Sri Lanka's recovery remains incomplete, urgent reforms needed: World Bank

Sri Lanka's recent economic performance has been strong, but the recovery remains incomplete, the World Bank said on Tuesday.

"With growth still below pre-crisis levels and poverty significantly elevated, strengthening the recovery will require continued macroeconomic stability, urgent structural reforms, and more efficient, better-targeted public spending, it said.

Sri Lanka's economy crashed in 2022 due to a forex crisis stemming from the COVID-19 pandemic and other flawed political and economic management reasons since 2019. The current turnaround was aided by the four-year IMF bailout of nearly 3 billion USD pinned to a stringent reform regime.

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.

The World Bank projects Sri Lanka's economy to grow by 4.6 per cent in 2025 supported by a modest rebound in industry and steady growth in services before slowing to 3.5 per cent in 2026.

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, Sislen said.

Despite strong recent growth, low inflation, and robust external inflows, food prices remain high, and reserve accumulation has slowed.

Sri Lanka's economic output is still below 2018 levels, and although poverty is declining, it remains twice as high as in 2019.

To support long-term growth and reduce poverty amid fiscal constraints, the bank calls for a broad package of 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 related to land and labour markets.

More than 80 per cent of government spending is exhausted in public sector salaries, welfare programs, and interest payments, leaving little scope for growth-oriented investments in infrastructure, education, and health.