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Overview

  • Country Context

    The COVID-19 pandemic impacted Sri Lanka profoundly, as is the case in many countries. When the first domestic cases of COVID-19 were reported in March 2020, the government rapidly scaled-up containment measures. Tourist arrivals were suspended, and an island-wide curfew was implemented from mid-March through June 2020. These measures, combined with rigorous case finding, contact tracing, as well as quarantine and isolation, ensured that the first wave was contained successfully. Only 3,380 cases and 13 deaths had been reported by September 30, 2020. However, the country had to contend with a second wave of infections and a rapid increase in cases during the last quarter of 2020. This time, however, the government resorted to targeted lockdowns instead of island wide curfews, to minimize the impact on economic activity.

    Recent Developments

    Amid the COVID-19 pandemic, Sri Lanka’s economy contracted by 3.6 percent in 2020, the worst growth performance on record, as is the case in many countries fighting the pandemic. Swift measures enacted by the government in the second quarter helped contain the first wave of COVID-19 successfully, but these measures hit sectors like tourism, construction, and transport especially hard, while collapsing global demand impacted the textile industry. Job and earning losses disrupted private consumption and uncertainty impeded investment. The economy began to recover in the third quarter as the first wave was brought under control and containment measures were relaxed. The momentum continued in the fourth quarter as the economy was broadly kept open despite a second wave of COVID-19 infections.

    The government took proactive measures to mitigate the impact of the pandemic. Despite limited fiscal space, resources were allocated (approximately 0.7 percent of GDP) for health measures, cash transfers, and postponed tax payments. While public expenditures increased, revenues declined, resulting in a widening of the fiscal deficit in 2020. Due to the economic contraction and the elevated fiscal deficit amid COVID-19, public and publicly guaranteed debt is estimated to have increased to 109.7 percent of GDP. In line with the government strategy to reduce external debt over the medium-term, debt financing relied increasingly on domestic sources.

    The Central Bank of Sri Lanka (CBSL) significantly contributed to the crisis response. It undertook considerable monetary policy easing, for which there was room given benign inflation, and additional measures to increase liquidity in the market and support businesses. It also introduced financial sector regulatory measures, like a debt moratorium for COVID-19 affected businesses and individuals. However, despite these efforts, bank lending to the private sector remained low. By contrast, credit to the government and state-owned enterprises surged and accounted for 80 percent of the total credit in 2020. The pandemic likely exacerbated pre-existing financial sector vulnerabilities, although the full impact of COVID-19 cannot yet be observed.

    An improved trade balance and strong remittance inflows narrowed the current account deficit. A sharp drop in imports in 2020 more than offset the decline in exports. However, with financial inflows insufficient to meet external liabilities, reserves declined to an 11-year low in February 2021, before a currency swap worth US$ 1.5 billion with the People’s Bank of China was approved in March 2021. Due to a shortage of foreign currency, the exchange rate depreciated by 6.5 percent from January through March 17, 2021. The CBSL took several measures to preserve foreign exchange reserves and reduce pressures on the exchange rate.

    Last Updated: Apr 06, 2021

  • Outlook

    Growth is expected to recover to 3.4 percent in 2021, mainly reflecting a base effect and FDI inflows. Gradually normalizing tourism and other economic activities as well as already signed investments will support growth. However, the subdued global recovery may dampen export demand. Over the medium-term, continued trade restrictions, economic scarring from the slowdown, and the high debt burden may weigh on growth prospects. Through an enhanced focus on an export-oriented growth model that taps the full potential of private investment, the country could realize its ambitions to increase its competitiveness and raise growth in a sustainable manner.

    The forecast is subject to both upside and downside risks. If the global economy recovers faster than expected and the global tourism industry rebounds more quickly with the progress on vaccination programs, the growth outlook could become more favorable. On the other hand, downward risks persist, pertaining to debt and external sustainability given high debt and low external buffers, especially because the repayment profile requires accessing financial markets frequently. Given large refinancing requirements, constrained market access amid rating downgrades is a challenge. Thus, striking a balance between supporting the economy amid COVID-19 and ensuring fiscal sustainability is key. A reform program to provide a fiscal anchor could help Sri Lanka to reduce debt vulnerabilities and lower sovereign risk.

    Risks and Challenges

    Delays in the vaccination process in Sri Lanka and/or major tourist origin countries may extend the horizon and depth of economic disruptions. A longer downturn could push many SMEs from illiquidity to insolvency. Lower growth would also put additional strain on public finance and could elevate risks to macroeconomic stability.

