supporting investments in urban water supply, sewage and drainage systems, cultural heritage rehabilitation, urban transport and traffic management and others areas.

The World Bank Group has supported the government’s transportation efforts through a Transport Connectivity project. Under this project approved by the Board in May 2016, an innovative performance-contract management approach to road rehabilitation and maintenance is being rolled out. A new Agriculture Sector Modernization Project was approved by the Board in June 2016, seeks to assist the government in: strengthening the country’s national agriculture research and development and extension system and policy; improving productivity and climate resilience in irrigated agriculture; and piloting value chain models to promote diversification and increase competitiveness and rural income.

The World Bank is also undertaking a new Water Supply and Sanitation Project, approved in 2015. The government places great importance on the development of the water and sanitation sector.

Environment, Climate Change and Disaster Risk Management

While Sri Lanka has invested significantly in emergency preparedness and response capacity since the devastating tsunami in 2004, a more comprehensive approach to disaster risk management is needed. In recognition of the social and economic effects of climate-related hazards, the government has recently made it a priority to strengthen the country’s resilience to natural disasters and climate change. Responding to the government’s expression of interest for assistance in this connection, a comprehensive program of support involving adaptation enhancing investments and a Catastrophe Deferred Draw-Down Option (CAT-DDO) was prepared and approved in FY14. To increase resilience, physical investments will be financed to address short term infrastructure weaknesses, coupled with a contingent credit line to safeguard against immediate fiscal impacts of a disaster.

To increase resilience, physical investments will be financed to address short-term infrastructure weaknesses, coupled with a contingent credit line to safeguard against immediate fiscal impacts of a disaster. The program is comprised of:

(i) the Climate Resilience Improvement Project (CRIP) aimed at the immediate reduction of physical risk and improving understanding of disaster risks to direct future investment;

(ii) a Development Policy Loan (DPL) with CAT-DDO to provide the government with liquidity in the immediate aftermath of a disaster;

(iii) support for the development of a long-term Disaster Risk Financing strategy to strengthen fiscal resilience to events; and

(iv) a Comprehensive Disaster Risk Mitigation Project (planned for FY2017) that would, among other things, implement the recommendations from the analytical work of the CRIP

A number of IFC’s ongoing investment and advisory projects are helping to build climate resilience, including the weather-index agri-insurance project, the sustainable energy finance advisory project, and investment projects fostering renewable energy.

Last Updated: Feb 07, 2017


LENDING

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

*Amounts include IBRD and IDA commitments