Strong growth expected to slowdown in 2026
The World Bank forecasts a 4.6 per cent growth for Sri Lanka this year and believes the reforms in sectors like public institutions and land need to get underway even as the threat of malnutrition still looms and food prices continue to be high.
With an incomplete recovery and a growth still below pre-crisis levels and poverty significantly elevated, the World Bank on Tuesday pointed out that macroeconomic stability was required to strengthen the recovery with urgent structural reforms, and more efficient better-targeted public spending. This was stated at the release of the World Bank’s Sri Lanka Development Update.
The World Bank highlighted that the government needs to aim at increased reforms aimed at enabling private sector led growth. Key priorities include easing barriers to trade and investment, improving the business environment, and modernising tax administration and regulations governing land and labour market.
Sri Lanka’s economy is expected to grow by 4.6 per cent this year supported by a modest rebound in industry and steady growth in services before slowing down to 3.5 per cent in 2026. This outlook is subject to heightened risks, including from elevated global uncertainty.
The bank recommended carrying out reforms in a bid to manage the public wage bill, including fairer pay structures, and modern payroll systems. On public investment the report urges the government to focus on key infrastructure gaps, implement stronger project planning, evaluation, and monitoring processes, prioritise the completion of nearly finished projects and increase funding for maintenance of infrastructure.
It was pointed out that more than 80 per cent of government spending is tied to public sector salaries, welfare programmes, and interest payments, leaving little room for growth enhancing investments in infrastructure, education, and health.
While Sri Lanka has limited scope to significantly increase or cut public expenditure, it could instead focus on maximising the benefits from its existing levels of public spending, especially on public sector wages and capital projects.
It was noted that although recent growth is strong inflation is low and external inflows robust, food prices have remained high, and reserve accumulation has slowed. Sri Lanka’s economic output is still below 2018 levels. Poverty although declining, remains twice as high as in 2019. The labour market has been slow to recover and many households have yet to regain livelihoods lost during the crisis. An additional 10 per cent of the population lives just above the poverty line, and malnutrition remains a serious issue, especially among vulnerable groups.
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