    The amount of debt and its composition imply significant fiscal risks. Sri Lanka is highly susceptible to market sentiments as its debt repayment profile requires the country to access financial markets frequently. Constrained market access amid rating downgrades remains a key challenge given the large refinancing requirements. A higher-than-expected deficit or lower than expected GDP growth could further affect market sentiments. Thus, striking a balance between supporting the economy amid COVID-19 and ensuring fiscal sustainability is key. A reform program to provide a fiscal anchor could help reduce debt vulnerabilities and lower sovereign risk.

    As a relatively small but strategically located country, Sri Lanka could strive to achieve sustainable development by moving towards an export-oriented and private-investment led growth model. This would likely require promoting trade and private investment (including FDI), establishing the necessary conditions for a thriving knowledge economy, facilitating public-private partnerships in key sectors (such as in infrastructure, health, and tourism), investing in tourism infrastructure, allowing productive local companies to integrate into global value chains, and attaining higher value addition in the manufacturing, agribusinesses, and service sectors.

    Last Updated: Apr 06, 2021

  • The World Bank Group and Sri Lanka

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

    The WBG is now supporting the Government of Sri Lanka’s efforts to prevent, detect, and respond to the COVID-19 pandemic and strengthen its public health preparedness.

    The World Bank’s immediate response to the crisis was first via an  emergency project of US$ 128.6 million approved on April 3, 2020. This was topped up with US$ 88.96 million of additional financing, mostly reallocated from other ongoing projects (US$ 60 million from three projects) to provide cash transfers to the vulnerable. Second, repurposing and restructuring the World Bank Social Safety Net Project, to disburse US$ 45 million as temporary payments to low-income households. Third, triggering the Contingency Emergency Response Components (CERCs) of US$ 56 million in four ongoing projects (in health, education, agriculture, and local development), repurposed and pooled for COVID-19 support in food security, education, transport and ICT. In addition, the World Bank’s support to Sri Lanka’s COVID-19 response include vaccination efforts and plans to build back better after the pandemic.

    Over time, the World Bank’s support for Si Lanka will evolve, enabling it to adapt to the aftermath of COVID-19. 

    Country Strategy

    The World Bank Group’s Country Partnership Framework (CPF) for Sri Lanka for FY2017-20 is based on the Group’s 2015 Systematic Country Diagnostics (SCD) and the country’s own development priorities. A Performance and Learning Review (PLR) for the CPF FY17-FY20 documenting progress at the midpoint of the CPF’s implementation was completed in April 2019.

    The CPF supports Sri Lanka’s transition to a more competitive, inclusive, and resilient upper-middle income country. It focuses on three broad areas: 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.

    The WBG Country Partnership Framework (CPF) FY17-20 continues to be relevant but in order to tackle the unprecedented threats posed by the COVID-19 crises, the World Bank shifted its focus aiming at striking a balance between helping Sri Lanka address its immediate health needs, address the short and medium-term needs from the COVID-19 crisis and the focus on the long-term economic path to bolster economic recovery. The World Bank, IFC, and MIGA will continue to collaborate closely in implementing these major shifts.

    From FY2017, when Sri Lanka graduated from International Development Association (IDA), the WBG’s soft lending arm, IBRD lending has accounted for an increasing share of WBG commitments to the country. The IBRD share of the WBG’s Sri Lanka portfolio rose from 12 percent in June 2016 to 35 percent in March 2021.

    World Bank Program

    As of March 2021, the WBG’s portfolio comprised of 19 IDA and IBRD projects, with a total net commitment of US$2.33 billion.  Some 65 percent of these commitments were for sustainable development and infrastructure (urban, climate resilience, agriculture, environment, transport and water); 32 percent for human development (education, health and social protection); and 3 percent for equitable growth, finance and institutions (finance, competitiveness and innovation).

    The total of active trust fund resources in Sri Lanka has increased from US$9.8 million to approximately US$ 39 million since July 2016 and consists of 21 active grants as of March 2021.

    The World Bank Group continues to support the Sri Lanka government’s development efforts by providing policy advice, analysis and technical assistance through trust funds and its own budget. This includes analytical work on investment policy and the business environment, and technical support for public financial management. Several activities have also helped lay the groundwork for more effective project interventions, notably in the health, water, and tourism sectors. In addition, the Group carried out structured diagnostics of the urban transport infrastructure and energy sectors and provided perspectives to support their development, including through WBG-assisted solutions.  

    The WBG’s technical support for collecting poverty data and monitoring poverty levels contributed to a deeper understanding of the role of social assistance in poverty alleviation. This has already had significant policy impact. In addition, a series of biannual economic updates has developed a broad audience for timely economic analysis and forecasts for potential future trends.

