Sri Lanka is focusing on long-term strategic and structural development challenges as it strives to transition to an upper middle-income country. Key challenges include boosting investment, including in human capital, realigning public spending and policy with the needs of a middle-income country, enhancing the role of the private sector, including the provision of an appropriate environment for increasing productivity and exports, and ensuring that growth is inclusive.

Economic growth in Sri Lanka has been among the fastest in South Asia in recent years. Growth averaged 6.3 percent between 2002 and 2013, with Gross Domestic Product (GDP) per capita rising from US$859 in 2000 to US$3,256 in 2013.  Preliminary indications are that GDP further increased by 7.8 percent in 2014.[1]

For most of the past decade, growth has been pro-poor, with consumption per capita of the bottom 40 percent growing at 3.3 percent a year, compared to 2.8 percent for the total population. Other human development indicators are also impressive by regional and lower middle income standards. Sri Lanka has surpassed most of the Millennium Development Goal (MDG) targets set for 2015, outperforming nearby country comparators on most MDGs.

Notwithstanding declining poverty, 13 districts comprising 36 percent of the total population remain below the national poverty headcount. In four conflict-affected border districts, poverty rates are at or above 20 percent. While the national unemployment level is low at 4.4 percent, 14 districts report unemployment rates higher than the national average. According to Department of Census and Statistics survey data of 2011, 76 percent of total unemployed are below 29 years of age.

Growth during the past five years has been in form of a peace dividend resulting from reconstruction efforts and increased consumption.  Sustaining broad-based economic growth into the future will require determined structural reforms that stimulate productivity growth and economic diversification across sectors, driven by technology and innovation, and new market development domestically and internationally.  As part of Sri Lanka’s structural economic transformation, employment in primary agriculture will likely continue to decline from its present share of 30 percent of the labor force as other sectors of higher productivity absorb rural surplus labor. At the same, along with productivity increases, agriculture is likely to become more capital intensive and technology-driven as labor shortages emerge. 

Improving the quality of human capital through effective education and skills development is central to Sri Lanka’s economic growth and competitiveness. Continued growth will also depend largely on fostering private sector development and private investment, especially increased foreign direct investment (FDI). Sri Lanka’s economy depends on FDI to bring in innovation. The import of FDI is further underscored by the country’s limited domestic savings rate, brought about largely by its demographic trends. Contrary to most economies in South Asia, Sri Lanka does not have a demographic dividend: by 2036, more than 22 percent of the population will be over 60, and there will be 61 dependents per 100 adults. Increases in the labor force, employment rates and productivity will be central to growth. Against the background of an aging society, efficient and well-targeted social assistance will also become more important.

Against this backdrop, Sri Lanka is in the midst of fundamental political change, following the election of Maithripala Sirisena as President of the country in January 2015. President Sirisena and his Government have committed to a rapid 100 day program focused largely on restructuring government after which Parliament is to be dissolved and general elections held. The winning coalition in these elections would be expected to form a long-term government with a corresponding economic policy direction.  

[1] Central Bank of Sri Lanka, 2015

Last Updated: Jun 23, 2015


The overarching aim of the World Bank Group’s Country Partnership Strategy (CPS) for Sri Lanka for FY13-16 is to support Sri Lanka’s transition to a middle-income country. Key elements of this transition include boosting investment, including in human capital, realigning public spending and policy with the needs of a middle-income country, enhancing the role of the private sector, including the provision of an appropriate environment for increasing productivity and exports, and ensuring inclusive growth. At the time the CPS was presented to the Board of Executive Directors in May, 2012, it set out to contribute to achieving these goals through three areas of engagement:  (i) facilitating sustained private and public investment; (ii) supporting structural shifts in the economy; and (iii) improving living standards and social inclusion

A CPS Progress Report prepared in FY14 provided an opportunity to review the country program and strategy together with the government, taking stock both of progress to date and the government’s evolving development needs and agenda. While the strategic objectives of the CPS were determined to remain relevant through FY16, the Progress Report proposed a refocusing of some activities as well as the addition of a fourth strategic area of engagement, namely increasing resilience to disasters and climate change, deemed central to Sri Lanka’s current development agenda and poverty reduction efforts. As the country shifts from reconstruction to addressing the challenges of development on a middle income trajectory, greater emphasis has been placed on facilitating and creating the enabling environment for increased foreign and domestic investment. At the same time, continued pockets of poverty highlight the need for renewed efforts to target development to the poor.

For more information read Sri Lanka Country Partnership Strategy Progress Report

Last Updated: Apr 16, 2015

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 middle-income countries.

International Development Association (IDA) commitments to date amount to $4.86 billion and $525.7 million in IBRD lending have been provided. Sri Lanka re-emerged as a blend IDA-IBRD country in FY12, regaining access to IBRD resources after a 26-year hiatus, and it will likely become an IBRD-only country at the end of the IDA17 cycle which concludes in FY17. The current active World Bank portfolio in Sri Lanka comprises 16 projects (13 IDA operations, two IBRD operations and one recipient-executed trust fund of over $5 million) with a total net commitment value of $1.9 billion.

