Overview

  • Context

    Sri Lanka has shown steady growth over the last decade although key macroeconomic challenges persist. Sri Lanka is a middle-income country with a GDP per capita of USD 4,102 (2018) and a total population of 21.7 million people. Following 30 years of civil war that ended in 2009, Sri Lanka’s economy grew at an average 5.6 percent during the period of 2010-2018, reflecting a peace dividend and a determined policy thrust towards reconstruction and growth; although growth slowed down in the last few years.

    The economy is transitioning from a predominantly rural-based economy towards a more urbanized economy oriented around manufacturing and services. Social indicators rank among the highest in South Asia and compare favorably with those in middle-income countries. Economic growth has translated into shared prosperity with the national poverty headcount ratio declining from 15.3 percent in 2006/07 to 4.1 percent in 2016.

    Extreme poverty is rare and concentrated in some geographical pockets; however, a relatively large share of the population subsists on slightly more than the poverty line. Low fiscal revenues combined with largely non-discretionary expenditure in salary bill, transfers, and interest payments have constrained critical development spending on health, education and social protection, which is low compared to peer countries. Public debt levels are high while the overall debt portfolio indicate some important challenges.

    Last Updated: Oct 15, 2019

  • Recent Developments

    Sri Lanka’s economic growth continues to be adversely affected by shocks. An unprecedented political controversy last year led to a subdued growth of 3.2 percent for 2018. Growth rebounded in the first quarter of 2019 to 3.7 percent (year-on-year) thanks to relatively benign weather that revived agriculture and related industry sectors. However, the aftermath of the April terrorist attacks that killed over 250 people, including tourists, is expected to take a toll on the economy in the rest of 2019 with decelerating private consumption and investment.

    Annual average inflation remained low at 4.2 percent by end-June 2019, with the moderation of food prices owing to improved weather, despite the passthrough of currency depreciation in 2018. Citing sluggish growth and favorable inflation expectations, the Central Bank reduced the policy rate corridor by 100 basis points in the first eight months of 2019. Nevertheless, the demand for private credit has shown limited responsiveness amid sluggish economic activity.

    On the external front, the trade deficit narrowed in the first half of 2019 due to a contraction of motor vehicles and gold imports, which experienced an import surge in the corresponding period of 2018, and increased garments exports. This is expected to have reduced the current account deficit for the first half of 2019 despite decelerating tourism receipts and remittances.

    Notwithstanding historically high debt repayments, official reserves increased thanks to the issuance of US$ 4.4 billion in sovereign bonds. While reserve cover reached a 12-month high at 5.2 months of merchandise imports by end-June 2019, external vulnerability remains high with relatively high short-term liabilities. The rupee remained broadly stable against the US dollar, with a year-to-date appreciation of 3.4 percent by end-June.

    Fiscal balances deteriorated in the first half of 2019. Tax revenues fell short of expectations due to weak collection of excise taxes from motor vehicles, petroleum products and import taxes, amid slow growth. Expenditures increased due to relief packages after the April attacks, settling of arrears and the implementation of budget proposals that increase recurrent expenditures in an election year.

    As a result, the annualized budget deficit is expected to have increased above 6.0 percent of GDP for the first half of 2019. Debt to GDP ratio at 82.9 and annual gross financing needs of approximately 18 percent of GDP remain among the highest among middle-income countries. In addition, the debt portfolio is subject to important risks with over 54 percent of the debt being foreign exchange denominated.

    The $3.20 poverty rate for lower middle-income countries declined from 9.5 percent in 2017 to 8.7 percent in 2018. The $5.50 poverty rate for upper middle-income countries declined from 39 percent to 37.3 percent during the same period.

    Tourism and related service sectors have increasingly become a viable source of employment and income for the poor and low-skilled in rural areas in recent years, contributing to poverty reduction. However, low female labor force participation and the low quality of private sector jobs, including high rates of informal employment, remain persistent issues. While overall unemployment was relatively low at 4.4 percent in 2018, youth unemployment recorded 21.4 percent, indicating difficulties with entering the labor market.

    Outlook

    Medium-term outlook is subject to the country’s ability to ensure political stability and return to normalcy. Growth for 2019 is expected at 2.7 percent as many important economic sectors show relatively weak performance. In the medium-term, the economy is expected to recover from the disruptions in 2019, and growth is expected to accelerate towards 4.0, gradually closing the output gap. The drivers of the recovery are investment and exports, as performance in the tourism sector improves and uncertainty after the elections is resolved.

    The current account deficit is expected to marginally narrow in 2019 compared to 2018 thanks to weak import demand. Significantly large debt creating flows will be required to close the external financing gap when the impact of past one-off FDIs wane off.

