Sri Lanka’s Demographic Transition: Facing the Challenges of an Aging Population with Few Resources

About the report:

The report examines some of the economic implications of Sri Lanka’s demographic transition, focusing on employment and productivity related issues on one side; and the performance of cash transfer programs to assist the poor and vulnerable groups on the other. It highlights the findings of a series of technical studies jointly prepared by Sri Lankan academics and World Bank staff, covering demographic change, National Transfer Accounts, labor markets and cash transfer programs.

Key Messages:

Sri Lanka is experiencing a demographic transition, with a steadily aging population, which will peak by 2041.

Sri Lanka stands out as one of the success stories of considerable advancements in human development in South Asia. Early investments in health and education have resulted in significant reductions in infant mortality rates, increases in life expectancy and decreased fertility rates.  These achievements have influenced Sri Lanka’s demographic cycle. The population is projected to reach its peak of 21.9 million people in 2031 and start declining after 2046.  By 2041, one out of every four persons is expected to be an elderly person, making Sri Lankans the oldest population in South Asia.

A large informal sector, high unemployment and low female employment rates are key labor market challenges.

At present, Sri Lanka is enjoying a demographic bonus with the share of the working age (15-64) population at 67%. However, a number of impediments prevent Sri Lanka from taking full advantage of this dividend. The report highlights three important policy challenges: a large informal sector, high unemployment, and low levels of female employment. Only 56% of the working age population is employed – driven by low labor force participation and high unemployment rates among women and youth.

An aging population presents significant social protection challenges for vulnerable groups, particularly low-income families supporting the elderly.

About 9% of the Sri Lankan population is below the poverty line. The number of female-headed households has also increased in recent decades as has the number of people with disabilities.

Public spending on social safety net programs has decreased as a percentage of GDP from 2.2 percent in 2004 to 0.3 percent in 2009. As a result, Sri Lanka has moved from being a country with relatively high safety net spending to one with limited resource allocation for safety nets. Sri Lanka’s main safety net program, Samurdhi suffers from poor targeting and benefit adequacy.

Policies that emphasize labor market competitiveness with efficient delivery of services for poor and vulnerable groups can help mitigate the social costs of this demographic transition.

The report provides a series of policy recommendations to help strengthen safety nets for vulnerable groups and increase labor market competiveness. Sri Lanka’s existing pension system only covers an estimated 10 to 15% of the elderly that were employed in the formal sector. Therefore any broad-based social protection policy should be complimented by extending pensions, social insurance and credit to the large proportion of workers employed in the informal sector. The report also highlights the need to improve existing safety net programs such as Samurdhi to improve targeting and adequacy of transfers to ensure they reach poor and vulnerable households.

Labor market reforms in Sri Lanka need to strike a balance between protecting the rights of workers with potential overregulation of jobs. Improving the quality of higher education and vocational training emerge as key priorities. Private sector participation in skills training can ensure the relevancy of such programs, to meet the needs of the expanding services sector as well as skills demanded by the  economy. Female labor force participation can be improved by provision of private or community-based daycare centers. Vocational skills and internship programs can also be tailored to the needs of working women, who are concentrated in low-pay occupations, resulting is a sizeable gender gap in wages.