    Last Updated: Apr 06, 2021

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

    Health

    The Primary Healthcare System Strengthening Project  ($200-million) focuses on the detection and management of Non-Communicable Diseases (NCDs) and targeting the most vulnerable. Within the two years of implementation, NCD services expanded to 187 primary care institutions across the country, with all services functional in 63 Phase-1 primary care institutions. In 2019, approximately 161,000 women aged 35-45 years were screened for cervical cancer at primary care institutions, exceeding targets. In recent years, substantial analytical work has informed government policies. This includes an assessment of the system for financing health care and the impact that COVID-19 has had on this, as well as a study on nutrition. An assessment on the pandemic preparedness of health system is currently underway.

    The Sri Lanka COVID-19 Emergency Response and Health Systems Preparedness Project ($128.6 million and an additional financing of US$88.97 million), is supporting the government’s efforts to respond to the COVID-19 pandemic. The project 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.

    Education

    The World Bank is helping the development of human capital across all levels of education and training. The Sri Lanka Early Childhood Development Project  is supporting children from disadvantaged households to access early learning opportunities. About 1.35 million children, half of whom are girls, have benefitted directly, along with teachers, parents, community members, and government officials.

    The General Education Modernization (GEM) project, launched in October 2018, seeks to promote learning outcomes in English and Mathematics, develop the socio-emotional skills of students and enhance teacher performance. About 1.3 million school children have directly benefitted from direct interventions to enhance learning, half of whom are girls. The GEM has also assisted the education response of the country to the Covid19 pandemic through support for distance learning and school health and hygiene. 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. Approximately 70,000 university students have benefited from direct interventions to enhance learning, of whom around 60 percent are female.

    Social Protection & Jobs

    The World Bank is playing a pivotal role in the reform of Sri Lanka’s 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 IWMS contains data on almost 2.5 million low-income households, which will be continually updated by local officials once the system is active. 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. Through this project, the World Bank provided $45 million of financing to cover the cost of emergency income support to low-income households during the April/May 2020 curfew.

    Further, the World Bank is also supporting Government of Sri Lanka’s COVID-19 response through the social protection sub component in the Sri Lanka COVID-19 Emergency Response and Health Systems Preparedness Project (Additional Financing of $87 million) wherein over 2 million beneficiaries have been provided cash and in-kind transfers. The beneficiaries include elderly, persons with disabilities, patients of chronic kidney disease, people from helpless community groups whose livelihoods are directly or indirectly lost due to the pandemic. In addition, this sub component also supported in-kind transfer of essential goods to families in quarantine, up to an overall limit of $5 million.

    Climate Change and Disaster Risk Management

    The annual average fiscal loss associated with disasters in Sri Lanka is very high and is estimated to be already in excess of $380 million. Floods is the most frequent natural disaster, with an estimated annual loss of $240 million. The ongoing Climate Resilience Improvement Project  (CRIP), implemented since 2014,  has achieved major results: rehabilitation of damaged infrastructure and the construction of physical protections against landslides along key corridors, school premises and other critical locations; and the development of basin-wide investment plans for 10 river basins based on the modern flood modeling approach. This led to the design of a new operation, the Climate Resilience Multi-Phase Program. The World Bank strengthened its support for Climate Change in Sri Lanka when Sri Lanka recognized its needs to access climate finance to scale up climate change mitigation activities.

    Agriculture

    The agriculture sector still employs approximately 27 percent of the population, although its contribution declined to 6.9 percent of GDP. Around 80 percent of agricultural land is under smallholder production, with around 1.65 million smallholder farmers operating an average of less than 2 hectares each, with limited opportunities to diversify into higher-value products. The World Bank program in Sri Lanka responds to these challenges by addressing some 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 among public institutions to recognize their role in creating the necessary conditions, stimulating private finance and bringing in private sector solutions. The Agriculture Sector Modernization Project (ASMP) includes different instruments to introduce modern technology to smallholder farmers and connect them to value chains, crowd in private finance and support the development of strategic market infrastructure, including roads. The observed impact of the project includes: i) increased incomes of farmers, including women, through improved productivity and establishment of farmer groups; ii) the upgrading of standards in the food processing industry; iii) transformational change in specific sub-sectors, such as tropical fruits, shrimp and ornamental fish; iv) creating more and better quality jobs; and v) 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 select hotspots. To enable smallholder farmers to raise productivity, the project is linking them to value chains and pushing new applications of technology, including real-time agricultural-meteorological information. Both projects are assisting the Government of Sri Lanka in its program to ensure short- and medium-term food security during the COVID-19 pandemic. The five production programs implemented under CSIAP to respond to the COVID-19 pandemic covered an area of 7,645 hectares (ha) and benefited 19,923 farm families (45 percent women). The production programs, together with the infrastructure investments such as tank rehabilitation, extension modernization and marketing infrastructure helped to boost employment, revived food supply chains, and supported economic activities in project areas. Thus far, the project supported the production of 2,468 MT of groundnut and 360 MT of chili, representing 9 percent and 0.7 percent respectively of their national production targets. The project’s import substitution contributions ranged from 54 percent for groundnut, 13 percent for cowpea, and 6 percent for green gram, and CSIAP outputs generated approximately $5.21 million in value addition in 2020.

