Learn how the World Bank Group is helping countries with COVID-19 (coronavirus). Find Out

Overview

  • Context

    Sri Lanka is a lower-middle-income country with a GDP per capita of USD 3,853 (2019) and a total population of 21.8 million. Following 30 years of civil war that ended in 2009, the economy grew at an average 5.3 percent during the period 2010-2019, reflecting a peace dividend and a determined policy thrust towards reconstruction and growth; although growth slowed down in the last few years. Growth is estimated to have been 2.3 percent in 2019, an 18-year low, partly explained by the impact of the April terrorist attacks.

    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.

    Recent Developments 

    The COVID-19 outbreak has substantially weakened the outlook as it exacerbated an already challenging macroeconomic situation of low growth rates and significant fiscal pressures. Inflation remained benign amid weak demand. Annual average inflation measured by the Colombo Consumer Price Index was 4.7 percent in June 2020. Muted inflation and the outbreak of COVID-19 prompted the Central Bank to ease monetary policy several times in the first half of 2020, bringing the policy rates down by 150 basis points.

    The external current account deficit is estimated to have narrowed to 2.2 percent of GDP in 2019, thanks to a reduction in imports, despite the slowdown in tourism receipts. The issuance of international sovereign bonds (USD 4.4 billion) helped debt repayment. However, reserves are low relative to short-term external liabilities. The exchange rate remained broadly stable despite depreciation pressures in March and April 2020. 

    Fiscal accounts deteriorated in 2019. Tax revenues fell due to weak collection of VAT, excise, and import taxes. Meanwhile, expenditures increased due to relief packages adopted after the April attacks and the implementation of expansionary budget proposals in an election year. As a result, the budget deficit increased to 6.8 percent of GDP. The central government debt-to-GDP ratio is high (87 percent), with more than half of the debt denominated in foreign currency.

    With a view to raise growth in the medium-term, the new administration announced a growth stimulus package in December 2019. It combines tax cuts - including a reduction of the VAT rate from 15 percent to 8 percent, increasing the annual VAT registration threshold from LKR 12 million to LKR 300 million, new hiring of civil servants, and debt relief for SMEs. Fitch and S&P revised Sri Lanka’s outlook from ‘stable’ to ‘negative’ on account of rising risks to debt sustainability. COVID-19 is likely to worsen fiscal accounts through reduced revenues and increased expenditures related to further fiscal stimulus.

    Last Updated: Jul 13, 2020

  • The economy is expected to contract by 3.2 percent in 2020 as the outbreak dampens export earnings, private consumption and investment. The external current account deficit is expected to remain benign thanks to the reduction in oil prices and a deceleration of imports, which will largely offset the reduction in receipts from garment exports, tourism and remittances. Refinancing requirements will be high, with annual gross foreign exchange requirements estimated at 6-7 percent of GDP during 2020-2022. The fiscal deficit will further expand, and the debt level is expected to increase due to the implementation of the stimulus package and settling of arrears. Public investment will be reduced to mitigate the impact of revenue shortfalls and create space for additional recurrent expenditures under the stimulus package and for COVID-19 related expenses.

    The slowdown in economic activity will trigger sharp jobs and earnings losses. Informal workers comprise about 70 percent of the workforce and are particularly vulnerable as they lack employment protection or paid leave. Social-distancing measures will directly impact services sector activities and extended travel restrictions will hurt tourism. Construction activities slowed down at the start of the year due to a shortfall of Chinese workers and projects are at risk of being stalled. The apparel industry, which accounts for about half a million jobs has announced significant job cuts due to low global demand and a shortage of raw materials. Meanwhile, agricultural production is expected to be largely undisrupted, amid government efforts to ramp up domestic production and import substitution. Remittances will fall in response to the global slowdown as well as the recent drop in oil prices, which will adversely impact some poor households. Cash support to beneficiaries of various social protection programs have been announced in response to the fallout from the COVID-19 outbreak. However, many poor and vulnerable people are excluded from these initiatives and the cash amount is likely not sufficient to effectively help mitigate the adverse impacts.

    Risks and Challenges

    The immediate challenge is to contain the domestic spread of COVID-19. A prolonged outbreak could lead to further movement restrictions and deeper disruptions in economic and labor market activities. Small and Medium Enterprises will struggle to survive. Sri Lanka is vulnerable to uncertain global financial conditions as the repayment profile requires frequent access to financial markets. A high deficit and rising debt levels could further deteriorate debt dynamics and negatively impact market sentiments.