As of August 2014, IFC’s total committed investment portfolio stood at $542 million, including $250 million mobilized from partner institutions. The committed portfolio has quadrupled in the last three years. The financial sector accounts for around half of IFC's own portfolio while manufacturing and services represent over 40 percent. IFC’s advisory program currently operates 11 portfolio projects with a combined fund value of $9 million and has two pipeline projects.

Growth Performance and Prospects

Sri Lanka’s growth and competitiveness are constrained by a skills gap that has emerged with the changing labor market conditions. The World Bank is helping to identify and address the particular challenges to skills development in Sri Lanka. Beyond assisting the country’s education systems, World Bank supported analytical work has helped Sri Lanka’s education authorities in identifying critical policy issues related to the demand and supply of skills in a changing labor market environment, with a view to making the workforce development system more responsive to the labor market. 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. Several innovative reforms are being supported under the project. The IDA credit of $101.4 million for the project will be complemented by a $100 million loan from the Asian Development Bank (through parallel financing) which is financing the implementation of the government’s Skills Sector Development Program for 2014-2020.

Poverty and Shared Prosperity

Sri Lanka’s headcount poverty rate has declined dramatically; falling from 23 percent in 2002 to seven percent in 2012.This impressive performance has largely been driven by three factors: a rising return to farm employment resulting from the increase in food prices; productivity growth among wage workers, particularly in secondary cities outside of Colombo; and declines in the dependency ratio. Growth has been pro-poor. Real per capita consumption of the bottom 40 percent grew between 2006 and 2009 by an average of 3 percent annually, while shrinking 0.4 percent overall. 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.

The World Bank is supporting government efforts to improve living standards and increase social inclusion and equitable access to public services. Activities focused on conflict-affected areas have included the Community Livelihoods in Conflict Affected Areas project, the Emergency Northern Recovery project, and the North and East Pilot Water, Sanitation and Hygiene project for post conflict resettlements.

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. A knowledge exchange was arranged in 2012 providing senior Sri Lankan policymakers the opportunity to exchange views and learn from the experiences of South Africa, Mauritius, Cambodia, South Korea and New Zealand.

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.

A Report on Standards and Codes on Accounting and Auditing is also underway, an update to one undertaken in 2004, to inform an action plan to be prepared by the government to further enhance the quality of corporate financial reporting. The government is undertaking a number of reform initiatives, including in the areas of revenue administration and treasury management. The government has also been working to reform and develop its public procurement system. Public procurement expenditure in Sri Lanka is substantial, equivalent to $4 billion or over 21 percent of total government spending. Most public procurement is financed through domestic funds (68 percent), followed thereafter by multilateral funds (12 percent). A joint review of the country’s public procurement system by the government, World Bank and Asian Development Bank (ADB) has identified certain areas for improvements. The government has recently formed a committee that is interacting with the World Bank to further develop its public procurement system.

Financial Sector

The World Bank has been actively supporting efforts to increase access to finance for the country’s SMEs and for the poor. The World Bank is currently supporting a warehouse receipts financing pilot project to help catalyze collateralized lending by commercial banks to farmers.

Construction of the first warehouse, in the village of Upuldeniya in Anuradhapura District is underway. The construction and installation of machinery will be completed by March 2015. The second warehouse in Ampara is expected to be completed by May 2015.The development of warehouse receipts as collateral is designed to reduce bank risk and farmer financing costs, increasing farmers’ access to finance and liquidity to invest in productivity enhancing inputs and equipment.

The World Bank has provided long-term funding for SMEs as well as technical assistance to support capacity building efforts in the banking sector to improve the SME lending culture in the country.

The following have been achieved as of June 31, 2014:

  • A total of 552 active loans (against a target of 560);
  • Cumulative disbursements of sub loans amounting to $24.3 million;
  • More than 8,680 SMEs and 6,834 commercial bank staff have been trained;
  • An estimated 4,546 potential new employment opportunities created.


The World Bank is providing assistance in the area of skills development to help orient the training sector to the emerging needs of a middle income country (see above under Growth Performance and Prospects).

World Bank support for the education sector is also being extended through the Transforming the School Education System project. The project 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 are being supported, including the establishment of a system for conducting national assessments of learning outcomes, and promoting school-based management as well as school-based teacher development. Below are some key achievements to date:

  • The survival rate of students through grade 11 is 84 percent (87 percent for girls and 81 percent for boys)
  • A national assessment of learning outcomes of children at grade 8 was completed in 2012.
  • School-based management has been introduced in 44 percent of education zones during 2012-2013. About 2,400,000 students (55 percent of all students) are enrolled in schools in these zones.
  • School-based teacher development programs have been conducted in 44 percent of education zones during 2012-2013. About 140,000 teachers (63 percent of all teachers) have benefited from these programs.