    Water Supply and Sanitation

    Sri Lanka has made a significant progress in providing its people with basic water supply and sanitation. Some 92 percent of the population has access to improved drinking water and 94 percent to basic sanitation. The Government of Sri Lanka now aims to increase access to piped water 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 of the poorest districts in the country (Mullaithivu, Kilinochchi, Nuwara Eliya, Badulla, Monaragala, Kegalle, and Ratnapura). In addition to constructing infrastructure, the project conducts extensive behavior change activities to promote hygiene, and trains and develops community based organizations to operate and maintain their water supply systems. The project aims to benefit more than 600,000 people with improved water supply and sanitation promoting water security, health and resilience.

    Urban Development

    The Metro Colombo Urban Development Project (MCUDP) is supporting the government of Sri Lanka’s efforts to reduce flooding in the Colombo Water Basin.  The project is undertaking select investments to strengthen the capacity of the Colombo Metropolitan Area (CMA) authorities to rehabilitate, improve and maintain local infrastructure and services. The Project is delivering a set of hard-engineering solutions to protect the city against flood events. In addition to hard infrastructures, the Project pioneered the use of urban wetlands as a nature-based solution for flood risk mitigation, building resilience to climate change, and improving urban livability. This has led to a moratorium on wetland reclamation within the metro Colombo area, and to an international recognition for Colombo as a Ramsar Wetland City  - the first capital in the world to receive this award. On urban upgrading and public space improvement, the Project has successfully improved public space in Colombo and rehabilitated 47 km of road. Once all sub-projects are completed, flood risk will be reduced to 4.0 - 4.3 km2 for the whole of Colombo, and 3.7 – 3.9 km2 for the project area. The population exposed to flood risk will be reduced by 27 percent for the project area and 12 percent for the whole Colombo.

    The Strategic Cities Development Project (SCDP) is supporting the government’s effort on regional development in Kandy, Galle and Jaffna—three strategic urban centers in the center, south, and north of the country. The project aim to improve selected urban services and public open spaces in the three participating cities, including urban upgrading and investments in urban water supply, sewage and drainage systems, rehabilitating cultural heritage, and improving urban transport and traffic management, among other areas. To date, approximately 400,000 people in these cities have benefitted from improved basic services. These range from improved reservoirs, water treatment, distribution, and sludge treatment, to better public spaces such as parks and viewing decks, and drainage improvements.

    The Local Development Support Project is supporting the Government of Sri Lanka to strengthen 134 Local Government Authorities (LGAs) in the Northern, Eastern, Uva and North Central Provinces to deliver services to communities in a responsive and accountable manner and to support the development of infrastructure. The project aims to establish a reliable and predictable flow of resources enabling LGAs to establish and use improved measurement systems; boost results-based planning and budgeting; and upgrade the management and delivery of a range of services.

    Transport

    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). Once fully operational, the system will help the Road Development Authority (RDA) to ensure the best use of scarce resources and reduce costs for planning, developing and maintaining roads. The project is also helping the RDA to assess the safety of certain high-risk national corridors and strengthen their capacity to design safer roads. Approximately 430 km of provincial roads, spread across all nine provinces of the country, are planned to be rehabilitated under the project, improving the connectivity of the provinces. Overall, the project has the potential to create about 1.3 million man-days of employment.

    The Kandy Multimodal Transport Terminal Development Project (KMTTDP) is a transformational urban mobility project which supports Sri Lanka in improving the accessibility and safety of public transport, and reducing congestion in the world heritage city of Kandy. The project will support the development of a modern multimodal transport terminal which integrates bus and rail transport, replacing the existing bus station. The project will facilitate the training of all relevant stakeholders for the operation of a multimodal terminal of this nature. It will also explore the potential for transit-oriented development (TOD) by locating amenities, employment, retail shops, and housing around the terminal, improve road safety and promote nonmotorized travel. 

    Last Updated: Apr 06, 2021

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