Sri Lanka’s recent economic performance has been strong, but the recovery remains incomplete, with growth still below pre-crisis levels and poverty significantly elevated, according to the latest Sri Lanka Development Update released by the World Bank. The report, titled Better Spending for All, emphasizes that strengthening the recovery will require continued macroeconomic stability, urgent structural reforms, and more efficient, better-targeted public spending.
The World Bank projects Sri Lanka’s economy to grow by 4.6 percent in 2025, supported by a modest rebound in industry and steady growth in services, before slowing to 3.5 percent in 2026. However, this outlook remains subject to heightened risks due to ongoing global uncertainty.
“While Sri Lanka’s recent economic progress is encouraging, the recovery is uneven and incomplete,” said David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka. “To build a stronger, fairer economy that benefits all households in a fiscally constrained environment, Sri Lanka needs the private sector to invest and create jobs — and ensure that every rupee of public money is well spent.”
Although recent growth has been strong, inflation is low, and external inflows remain robust, food prices have stayed high, and reserve accumulation has slowed. The country’s economic output is still below 2018 levels. Poverty, while declining, remains twice as high as in 2019. The labor market has been slow to recover, and many households have yet to regain livelihoods lost during the crisis. Around 10 percent of the population now lives just above the poverty line, and malnutrition continues to be a serious concern, especially among vulnerable groups.
To support long-term growth and reduce poverty within fiscal limits, the report calls for a comprehensive package of reforms aimed at enabling private sector-led growth. Key priorities include easing barriers to trade and investment, improving the business environment, and modernizing tax administration, as well as regulations governing land and labor markets.
The report places special focus on public spending, noting that over 80 percent of government expenditure is tied to public sector salaries, welfare programs, and interest payments. This leaves little room for growth-oriented investments in infrastructure, education, and health. While Sri Lanka has limited scope to either significantly increase or reduce public spending, the World Bank stresses the need to maximize returns from existing expenditure — particularly through reforms in public wage management and capital project efficiency.
Key recommendations include reforms to manage the public wage bill through 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, prioritize the completion of nearly finished projects, and increase funding for infrastructure maintenance.