    Gross official reserves are expected to remain relatively low as the country faces large debt repayments. Provided that the revenue-led fiscal consolidation will continue, the primary surpluses will return in 2020, to help bring debt to a sustainable path.

    In the absence of currency depreciation, the debt-to-GDP ratio will stabilize in 2019. The successful completion of the IMF supported reform program and the continuation of the reform agenda beyond mid-2020 will be critical for macroeconomic stability and sustainability.

    The slowdown in economic activities, especially tourism, trade, transport, construction and other SME businesses, is expected to constrain jobs and wage growth in the near-term. The decrease in remittances will also lead to lower contributions to household income. As a result, the pace of poverty reduction is expected to slow down, with poverty measured using the $5.50 poverty line projected at 36.1 percent in 2019.

    Risks and Challenges

    Risks are tilted to the downside. On the domestic front, a challenging political environment, delays or reversals in efforts to strengthen revenues, and a slower than expected recovery of some key economic sectors represent important risks. Mitigating these risks will be key to creating private sector jobs and accelerating poverty reduction.

    Externally, while Sri Lanka has raised enough foreign currency funds to manage immediate debt repayments, continued large refinancing requirements, weak fiscal buffers and high indebtedness make the economy vulnerable to uncertain global financial conditions.

    Priority reforms include: (a) continuing fiscal consolidation by broadening the tax base and aligning spending with priorities; (b) shifting to a private investment-tradable sector-led growth model by improving trade, investment, innovation and the business environment; (c) improving governance and SOE performance; (d) addressing the impact of an aging workforce by increasing labor force participation, encouraging longer working lives and investing in skills to improve the productivity; and (e) mitigating the impact of reforms on the poor and vulnerable with well-targeted social protection spending.

    Last Updated: Oct 15, 2019

  • The World Bank Group and Sri Lanka

    The World Bank Group has supported Sri Lanka’s development for over six decades. Although in many ways it is a development success story, Sri Lanka still faces critical challenges as it strives to be an upper middle-income country.

    WBG’s Country Partnership Framework (CPF) for FY2017-20, endorsed by the Institution’s Board of Directors in June 2016, is based on the 2015 Systematic Country Diagnostics (SCD) and the country’s priorities. A Program and Learning Review (PLR) for the Sri Lanka Country Partnership Framework FY17-FY20 (CPF) documenting progress at the midpoint of the CPF’s implementation was completed in April 2019.

    The World Bank Group supports Sri Lanka’s transition to a more competitive, inclusive, and resilient upper-middle income country including through a focus on i) macro-stability and competitiveness; (ii) inclusion and opportunities for all; and (iii) green growth, environmental management, and climate change adaptation and mitigation potential—as well as the cross-cutting themes of gender and governance which form the three CPF program areas. This strategy remains relevant and well aligned with Sri Lanka’s development strategy, which the Government articulated in its Vision 2025, launched in September 2017.

    The Government’s Vision 2025 largely confirmed the SCD findings and identified four main constraints to growth: (i) structural weaknesses in a growth model which did not foster productive investments, competitiveness and innovation; (ii) inward rather than outward- and export-led growth, which would leverage the global market and international supply chains; (iii) public finances dogged by increasing debt repayments and inefficient State-Owned Enterprises which crowded out more productive investments and development spending; and (iv) regulatory barriers that stifled private sector development and job creation. The World Bank is supporting government reforms aimed at addressing these constraints.

    Sri Lanka graduated from International Development Association (IDA) in FY2017 and is receiving IDA transition financing during IDA18 period (FY2018-20). Consistent with Sri Lanka’s graduation, IBRD lending accounts for an increasing share of commitments—36 percent in August 2019, up from 12 percent in June 2016.

    World Bank Program

    As of October 10, 2019, the active IDA and IBRD portfolio comprise of 18 projects (with a total net commitment of US$ 2.26 billion), and includes 65 percent of commitments in sustainable development (urban, climate resilience, agriculture, environment and water); 24 percent in human development (education, health and social protection); 7 percent in infrastructure; and 4 percent in the Finance sector. The total of active trust fund resources in Sri Lanka has increased from US$9.8 million to approximately US$ 22 million since July 2016 and consists of 32 active grants.

    During the CPF period there have been notable achievements in macro-fiscal stability and trade policy, but the competitiveness and investment agendas remain a work in progress. The Government’s commitment to “doing business” reforms and attracting investment through PPPs remains strong, and WBG support has helped register progress in the enabling environment for private investment, in particular through the adoption of digital technologies.

    There has also been progress in promoting inclusion and opportunities for all, especially in higher education and health systems, while skills training, social protection, and rural service delivery face challenges. The progress in seizing green growth opportunities, improving environmental management, and enhancing adaptation and mitigation potential has been mixed with good progress on key aspects of building resilience to climate and disaster risk, but less success in urban development and improved natural resources management.  