    Last Updated: Jul 13, 2020

  • The World Bank Group and Sri Lanka

    The World Bank Group has supported Sri Lanka’s development for over six decades and been a trusted development partner through many transitions. 

    The most recent support is the Sri Lanka COVID-19 Emergency Response and Health Systems Preparedness Project to help the country prevent, detect, and respond to the COVID-19 pandemic and strengthen its public health preparedness. Further support is envisaged through the activation of Contingency Emergency Response Components (CERC’s) of ongoing projects. The World Bank’s country engagement approach will evolve to adapt to the aftermath of COVID-19. 

    Country Strategy

    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 and resilience—as well as the cross-cutting themes of gender and governance which form the three CPF program areas.

    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—38 percent in April 2020, up from 12 percent in June 2016.

    World Bank Program

    As of April 9, 2020 the active IDA and IBRD portfolio comprise of 19 projects (with a total net commitment of US$ 2.245 billion), and includes 66 percent of commitments in sustainable development and infrastructure (urban, climate resilience, agriculture, environment, transport and water); 29 percent in human development (education, health and social protection); and 5 percent in the finance and governance sectors. The total of active trust fund resources in Sri Lanka has increased from US$9.8 million to approximately US$ 20 million since July 2016 and consists of 24 active grants (as of April 9, 2020).

    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. These activities included analytical work on investment policy and the business environment, and technical support for public financial management. Several activities also helped lay the groundwork for more effective project interventions, notably in health, water, and tourism. The 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.

    Last Updated: Apr 12, 2020

  • 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 Primary Healthcare System Strengthening Project builds on a $200-million Second Health Sector Development Project (closed in 2018). This project aims at benefiting the people of 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.

    The year 2020 is seeing an unprecedented public health crisis of the COVID-19 pandemic. Given the emergency situation, the Sri Lanka COVID-19 Emergency Response and Health Systems Preparedness Project ($128.6 million) was swiftly activated tapping into the Fast-Track COVID-19 Facility that availed $14 billion for all IDA and IBRD countries globally. The project is supporting the government in strengthening the emergency response mechanism and capacity and the national and sub-national institutions in responding to the ongoing COVID-19 outbreak and any public health emergencies that may occur in the future.

    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. 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 contributes to improve learning outcomes in English and Mathematics and enhance teacher performance.

    The Accelerating Higher Education Expansion and Development (AHEAD) Operation supports 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.

    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 of flood damaged irrigation and flood control infrastructure benefiting more than 50,000 hectares of agricultural land, landslide mitigation works in 18 schools protecting 30,000 students while ensuring transport connectivity for more than 750,000 people by upgrading vulnerable bridges and stabilizing unstable road slopes which will create landslides during rainy periods. CRIP also developed Integrated Flood and Drought Risk Assessment Reports and Basin Investment Plans for 6 river basins, based on which the GoSL will prioritize future flood and drought mitigation investments.  The Climate Resilience Multi-Phased Program (CRes MPA) approved by the Bank will support the Government to modernize forecasting and early warning services of high impact weather, and in flood mitigation investments in Kelani river basin. The Catastrophe Deferred Draw-Down Option (Cat-DDO) program closed in 2017 provided immediate liquidity to the Government after 2016 floods and supported strengthen disaster risk financing, risk information systems and resilient infrastructure planning. Building on these initiatives, the GoSL and the Bank will work closely to advance dialogue to mainstream DRM further into various sectors.

    Agriculture

    Agriculture sector still employs approximately 27 percent of the population, although its contribution declined to 6.9 percent of GDP. Around 80 percent of the approximately 2.3 million hectares of agricultural land is under smallholder production with around 1.65 million smallholder farmers operating on average less than 2 ha. Traditionally, the Government’s approach is interventionist, most notably in its objective to achieve self-sufficiency, which has limited farmers’ opportunities to diversify into higher-value products and kept the sector concentrated in the low-value food crops.  The Government has sought to introduce some reforms in the sector, but these have not progressed due to many challenges. The World Bank program in Sri Lanka responds to these challenges to address some of the long-standing issues around productivity, private sector investment, value chains, policy reform, and adaptation to climate change.

    A core principle of the program is private sector-led smallholder agricultural transformation. This involves a change in mindset of current public institutions to recognize the public role in creating necessary conditions, stimulating private finance and private sector solutions. The Agriculture Sector Modernization Project (ASMP) includes different instruments (matching grants, credit guarantee, out-grower support, farmer-agribusiness alliances) to explicitly crowd in private finance, together support for strategic market infrastructure, including roads. As of October 2019, The total approved matching grants amount to US$68.4m. The observed impact of the scheme includes: i) the upgrading of standards in the food processing industry; ii) achieving transformation change in specific sub-sectors (such as shrimp and ornamental fish) through addressing sector-wide challenges; iii) creating more and better quality jobs; and iv) creating competitiveness and new markets through clustering and scale.

