The World Bank Group In Sri Lanka

Sri Lanka’s economic recovery remains strong, supported by consumption and investment, robust remittances and tourism inflows, and significant revenue improvements. Poverty levels have declined but vulnerability remains high as real wages and labor force participation are below pre-crisis levels. Medium-term growth prospects hinge on sustained macroeconomic stability and the implementation of structural reforms that boost trade and attract non-debt-creating flows.

Outlook

Despite strong recent performance, in the absence of growth-enhancing structural reforms, medium-term growth prospects remain modest at 3.1 percent and are expected to be driven primarily by a recovery in consumption, with limited contribution from investment and exports. As demand picks up, inflation is projected to increase towards its target range. The current account is expected to remain in a moderate surplus, supported by lower global oil prices, tourism-led increases in service exports, and buoyant remittances. Continued primary surpluses are expected in the medium term, and PPG debt is projected to trend downward. Supported by moderate inflation and economic growth, poverty is projected to decline in 2025 and beyond.

However, downside risks remain high. Moderating global growth and the recalibration of global trade could dampen export demand, deter investment, and result in potential trade-related job losses. The continued reliance on value-added and trade taxes could hinder the recovery in consumption and exports. Close monitoring of private sector credit growth is needed. Persistent under execution of the capital budget poses risks for long-term growth.

To boost growth prospects and revitalize private sector led job creation, it is critical to maintain macroeconomic stability, policy consistency, and undertake structural reforms. This includes addressing rigidities in labor regulation and reliance on public sector employment that have constrained labor market dynamism and recovery in labor incomes. Higher broad-based growth that creates jobs across the country and increases labor incomes will contribute to sustained poverty reduction and increase households’ resilience to shocks.

Recent developments

The economy grew by 4.8 percent in the first half of 2025, as industry, led by textiles, construction, and food manufacturing, continued to rebound, and services, led by financial and tourism-related services, grew steadily. Private consumption is beginning to recover, amidst rising wages, high credit growth, deflation, and a stable rupee.

After eleven months of deflation, headline inflation turned positive in August 2025 (1.2 percent), driven by higher food prices and a rebound in administered energy prices. To steer inflation closer to its 5 percent target, the central bank cut policy rates by 25 basis points in May 2025 (a cumulative 825 basis point reduction since 2023). Accommodative monetary policy contributed to lower lending rates and a sharp pick-up in private sector credit growth to 19.6 percent in July 2025.

The merchandise trade deficit widened by 22.5 percent during January-July 2025, as imports – driven mainly by vehicles and consumer goods – outpaced sluggish exports. However, robust tourism earnings and remittances kept the current account in surplus (US$1.7 billion during January-July 2025). External debt restructuring and development partner inflows contributed to a stable balance of payments. Despite continued (but slower) foreign exchange purchases by the central bank, usable reserves remained at end-2024 levels, and the rupee depreciated 3.2 percent against the dollar by end-August 2025 after appreciating in 2023-24. Further, the US imposed a 44 percent tariff on Sri Lankan imports in April 2025, revised down to 20 percent in August.

The primary surplus increased during January-July 2025, supported by a 26.5 percent growth in revenue, mainly from taxes on imports and reduced capital expenditure. External debt restructuring is nearly concluded, with almost 98 percent of Eurobonds exchanged and several bilateral agreements with official creditors finalized.

While reductions in transport and energy costs in the first half of 2025 eased pressures on household budgets, crisis impacts persist. Poverty and malnutrition rates remain higher than precrisis levels, with food prices rising despite the recent deflation, raising concerns about prolonged food insecurity and longer-term human capital accumulation. Due to the scarring effects of the contraction, labor force participation was 47.4 percent in 2024, its lowest level since 2015. Real wages remain about 15 percent below their 2019 levels, with women (29.8 percent) and urban areas (44.3 percent) particularly affected. Spatial inequalities remain high.