    The Bank continues to provide policy advice, analytical support and technical assistance, funded both through trust funds and its own budget, to assist government efforts. Previously these activities included analytical work on investment policy and the business environment and technical support for public financial management, tourism strategy formulation, Public-Private Partnership (PPP) readiness, and follow-up to the Financial Sector Assessment Program (FSAP). Governance-related activities included support for the implementation of the RTI Act and preparation for the introduction of e-procurement.

    Several activities also helped lay the groundwork for more effective project interventions, notably in health, water, PPPs, and tourism. The recent WBG Urban Transport InfraSAP and Energy InfraSAP laid out structured diagnostics of the sectors and provided perspectives to support the development of these sectors, including through WBG-assisted solutions.

    Technical support for poverty monitoring and data collection contributed to a deeper understanding of the role of social assistance in poverty alleviation, a linkage that has already had significant policy impact. A series of biannual economic updates has developed a broad audience for timely economic analysis and the forecast of potential future trends.

    World Bank - IFC Collaboration

    IFC’s strategic approach in Sri Lanka aims at closing the country’s development gaps by supporting key sectors delivering sustainable, inclusive and strong long-term growth.

    As of 30th June 2019, IFC has invested over $1.3 billion in Sri Lanka, and its committed portfolio stands at $352 million. IFC’s work focuses on the private sector but is done in close coordination the Government and the World Bank.

    The main pillars of IFC’s strategy in the country focus on the promotion of export driven companies, technology ecosystems, sustainable tourism, financial inclusion and infrastructure improvement. Through all the work that IFC does in Sri Lanka it retains a sharp emphasis on gender and climate change challenges facing the country.

    IFC’s investment work is supported by our advisory services to help unlock private sector potential, which is essential for expanding businesses, creating jobs, and promoting sustainable growth in the country.

    MIGA

    MIGA has no outstanding exposure in Sri Lanka, despite active business development efforts. MIGA remains open to supporting cross-border investments in Sri Lanka through its political risk instruments, which cover foreign investors against the risks of expropriation, transfer restrictions and inconvertibility, breach of contract, and war and civil disturbance events. These instruments could be used to de-risk foreign investments in Sri Lanka, including in infrastructure and PPPs, in support of Maximizing Finance for Development principles. 

    Last Updated: Oct 24, 2019

  • 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 percent and the primary education completion rate is over 95 percent. 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 somewhat higher number of girls than boys in secondary and higher education. 

    However, access to higher education is low, below the level expected of an upper-middle income country. Also, universal access to good quality early childhood education is a challenge.

    The World Bank is helping the development of human capital across all levels of education and training. The Sri Lanka Early Childhood Development Project will increase the ability of children from disadvantaged households to access early learning opportunities. World Bank assistance to the general education sector is currently ongoing through the General Education Modernization project that was launched in October 2018 and seeks to promote learning outcomes and socio-emotional skills of students.

    This project enhances quality and strengthens the stewardship of the general education system. It also contributes to improve learning outcomes in English and Mathematics and enhance teacher performance. The Accelerating Higher Education Expansion and Development (AHEAD) Operation is new in the higher education sector and will help the country to increase enrollment in priority disciplines for economic development, improve the quality of degree programs, and promote research and development, and commercialization of innovations. This AHEAD Operation is the first Program for Results (PforR) Operation in Sri Lanka and in the higher education sector worldwide.

    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 and, more recently, through loans from the International Bank for Reconstruction and Development.

    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 (39 per 100,000 and 9 per 1,000 live births, respectively) in the last half-century is in part due to effective and integrated maternal and child health services.

    A national health sector program supported under a $200-million Second Health Sector Development Project (approved in FY2013) closed in September 2018 contributing to key achievements in the health sector development in Sri Lanka. The project was designed to improve the standards of performance of the public health system and enable it to better respond to the challenges of malnutrition and non-communicable diseases (NCDs). The project also supported innovation, results monitoring, and capacity building in the health sector.

    The Primary Healthcare System Strengthening Project builds on the earlier project and will benefit the people in Sri Lanka by increasing the utilization and quality of primary health care services. The focus of this project is on the detection and management of NCDs, responding to the changing health needs of the population and targeting the most vulnerable.

    On the analytical front, substantial knowledge has been generated in recent years that inform government policies. Some of the key analytical work include assessment of health financing system, positive deviance study for nutrition, public expenditure review for health and nutrition, and analyses of human capital development.

    Urban Development

    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, which in addition to Colombo also includes other major urban centers such as Kandy, Galle, and Jaffna. The World Bank is supporting Sri Lanka to implement its urbanization and rural-urban integration agenda.