     The Climate Smart Irrigated Agriculture Project (CSIAP) aims to improve the productivity and climate resilience of smallholder agriculture in selected climate hotspot areas is also a vital need with increased climate variability increasing risks to drought and flood and it would also support linkages of smallholders to value chains. Farm productivity and value addition is held back by low innovation and lack of adoption of technologies, especially by smallholder farmers. Both ASMP and CSIAP emphasize innovation. CSIAP will push new technology applications including (inter alia) providing real-time agriculture-meteorological information to farmers and other stakeholders. Both ASMP and CSIAP are assisting the Government in its COVID-19 short- and medium-term food security and productivity enhancement program.

    Water Supply and Sanitation

    Sri Lanka has made a significant progress to achieve basic water supply and sanitation. Ninety two percent of the population has access to improved drinking water and ninety four percent to basic sanitation. The Government of Sri Lanka aims to increase piped water access to meet the Sustainable Development Goals. The Water Supply and Sanitation Improvement Project has made substantial contributions to providing 24-hour treated piped water supply and sanitation services in rural, peri-urban and estate areas in seven districts (Mullaithivu, Kilinochchi, Nuwara Eliya, Badulla, Monaragala, Kegalle, and Ratnapura) that are among the poorest in the country. In addition to construction of infrastructure, the project conducts extensive hygiene behavior change activities, and training and development of Community Based Organizations to operate and maintain their water supply systems. The projects aims to benefit more than 600,000 people with improved water supply and sanitation, improving water security, health and resilience.

    Urban Development

    Sri Lanka’s urbanization is manifesting itself with the emergence of the economically dominating Colombo metropolitan region (CMR) and the Kandy–Colombo–Galle multicity agglomeration. While the CMR covers only about 6 percent of the country’s total land area, it is home to 28 percent of Sri Lanka’s population, accounts for about 45 percent of national GDP and 80 percent of industrial value added. It is the country’s major urban agglomeration and is growing faster than any other area in Sri Lanka, at the same time the CMR also hosts the highest numbers of the country’s poor and bottom 40 percent populations. The World Bank is supporting Sri Lanka to implement its urbanization and rural-urban integration agenda.

    The Metro Colombo Urban Development Project (MCUDP) is supporting the government of Sri Lanka to reduce flooding in the catchment of the Colombo Water Basin, and strengthen the capacity of local authorities in the Colombo Metropolitan Area (CMA) to rehabilitate, improve and maintain local infrastructure and services through selected demonstration investments. The Project pioneered the use of urban wetlands as a nature-based solution for flood risk mitigation, for building climate change resilience, and for improving urban livability. Urban wetland management work supported by the Project has led to the Cabinet approval of a moratorium on wetland reclamation within the metro Colombo area, and to an international recognition for Colombo as a Ramsar Wetland City (first capital in the world to receive this award). Once all sub-projects are completed, the reduction in the area of flood risk will be 4.0 - 4.3 km2 for the whole Colombo, and 3.7 – 3.9 km2 for the Project area. Flood reduction measures will reduce the population affected by flooding by 27 percent for the project area and 12 percent for the whole Colombo.

    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. To date, approximately 400,000 people have benefitted from improved basic services delivered in the participating city regions. These range from improving reservoirs, water treatment, distribution, and sludge treatment, to public spaces such as parks and viewing decks, to bus terminals and drainage improvements.

    The Local Development Support Project is supporting the government of Sri Lanka on strengthening local government authorities' capabilities to deliver services to communities in a responsive and accountable manner and to support economic infrastructure development in participating provinces.

    Trade and Competitiveness

    The Trade and Competitiveness program is a package of technical assistance to support the Government of Sri Lanka’s ambition to create more, better private sector jobs and improve the enabling environment for business. 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, including analytical output (programming and policy briefs) related to gender in specific sectors. Specifically, the program intends to address regulatory and institutional constraints that inhibit the competitiveness of the private sector in order to support private-sector led growth, increase economic diversification and enhance the volume and value addition of exports via interventions related to improving Sri Lanka’s trade potential, investment climate and policy and regulatory simplification and Doing Business program.

    Last Updated: Apr 12, 2020

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