Overview

  • AT A GLANCE

    Sri Lanka is a recently graduated Upper 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 5.8 percent during the period of 2010-2017, reflecting a peace dividend and a determined policy thrust towards reconstruction and growth; although there were some signs of a slowdown 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. The country has made significant progress in its socio-economic and human development indicators.

    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 extreme poverty line.

    Low fiscal revenues combined with largely non-discretionary expenditure in salary bill, transfers, and interest payments have constrained critical development spending and squeezed expenditure on health, education and social protection, which is low compared to peer countries. Debt levels are high and the overall debt portfolio indicate some important risks.

    Last Updated: Mar 15, 2019

  • RECENT ECONOMIC DEVELOPMENTS

    Growth is expected to have declined to 3.2 % in 2018, down from 3.3 percent in 2017. While agriculture made a positive contribution, thanks to clement weather, a deceleration in construction depressed the contribution from industry, and services expanded at a modest rate. Inflation declined to 4. 3 percent by end 2018, with the moderation brought about by lower food prices, despite currency depreciation and high oil prices in the first half of the year. Monetary policy, which remained broadly tight in response to external pressures, also helped maintain inflation low.

    External sector performance was mixed. The trade deficit widened. While earnings from tourism continued to grow fast, high oil prices in the first half of 2018 and increased imports of vehicles drove overall import growth. Meanwhile, worker remittances remained almost flat, and increased dividend and interest outflows exerted pressure on the current account deficit, which is expected to have widened to 3.0 percent of GDP in 2018 (from 2.6 in 2017). Debt-creating flows dominated the financial account with issuance of Eurobonds, project loans and term-financing. Nevertheless, FDI is expected to have reached an all-time high at around USD 2.0 billion in 2018, thanks to the long-term leasing of the Hambantota port.

    A political controversy in the fourth quarter of 2018 affected external sector performance. Fitch, S&P and Moody’s cut Sri Lanka’s sovereign credit rating by one notch, and currency pressures were elevated amid capital outflows. Keeping with debt repayment, capital outflows, and market intervention by the Central Bank, gross official reserves decreased to USD 6.9 billion in December (from an all-time-high of USD 9.9 billion in April 2018). Thus, reserve adequacy metrics remained weak, with foreign exchange obligations for 2019 estimated at USD 5.9 billion. The Government announced plans to issue Eurobonds, and borrow from Chinese banks, while entering into SWAP arrangements.  IMF reached a staff-level agreement on the fifth review of Sri Lanka’s Extended Fund Facility program - in February 2019, which was delayed earlier due to the political controversy. After the announcement of the staff-level agreement with IMF, the Government raised USD 2.4 billion in Eurobonds.

    Fiscal policy remained conservative. A primary surplus of 0.5 percent of GDP is expected to have been realized in 2018, thanks to tight control over expenditures. However, a sharp increase in interest expenditure is expected to have overshadowed these improvements and contributed to keep the overall deficit at 5.2 percent of GDP (only marginally down from 5.5 percent in 2017). Central government debt is estimated to have reached 83 percent of GDP, more than half denominated in foreign currency. Recent commercial borrowings have increased the cost and risk of the portfolio. While the implementation of cost-reflective pricing of fuel is an important step, further reforms are needed to reduce fiscal risks of SOEs.

    Poverty measured at USD 3.20 per day per person (in 2011 PPP terms) is expected to have continued its downward path from 9.4 percent in 2017 to 8.7 percent in 2018. A rebound in the agricultural sector and modest inflation helped incomes of the rural poor. The political turmoil, however, put a temporary brake on the rapid growth in tourism towards the end of the year, on the eve of the peak holiday season. A rebound in this sector could help move labor out of agriculture and improve the earnings of the poor.