    The Metro Colombo Urban Development Project (MCUDP) 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. Results achieved: 3 km of primary canals have been completed, 2 micro-drainage subprojects have been implemented, and 29 km of roads that have been built or rehabilitated based on prescribed standards. The Beddegana Wetlands Park aids in flood control and allows the public to experience the city’s unique urban wetlands. In addition, the project rehabilitated the Town Square and Viharamahadevi Park, which included the creation of playgrounds, bicycle paths and public facilities.

    The Strategic Cities Development Project and the Additional Financing to the project (approved in 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, among other areas.

    Climate Change and Disaster Risk Management

    Climate-related hazards pose a significant threat to economic and social development in Sri Lanka. By 2050, potential impacts due to climate change are foreseen to be approximately a 1.2 percent loss of annual GDP. The ongoing Climate Resilience Improvement Project (CRIP) carried out rehabilitation works related to irrigation hydraulic infrastructures benefiting 50,000 hectares of agricultural land, landslide mitigation works in 18 schools protecting 30,000 students while establishing transport connectivity for 750,000 people by rehabilitating roads damaged by landslides and floods. CRIP also developed Integrated Flood and Drought Risk Assessment Reports and basin investment plans for 6 river basins, based on which the GoSL will invest in Forecasting and Early Warning of High Impact Weather, Floods and Landslides and Flood Mitigation Investments. The Cat-DDO program closed in 2017 supported the Government to strengthen disaster risk financing, risk information systems and resilient infrastructure planning. Building on these initial outputs, the GoSL and the Bank has advanced the dialogue to mainstream DRM further into various sectors.

    Trade and Competitiveness

    The Trade and Competitiveness program is a package of technical assistance to support the Government of Sri Lanka’s economic reform objectives to ultimately create more and better private sector jobs and become an upper-middle income country. The program is a joint initiative from the World Bank and the Australian Department of Foreign Affairs and Trade (DFAT).

    All activities in the program are underscored by a strong focus on gender, youth, disability and poverty. Specifically, the program intends to enhance the trade and competitiveness of the private sector as a way to support private-sector led growth, increase economic diversification and enhance the volume and value addition of exports via the following areas:

    Enhancing Sri Lanka’s Trade Potential: via the establishment of a more open trade policy regime; the development of an agile trade facilitation system and the reduction of regulatory barriers to trade. Among noteworthy reforms are the implementation of the Trade Information Portal established with joint agreements committing 30 agencies to share data with the Department of Commerce on trade-related regulations. The National Single Window (trade) Blueprint for Implementation and continues to support the Government with technical assistance on legal and procedural aspects of improved trade facilitation.

    Enhancing Sri Lanka’s Investment Climate and Policy and Regulatory Simplification: Activities to foster domestic and foreign direct investment (FDI) through (i) institutional, legal and regulatory reforms to reduce transaction cost to enterprises and improve the overall domestic business environment; (ii) strengthening the Board of Investment’s capacity for investment promotion and advocacy to attract FDI in the country’s most strategic sectors; (iii) facilitating investment approval processes through a single window for investment; (iv) improving the effectiveness of the investment incentive regime and; (v) strengthening legal framework governing investment.

    Some significant achievements include, the design of the Doing Business reform program, which has significantly reduced the processing time and cost for business owners with delivered reforms such as the online portal for one-day business registration, single application windows for obtaining building permits and carrying out property transactions at the Colombo Municipal Council, introduction of pre-trial conference as part of the case management techniques used in court, online systems for filing tax with the Inland Revenue Department, increased transparency across participating institutions and the appointment of an Official Receiver to improve the recovery rate and time of business insolvency cases. Further reforms are expected over 2019.

    In addition, support to the Board of Investment’s modernization including the delivery of an investment promotion and aftercare program and the design and implementation of a One Stop Shop for fast-tracking investment approval.

    Firm Growth, Productivity and Jobs: Building a more resilient innovative economy and entrepreneurial society; also inclusive of a Public Expenditure Review that will comprises of a functional and institutional review of current Research & Development, innovation and entrepreneurship programs and Government spending.

    SMEs: Inclusive of a Financial Sector Modernization Project together with complementary technical assistance for capital market development; a proposed innovative SME project focuses on business development and innovative finance for SMEs and entrepreneurs.

    Last Updated: Oct 15, 2019

Api


LENDING

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

*Amounts include IBRD and IDA commitments

MULTIMEDIA



Additional Resources

Country Office Contacts

Colombo
6th Floor, Hilton Colombo
2, Chittampalam A. Gardiner Mawatha
Colombo 2, Sri Lanka
+94-11 5561300
infosrilanka@worldbank.org
Washington
1818 H Street NW Washington, DC 20433
+1 202-473-8955
infosrilanka@worldbank.org