Sri Lanka

Sri Lanka is a lower-middle-income country with a population of approximately 22 million (as of 2023). Located in South Asia, it is an island nation in the Indian Ocean, strategically positioned along major maritime trade routes. Sri Lanka shares maritime borders with India and the Maldives. The country has diverse natural resources, including fertile agricultural land, mineral deposits such as graphite and ilmenite, and a rich biodiversity. Key agricultural exports include tea, rubber, coconut, and spices, with tea being one of its most recognized global products. The services sector—particularly tourism, transport, and financial services—plays an increasingly significant economic role.

Sri Lanka has historically been a regional leader in human development, showing strong outcomes in health, education, and social indicators relative to its income level. However, recent years have posed considerable economic challenges, including fiscal imbalances, rising debt levels, and inflationary pressures. These issues have been compounded by external shocks such as the COVID-19 pandemic and fluctuations in global commodity prices.

Sri Lanka is implementing macroeconomic stabilization measures and structural reforms with support from international partners. Key priorities include restoring debt sustainability, strengthening governance, expanding social protection, and promoting inclusive and sustainable growth.

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In late 2025, Sri Lanka was struck by Cyclone Ditwah, which flooded one-fifth of the country's landmass and caused 687 fatalities, along with extensive damage to crops, livestock, infrastructure, productive assets, and livelihoods. Despite this severe shock, the economy continued to recover through 2025, supported by rising household spending, stronger investment, and steady gains in tourism and remittances. The rebound in industrial activity continued, driven by the textile, construction, and food manufacturing sectors, while financial and tourism-related services expanded further. After eleven consecutive months of deflation, prices began to rise again in August 2025 due to higher energy costs. With inflation remaining below target, the Central Bank reduced the policy rate to 7.75 percent in May 2025, making borrowing cheaper and helping the private sector grow rapidly.

While exports reached a record high despite uncertainty in global trade policies, imports grew faster, mainly due to increased purchases of personal vehicles and other consumer goods. However, Sri Lanka maintained a current account surplus in 2025, supported by strong tourism earnings and remittances. Usable foreign exchange reserves increased to $5.4 billion, and while the rupee depreciated slightly after two years of appreciation, overall external conditions are stable.

Government finances also improved, with the primary surplus more than doubling from 2024. Higher tax revenues, particularly from VAT and vehicle imports, together with prudent management of recurrent expenditure and lower capital spending, supported this outcome. Public debt remains high but has declined from its peak as debt restructuring nears completion. These improvements have strengthened macroeconomic stability, even though structural challenges remain.

However, many households are still struggling to recover from the crisis. Poverty and malnutrition remain above pre-crisis levels, and real wages are well below 2019 levels. Labor force participation is low, especially among women, while many families face rising food costs and limited employment opportunities. Regional inequalities also persist, slowing the pace of social recovery.

Although the medium-term outlook has improved, sustaining these gains will require maintaining macroeconomic stability, further progress on structural reforms, stronger job creation, proactive policy responses to spillovers from the conflict in the Middle East, and targeted support for vulnerable groups to ensure that growth benefits more people across the country.

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The World Bank Group (WBG) has been a vital development partner for Sri Lanka for over 70 years, providing financing, advisory services, and analytical support to advance the country’s development agenda. This long-standing partnership has focused on promoting fiscal sustainability, enhancing competitiveness, and supporting Sri Lanka’s transition toward a green, resilient, and inclusive recovery.

As of March 2025, the World Bank has approved $1.85 billion for 12 active operations under the International Development Association (IDA) and the International Bank for Reconstruction and Development (IBRD), which includes one initiative funded by multiple donors. Of these commitments, 36% support infrastructure development, such as transportation and urban systems. Additionally, 24% are allocated to people-focused sectors, including education, health, and social protection, while 21% support environmental initiatives related to agriculture and water. The remaining 19% focuses on prosperity, covering areas like finance, competitiveness, and governance. Furthermore, Sri Lanka benefits from $58.07 million in active trust fund resources across 26 grants.

The International Finance Corporation (IFC) has also played a significant role in promoting private sector-led growth, investing over $2 billion in sectors such as manufacturing, infrastructure, telecommunications, tourism, and energy, while also offering expert solutions. Since the onset of the COVID-19 pandemic, IFC has invested nearly $900 million to support businesses and preserve jobs. IFC's strategy for Sri Lanka will focus on fostering growth by creating jobs and mobilizing private capital.

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The World Bank Group’s new Country Partnership Framework (CPF) for Sri Lanka sets out a clear roadmap to support Sri Lanka’s continued recovery and its ambition of achieving 7% growth. Anchored in the country’s development priorities, the CPF focuses on creating jobs through private sector-led growth, promoting reforms that improve the business climate, facilitate trade, and enhance competitiveness. It channels investment into sectors with strong potential to create jobs and attract private capital at scale, including ports and logistics, clean energy, export-oriented agriculture, and high-value tourism. The CPF deploys the full World Bank Group toolkit — financing, guarantees, and advisory services — to unlock private investment and expand opportunity. Targeted support will be provided to women and youth and to lagging regions, especially the Northern and Eastern provinces. The CPF also strengthens Sri Lanka’s resilience to future shocks that could reverse development gains and derail the path to sustainable growth.

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