Overview

CONTEXT

Sri Lanka is a lower middle-income country with a total population of 20.8 million people and a per capita income of USD 3,912 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 2014 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: Apr 30, 2016

STRATEGY

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.

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 an 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.

The World Bank Group (WBG) is currently preparing its Country Partnership Framework (CPF) for Sri Lanka for the period 2017-2020. The CPF is a strategic document that describes the WBG’s program for supporting the achievement of the government’s development goals for the benefit of its citizens.  The CPF is defined jointly with the Government of Sri Lanka and it sets out the sectors in which the WBG will be involved, and the financing, technical assistance and knowledge that will be provided to Sri Lanka.

A Systematic Country Diagnostic (SCD) informed the process of developing the CPF for Sri Lanka.

Last Updated: Apr 30, 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 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.

Education

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.

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.

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


LENDING

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

*Amounts include IBRD and IDA commitments