Challenges

After experiencing a balance of payments crisis and a sovereign debt default in 2022, the Sri Lankan economy began recovering in 2024. The crisis, caused by long-standing structural weaknesses and macroeconomic imbalances, and exacerbated by exogenous shocks, led to a contraction of 9.5 percent over 2021–23. Macroeconomic stability was restored with the implementation of reforms, including cost-reflective utility pricing and new tax measures. Real GDP expanded by 5 percent in 2024. From its peak of 69.8 percent in September 2022, inflation fell to single digits by mid-2023. External buffers were rebuilt, with usable reserves rising to US$4.7 billion by end-2024 (equivalent to 3 months of imports), from US$500 million at end-2022. The primary balance was in surplus in 2023–24. Public and publicly guaranteed (PPG) debt-to-GDP remains elevated at 103.9 percent (end-2024) but has fallen from end-2022 levels (119.2 percent).

Despite these improvements, the recovery is unfinished. Real output is below 2018 levels, poverty is double its 2019 levels, and the labor market recovery is slow. Long-term prospects for growth, jobs, and poverty reduction are hinged on increasing female employment, retaining skilled labor (in the context of an aging society), modernizing the labor law, improving the tax morale, strengthening trade linkages, improving logistics performance, and improving the business environment.

Last Updated: Oct 07, 2025

The World Bank Group and Sri Lanka

The World Bank Group has been a trusted development partner for Sri Lanka for over seven decades. Throughout the 70-year partnership, Bank Group’s financing, analytical work, and advisory services have contributed to Sri Lanka’s developmental roadmap, balancing opportunistic engagements with a long-term focus on fiscal sustainability, competitiveness, and the country’s transition to a green, resilient, and inclusive recovery.

The World Bank has approved US$2.52 billion in lending to support 15 IDA and IBRD projects, including one multi-donor trust-funded project as of October 2024. Approximately 20 percent of these commitments are dedicated to Planet (agriculture and water); 18 percent to People (education, health, and social protection); 34 percent to Prosperity (macroeconomics, trade and investment, finance, competitiveness and innovation, and governance); and 28 percent to Infrastructure (transport and urban). In addition, the total amount of active trust fund resources amounts to US$65.30 million and consists of 29 active grants.

Country Strategy

The World Bank Group’s engagement in Sri Lanka is guided by its Country Partnership Framework (CPF) for Sri Lanka based on the country’s medium and long-term development priorities. These priorities are identified through the Bank’s Systematic Country Diagnostics (SCD) and analytics, consultations with stakeholders, and the Bank's comparative advantage.

WBG Country Partnership Framework (FY2024 to FY2027) was approved on June 28, 2023. The CPF focus on economic stabilization, structural reforms, and protection of the poor and vulnerable in the short term, in pursuit of green, resilient, and inclusive development in the longer term. Due to the uncertainty at the time of preparing the CPF, a   two-phased approach was adopted which offers flexibility to adapt depending on the country’s macro-economic situation and progress of reforms. To improve the focus of the program, the CPF has been narrowed to a set of five objectives contributing to two aspirational high-level outcomes (HLOs), which will guide WBG’s engagements. The proposed HLOs are (i) Economic Stabilization and Private Sector Job Creation; and (ii) Protected and Enhanced Human and Natural Capital. Enhancing Resilience is a cross-cutting theme. Through the CPF, the WBG will strive to help Sri Lanka build back better and embark on a post-crisis growth path, with an eye on the long-term.

The design and priorities of the CPF are guided by the  SCD Update (2021), dialogue with stakeholders, and lessons from past engagement. The World Bank, IFC, and MIGA will continue to collaborate closely in implementing major shifts to address the country’s needs.