    OUTLOOK

    The economy is expected to rebound, and growth to converge gradually toward 4 percent in the medium term, driven by domestic demand. Inflation is projected to stabilize around 5%. Continued fiscal consolidation, albeit slow, should bring the overall fiscal deficit and public debt on a downward path. The current account deficit is projected to remain at around 2.4 percent of GDP between 2019-2021 as tourism receipts help counterbalance the effect of sluggish remittance flows and high external interest payments. Foreign capital inflows to government securities, and FDI should help meet external financing requirements. The recovery of domestic demand and improvements in the labor market, aided by low inflation, should boost real incomes and lead to a further reduction in poverty. Sri Lanka is a fast-growing tourist destination and the tourism sector could help accelerate poverty reduction as it is labor-intensive, requires relatively low investment, and thus holds great potential to create jobs for youth and women. More generally, the recovery of domestic demand and improvements in the labor market, aided by low inflation, should boost real incomes and lead to a further reduction in poverty. As a result, the $3.20 poverty rate is projected to further decline to 8 percent in 2019 and 7.2 percent in 2020.

    RISKS AND CHALLENGES

    The challenging political environment remains a key source of risk. Given recent developments, and the impending election cycle, the window for reforms is narrowing. On fiscal and debt management fronts, risks include a delay or reversals in efforts to strengthen revenue collection, improve tax administration, and implement liability management operations. On the external front, tighter than expected global financial conditions would increase the cost of debt and complicate endeavors to roll-over maturing Eurobonds. The increasing occurrence and impact of natural disasters could also have an adverse impact on growth and poverty reduction.

    Priority reforms to sustain economic growth, create more and better jobs, and reduce poverty include: (a) fiscal consolidation to make space for investments in health, education, social protection and public infrastructure; (b) improving competitiveness and promoting trade and FDI to facilitate a shift in the growth model driven more by private investment and exports; (c) mainstreaming governance reforms, particularly with respect to PFM and SOE reforms; and (d) reducing vulnerability stemming from refinancing risks and natural disasters risks.

    Last Updated: Mar 15, 2019

  • THE WORLD BANK GROUP AND SRI LANKA

    The World Bank Group has supported Sri Lanka’s development for nearly six decades. Although in many ways it is a development success story, Sri Lanka still faces critical challenges as it strives to become 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 recently completed.

    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 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—27 percent in December 2018, up from 12 percent in June 2016.

    WORLD BANK PROGRAM

    IBRD and IDA portfolio commitments totaled $1,948.5 million as of end March 2019, with 17 operations under implementation. Of these commitments, 65 percent are in the sustainable development cluster (urban development, rural development, climate resilience, agriculture, environment, and water), 33 percent in human development (education, health, and social protection), and the balance in the financial sector. The total of active trust fund resources in Sri Lanka has increased from $9.8 million to $27.8 million since July 2016.  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 solid 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. These activities included analytical work on investment policy and the business environment and technical support for public financial management, tourism strategy formulation, 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 activities in Sri Lanka support the World Bank Group’s CPF goals. By working closely with the private sector, the government, and the World Bank, IFC focuses on facilitating inclusive growth by attracting private sector finance.

    During the CPF period thus far, IFC has delivered US$313 million in long-term financing, across 14 projects supporting better, efficient, and sustainable growth. IFC’s committed investment portfolio increased from $244 million with 17 clients at the start of FY17 to $411 million with 19 clients at the end of FY18. The increase in the portfolio also reflects a strategic shift to address the country’s biggest development gaps, especially in inclusion, infrastructure, productivity, and sustainability. In implementing the CPF, IFC is helping to create markets by diversifying into new sectors such as small and medium-sized enterprises (SMEs), gender financing, renewable energy, and climate-smart agriculture. IFC in partnership with the Government of Australia launched in April 2017 the “Women in Work” program to demonstrate that corporate performance can improve by closing gaps between men and women in the private sector.  IFC’s advisory services portfolio stood at $9.3 million at end-FY18. IFC worked on 13 advisory services projects during the first half of the CPF period, 9 of which are still ongoing in the financial sector and are focused on SME banking and capacity building in lagging regions. Other advisory projects are in water, gender, agribusiness, corporate governance, and PPPs

    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: Mar 27, 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 slightly higher number of girls than boys in secondary 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 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.

    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 innovation. 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.

    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 (30 per 100,000 and 8 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. 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 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 quality of primary health care services. The focus of this project is on the detection and management of non-communicable diseases, responding to the changing health needs of the population and targeting the most vulnerable.

    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: Mar 20, 2019

Api


LENDING

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

*Amounts include IBRD and IDA commitments

MULTIMEDIA



PHOTO GALLERY

More Photos Arrow

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