Cautious optimism and a clear warning
Sri Lanka’s economy may finally be on the mend, but the World Bank has warned that the recovery remains fragile and could easily falter without faster, deeper reform.
In its latest Sri Lanka Development Update titled Better Spending for All, the World Bank projects the economy to grow by 4.6% in 2025, before easing slightly to 3.5% in 2026. The numbers show progress, but the tone of the report is unmistakably cautious. Stability, the Bank says, is not yet sustainability.
At the Colombo launch of the report, World Bank Country Manager Gevorg Sargsyan praised the progress made over the past two years, noting that the economy grew by around 5% in the first half of 2025. “We’ve seen people spending and investing more, inflation stabilising, and businesses accessing credit again,” he said.
Yet, he warned that “the journey is far from over,” reminding policymakers that the economy remains below its 2018 level and that poverty is still twice as high as before the crisis.
The social divide behind the macro recovery
According to the World Bank, 22% of Sri Lankans still live below the poverty line, with another 10% hovering just above it. That means nearly one in three people remains extremely vulnerable to any economic shock.
Sargsyan highlighted that malnutrition and underemployment continue to persist, even as inflation cools and foreign reserves stabilise. “While poverty is expected to decline this year, the benefits of recovery are not yet reaching everyone,” he said.
This uneven rebound, the Bank argues, is why reforms must now shift from firefighting to future-building with a sharper focus on trade liberalisation, investment promotion, tax reform, and job creation.
Private sector must lead- public finances can’t carry growth
“The public sector simply has no fiscal space left,” Sargsyan said bluntly. “Private-sector-led growth is the only viable option for Sri Lanka right now.”
He pointed out that around 80% of Government spending goes to salaries, welfare, and debt service leaving little room for capital investment in infrastructure, health, or education. Instead of cutting spending, he called for “smarter spending” that delivers better results per rupee.
The newly introduced public investment management system designed to streamline and track state projects, was described as a step in the right direction. If implemented well, it could ensure projects are chosen and executed based on economic merit, not administrative habit.
Reform momentum remains the hinge
World Bank Country Economist Shruti Lakhtakia echoed the same concern: Sri Lanka’s outlook is improving, but the foundation remains thin.
In her presentation, Lakhtakia said growth in the first half of 2025 was driven largely by household consumption rather than investment. “Cement consumption and private credit have picked up, but activity remains below pre-crisis levels,” she said.
Inflation has stabilised, allowing the Central Bank to ease rates, which has helped fuel a 20% rise in private credit by mid-year. Tourism and remittances have kept the current account in surplus, yet reserve accumulation has slowed, and the rupee has weakened slightly against the dollar.
Lakhtakia warned that Sri Lanka’s fiscal buffers, though improving, are still being achieved partly through under-execution of capital spending a short-term fix that could hurt long-term growth.
“We project a primary surplus above the Government’s target,” she noted, “but that is partly because of reduced investment.”
Spending smarter, not bigger
The Bank’s analysis shows that Sri Lanka’s total government spending is low compared with peers, but its rigidity is unusually high. With four-fifths of expenditure effectively locked into wages, transfers, and interest, the margin for manoeuvre is minimal.
Lakhtakia suggested modernising the public wage system, reducing duplication, and preserving frontline services such as health and education. “A review of base pay and allowances could help make compensation more equitable and performance-based,” she said.
She also called for faster completion of existing capital projects and better asset maintenance, emphasising that linking investment to real infrastructure gaps is critical.
“Better targeting and stronger execution,” she said, “will ensure that limited public money delivers maximum social and economic returns.”
A narrow but promising path
The World Bank’s near-term forecast remains cautiously positive. Growth in 2025 will depend on policy stability and continued reform implementation. Inflation is expected to remain moderate, the external account supported by tourism and remittances, and the fiscal balance improving gradually.
However, the risks remain high. Global uncertainty could weigh on exports and investment, while any pause in reform momentum could quickly erode confidence. “Without these reforms,” the report warns, “growth could once again rely on consumption rather than productive investment and progress could stall.”
What this means for Sri Lankan businesses
For the private sector, the message is clear: the policy window for expansion is open, but it won’t stay that way indefinitely. Companies that align with reform areas particularly export-oriented manufacturing, IT-BPM, logistics, renewable energy, and agri-processing stand to benefit most.
As financing conditions improve and rates stabilise, investors are likely to reward firms that show strong governance, transparency, and adaptability. With global markets still uncertain, local competitiveness and regulatory predictability will be decisive advantages.
Sargsyan summed it up simply: “Sri Lanka has made real progress, but there is still much to do. The recovery is fragile, and many citizens have not yet felt its benefits. By focusing on smarter spending and meaningful reform, the country can build a stronger, more resilient future.”
The bottom line
Sri Lanka has crossed the first hurdle, stabilising a crisis-hit economy. The harder task now is sustaining recovery through structural reform. Trade barriers must fall, taxes must become simpler and fairer, and public money must be spent with purpose.
The World Bank’s message isn’t pessimistic; it’s pragmatic. The path to durable growth exists, but it is narrow and time-sensitive. Delivering on reforms now could define Sri Lanka’s next decade.