Sri Lanka graduated from International Development Association (IDA), the Bank Group’s soft lending arm, in FY2017, lending from the International Bank for Reconstruction and Development (IBRD) which  accounted for an increasing share of World Bank commitments to the country. Considering the dire economic crisis in Sri Lanka in 2022, the World Bank worked closely with the government to explore the most viable financing arrangement within the World Bank’s mandate to provide optimal level of support for the Sri Lankan people. Effective December 5, 2022, Sri Lanka has been reclassified as an IDA Gap country – an IDA-only borrower with a GNI per capita above IDA’s operational cut-off ($1,255 in FY23) for more than two consecutive years but lacking IBRD creditworthiness.  As an IDA Gap country, Sri Lanka will have access to IDA concessional resources on blend terms.

Last Updated: Oct 10, 2024

The World Bank Group supports Sri Lanka’s efforts to meet its development goals. Highlights include:

Education

The World Bank is helping the development of human capital across all levels of education and training. The Sri Lanka Early Childhood Development (ECD) Project is supporting children from disadvantaged households to access early childhood development and foundational learning opportunities. The General Education Modernization (GEM) project, seeks to promote learning outcomes in English and Mathematics, develop the socio-emotional skills of students, and enhance teacher performance. The Accelerating Higher Education Expansion and Development (AHEAD) is helping increase enrollment in priority disciplines for economic development, improve the labor market of degree programs, and promote research and development and innovations for economic growth. Support from the Bank’s existing education projects is currently being finalized to provide school meals and tuition waivers for preschool children from vulnerable households as a response to Sri Lanka’s economic crisis.

Key Results:

• About 1.5 million children, half of whom are girls, have benefitted directly from the ECD Project, along with teachers, parents, community members, and government officials.
• About 1.3 million school children, half of whom are girls, have directly benefitted from the GEM project direct interventions to enhance learning.
• Approximately 70,000 university students have benefited from direct interventions supported by the AHEAD project to enhance learning. Around 60 percent of these students are female.

Link to Results Brief

Health

The Bank’s US$200 million commitment in Primary Healthcare System Strengthening Project supports the increased utilization and quality of primary healthcare services, with an emphasis on the detection and management of Non-Communicable Diseases in high-risk population groups. The Sri Lanka COVID-19 Emergency Response and Health Systems Preparedness Project (ERHSP) has been supporting the government’s efforts to respond to the COVID-19 pandemic and the economic crisis. The project mainly focuses on strengthening the capacity of national and sub-national institutions to address immediate needs and equip them to handle future public health emergencies, and social measures through the provision of scaled-up cash and in-kind transfers for the elderly, persons with disabilities and patients with chronic kidney disease from low-income households in response to COVID-19. An additional financing of $267.7 million, were approved in 2021 to provide scaled-up social protection measures to vulnerable communities, and to support vaccine procurement and deployment, including the purchase of Pfizer vaccines to achieve the planned coverage in Sri Lanka.

A further US$21.6 million has been disbursed to the Ministry of Health as a response to Sri Lanka’s economic crisis to support the purchase of essential medicines, medical supplies, and nutritional supplements urgently needed to strengthen health resources.

Key Results:

• US$21.6 million medicines and medical supplies distributed to all public hospitals at no cost, based on need, estimations, and disease patterns to ensure sufficient supplies to combat the COVID-19 pandemic and other life-threatening diseases during the economic crisis.
• As of January 2022, the Primary Healthcare System Strengthening project had strengthened 139 Primary Medical Care Institutions (PMCIs) across the country improving the accessibility and quality of services.
• In recent years, substantial analytical work has informed government policies. This includes an assessment of the system for financing health care and the impact COVID-19 has had on health financing, human capital development, and an assessment on the pandemic preparedness of the health system.
• The project has supported the national non-communicable diseases program to digitize the information system at healthy lifestyle centers in the country. 

Link to Results Brief

Social Protection

The World Bank is playing a pivotal role in the reform of Sri Lanka’s social safety net through the $75 million IDA-financed Social Safety Nets Project. The project is developing an Integrated Welfare Management System (IWMS), a central online portal that will serve as a “one-stop shop” for Sri Lanka’s welfare programs. The new IWMS will generate information that can be used to better identify and deliver the support for households, reduce overlaps, and eliminate leakages in welfare programs. The Project has also supported drafting the National Social Protection Strategy and the Graduation Strategy.