The Higher Education for the Twenty-First Century project is also active, working to enhance the capacity of Sri Lanka’s higher education system, institutions, and human resources to deliver quality higher education services. The project is also building research capacity at the universities through Ph.D. programs and competitive research grants. Below are results to date:

  • A Sri Lanka Qualification Framework covering all stages of education and training has been developed and adopted.
  • A Quality Assurance Framework covering public and private higher education institutions has been prepared and implementation is in progress. 
  • University Development Grants to improve the employability of students are under implementation in all 17 universities.
  • Quality and Innovation Grants have been awarded to 58 study programs, exceeding the project target of 51 study programs. 
  • There are over 15,000 students enrolled in the Advanced Technological Institutions, surpassing the project target of 11,000 students at the present stage. Modernized curricula have been introduced in all 12 Advanced Technological Institutions.
  • Over 200 university and Sri Lanka Institute for Advanced Technological Education academics have commenced Master’s or PhD degree programs, exceeding the project target of 100 Masters/PhD degrees.
  • Short-term professional development activities have benefited about 3,560 university administrators and managers, academics, and technical and support staff.
  • Employment and employer studies conducted under the project show improvement in the employability of graduates, and that employers provide positive feedback about many types of graduates.

Moving forward, the World Bank will also be supporting government efforts to mainstream early childhood education reforms. An Early Childhood Development project is currently under preparation, likely to be delivered this fiscal year. Investment in early childhood development consistently brings very high cumulative returns in human capital, is one of the most cost-effective ways to create social equity, gives children a fair chance of success in life, and could help disadvantaged households and communities to break the vicious cycle of poverty often transmitted across generations.


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.

A 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.

A national health sector program is also currently being supported under a $200-million Second Health Sector Development Project (approved in FY13), 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 will also support innovation, results monitoring, and capacity building in the health sector. This recently approved project expects to support the implementation of 20 results (a subset of the National Health Development Plan results). In the first year of implementation the six Project Development Objective Indicators all met or surpassed their targets. Of particular note:

  • Twenty percent (733) of the 3775 Maternal and Child Health (MCH) clinics across the country were supported to reach full capacity to provide MCH services, meeting the target set for the year, and 55 Medical Officer of Health areas have at least three health and nutrition community support groups surpassing the target of 10 areas; 
  • Twenty five percent (82) of the 324 Medical Officer of Health areas reported having at least two functioning Healthy Lifestyle Centers surpassing the year-end target of 10 percent
  • National guidelines for rehabilitation services for disabled persons are being developed
  • The percentage of hospitals linked to the quality assurance program for laboratory tests conducted by the Medical Research Institute surpassed the target of 20 percent, reaching 46 percent in 2013;
  • The TB case detection rate surpassed its 2013 target of 72 percent by 2 percent;
  • Guidelines for quality management units have been prepared and training for administration of the guidelines has been completed;
  • Implementation of the Environmental Management Framework has commenced well, with 10 hospitals initiating the procedure of obtaining Environmental Protection Licenses and Scheduled Waste Licenses by submitting proposals to the Ministry of Health, which were approved and budgeted accordingly. Obtaining of these two licenses ensures availability of a safe sewerage disposal system, clinical waste management, and environment cleanliness.

Rural-Urban Transition

The World Bank is supporting government efforts to enhance Sri Lanka’s urban areas and support internal integration. The Metro Colombo Urban Development project, approved in FY12 and funded by the International Bank for Reconstruction and Development (IBRD), is helping the Colombo Metropolitan Region to address obstacles preventing it from 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, including on solid-waste landfill, wetland management, private participation in waterfront development, and strategic city development. Further support is to be 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, discussed further below.

Complementing the IBRD loan and related studies, IFC is financing an innovative municipal waste-to-energy project for the Western Province.

The World Bank is deepening its support for the development of a strong network of well-connected, sustainable cities throughout the country. Sri Lanka is taking important steps to implement its urban vision, including connectivity improvements, urban renewal and green city initiatives in the Colombo Metropolitan Region and secondary cities. Following analytical work to understand the economic drivers of rapidly growing secondary cities, the World Bank is supporting government efforts to improve urban services and livability through the Strategic Cities Development project, approved in May 2014. The project will focus on the two strategic city regions of Kandy and Galle, supporting improvements to such critical urban services as water supply, drainage infrastructure and select public transport facilities, as well as traffic management.

Key public spaces in these urban centers will also be upgraded by the end of the project. Technical assistance under the project is expected to increase these municipalities’ capacity to design, plan and manage their growing cities. Fostering economic growth in major urban centers outside of Colombo should produce a more spatially balanced distribution of economic opportunities and bolster shared prosperity and overall national economic growth.

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.

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 10, 2015