Further, in the backdrop of Sri Lanka’s economic crisis the World Bank is supporting Government to ensure that the poorest and most vulnerable people receive adequate support. Under the Bank’s Contingent Emergency Response Component (CERC) US$145 million has been provided to increase the real income of the poor and vulnerable households heavily impacted by the economic crisis.

Key Results:

• Over 3.1 million beneficiaries of country’s main social assistance cash transfer programs (Samurdhi, Chronic Kidney Disease patients’ allowance, Elderly allowance, and Disability allowance) provided cash transfers for three months (May-July) to mitigate the impacts of the economic crisis.
• Development of an active Social Registry Information System, populated with approximately 2.5 million households. The data is currently being updated.

Agriculture

Around 80 percent of agricultural land is under smallholder production, with around 1.65 million smallholder farmers operating on less than 2 hectares each with limited opportunities to diversify into higher-value products. The World Bank program responds to these challenges by addressing long-standing issues around productivity, private investment, value chains, policy reform, ensuring food security and building climate resilience. A core principle of the program is private sector-led smallholder agricultural transformation, supporting public institutions to create the necessary conditions, stimulating private finance, and enhancing sustainability of solutions. 

The Agriculture Sector Modernization Project (ASMP) is connecting smallholder farmers to markets through the introduction of modern technologies and business models that strengthen value chain linkages. With additional finance from the European Union, ASPM is scaling-up its work with farmer clusters in five new districts. These investments are generating increased farmer incomes, new jobs, and export revenue that are important for crisis response in the short-run and for long-term economic recovery.

The Climate Smart Irrigated Agriculture Project (CSIAP) is introducing new approaches to the rehabilitation and management of traditional irrigation tanks and tank cascades including farm-level improvements that raise smallholder productivity, market participation, and climate resilience. To help mitigate the economic crisis, CSIAP is rapidly scaling up support for CSA practices such as nutrition sensitive homestead gardens.

Key Results:

• ASMP matching grants and farmer demonstrations have so far generated around US$141 million in new export earnings and at least US$8.6 million in foreign exchange savings from import substitution.
• From every rupee invested in ASMP matching grants, the project has mobilized an additional two rupees in private development finance that is helping Government to maximize finance for development.
• Through uptake of climate smart agriculture technologies, smallholder in CSIAP hotspot areas recorded a 13 percent improvement in income during COVID-19 lockdowns compared to a 19 percent drop for households not participating in the project.

Link to Results Brief

Climate change and Disaster Risk Management

The annual average fiscal loss associated with disasters in Sri Lanka, floods, droughts, landslides, storm surges, and cyclones, is estimated to be more than US$380 million. Climate change is further aggravating disaster risks, particularly flooding, rain triggered landslides, and coastal inundation. Significant modification of strategies, infrastructure, systems, and practices will be needed to withstand the effects of climate change and multiple natural and man-made hazards; COVID-19 pandemic, marine hazards and the ongoing economic crisis. The World Bank program in Sri Lanka responds to these challenges by improving government capacity for early warning and disaster response, as well as planning and implementation of mitigation and adaptation measures.

The Sri Lanka Climate Change Action Plan in the South Asia Climate Roadmap 2021-2025 identifies four priority areas for advancing climate change action in Sri Lanka: i) Infrastructure Resilience; ii) Integrated Landscape Management for Agriculture, iii) Water Resources, and Forests; and iv) Clean Energy and Resilient Livelihoods.

The Climate Resilience Multi Phase Program (CRes MPA) intends to support a more strategic approach to medium and long-term climate resilience challenges by improving warnings of high impact weather, hydrological hazards and develop multipurpose water infrastructure for climate resilience. This three-phase program focuses on enhancing the capacity of the Government to deliver improved weather and climate forecasting and early warning; and to reduce flood risks in the lower Kelani basin (between Hanwella and Kaduwela).

Key Results:

• The $152m IDA financed Climate Resilience Improvement Project  (CRIP) benefitted 11.5 million people in 22 out of 25 districts in Sri Lanka. The project’s irrigation rehabilitation efforts alone benefited 216,933 farming families served by 172,491 ha in 11 districts.
• CRIP improved resilience of communities and assets though rehabilitation and improvement of 38 bridges, 640 culverts and small bridges, 2,448 km of highways, and 154.95 km of provincial roads, including landslide and rockfall locations, rural roads and bridges which restored the transport connectivity of 1,799,000 people.
• Additionally, the project supported school safety interventions for 28,801 students and approximately 500 staff in 18 schools in the Central Province by mitigating landslide risks in targeted high-risk schools. 
• The multi-hazard early warning system of CRes MPA program under development, has been adapted to include warnings for biological threats similar to the COVID-19 Pandemic and marine hazards. The project will continue to adapt to enhance economic performance post-COVID-19 through enhanced meteorological services for building climate and economic resilience in Sri Lanka.

Water

Water touches every aspect of development and links with nearly every Sustainable Development Goal (SDG). Through three inter-related pillars of sustaining water resources, delivering services, and building resilience, the World Bank has played a key role in Sri Lanka’s water security. The Water Supply and Sanitation Improvement Project provides over US$200 million to increase access to piped water services and improved sanitation to underserved households urban, rural and plantation areas. The Integrated Watershed and Water Resources Management Project provides over US$65 million to improve the safety of dams and irrigation functionality and improve Sri Lanka’s water management institutions.

Key Results:

• 560,000 poorest people in urban, rural and estate areas in seven districts directly benefited from access to improved water sources and sanitation under the Water Supply and Sanitation Improvement Project.
• 136,292 people received training on water supply, sanitation and hygiene (WASH).
• 41 schools, four public institutions and seven convenience centers provided with flush toilets and handwashing facilities, where such facilities were previously inadequate. These sanitation facilities support girls' school attendance through access to facilities which provide dignity, safety and comfort for menstrual hygiene management.
• Construction of 24,048 toilets for households with persons of special needs, female-headed households and vulnerable households in plantation estates through demand-driven grants. These households previously shared unsanitary facilities or did not use a toilet at all.
• 27 laboratories at water treatment plants and two mobile laboratories equipped with over 200 water quality testing kits and training to support Community-Based Organizations (CBOs). These mobile labs have been instrumental in addressing poor quality of drinking water and have facilitated water testing at over 1,200 CBO-managed water systems in rural Sri Lanka.  

Link to Results Brief and Blog

Transport

The World Bank is improving accessibility and connectivity to social and economic opportunities, especially for the poor and vulnerable in remote areas of the country by providing safe and resilient road and public transport infrastructure and creating employment opportunities. The Inclusive Connectivity and Development Project for Sri Lanka aims to provide safe, efficient, and climate resilient connectivity and strengthen agricultural supply chains to empower project communities in selected districts of Sri Lanka. The Transport Connectivity and Asset Management Project (TCAMP) is supporting the Government of Sri Lanka’s efforts to strengthen road asset management at the national level and improve provincial roads in all the nine provinces of the country. The project is supporting the operationalization of the Sri Lanka Road Asset Management System (SLRAMS) and will sustain the investments by strengthening institutional capacities for better asset management and integrated urban transport planning.

Key Results:

• Sri Lanka Road Asset Management System (SLRAMS) operationalized at the Road Development Authority (RDA) which will ensure the best use of scarce resources in road investments and reduce costs for planning, developing and maintaining roads.
• Around 200kms of provincial roads rehabilitated across the country improving assess and connectivity to social and economic opportunities.
• Over 30,000 people in the Western and Southern provinces alone are estimated to have benefited from the road improvements in FY21.
• Around 1000km of rural roads have been identified under the Inclusive Connectivity and Development Project, for rehabilitation to improve safety, resilience and connectivity.

Last Updated: Oct 06, 2022