World Bank says Sri Lanka economy back to pre-crisis levels, but warns recovery uneven

Sri Lanka
By Editor_1
A general view of Sri Lanka's main business city, Colombo. The Sri Lanka Development Update, ‘From Recovery to Transformation’, released on Tuesday (October 6, 2026), projects the economy to grow by 4.4% in 2026, exceeding the World Bank’s earlier forecast, supported by strong industrial activity and continued growth in the services sector -Dinuka Liyanawatte/ Reuters/File

COLOMBO – Sri Lanka’s economy has returned to its pre-crisis level after expanding for 12 consecutive quarters, but the recovery remains incomplete, with household incomes, employment and living standards continuing to lag behind the broader economic rebound, the World Bank Group said in its latest economic outlook.

The Sri Lanka Development Update, ‘From Recovery to Transformation’, released on Tuesday (6), projects the economy to grow by 4.4% in 2026, exceeding the World Bank’s earlier forecast, supported by strong industrial activity and continued growth in the services sector.

Growth is expected to moderate to 4.2% in 2027 as the post-crisis rebound loses momentum and weak productivity continues to constrain economic expansion.

The World Bank warned that heightened downside risks, including prolonged volatility in global energy markets and the potential effects of El Niño, could undermine productivity and food security.

“Sri Lanka’s reclassification as an upper-middle-income country, especially in a challenging global environment, is a testament to the hard work of its people and the government’s commitment to recovery,” said Gevorg Sargsyan, World Bank Group Country Manager for Sri Lanka.

He cautioned, however, that the milestone marked “a beginning, not the end” and said Sri Lanka needed to build on the recovery to transform its economy and generate more employment.

Sargsyan said sectors with significant growth potential, including agrifood, could play an important role if supported by appropriate policies, infrastructure and an enabling business environment that allows farmers, businesses and investors to expand.

According to the report, real GDP grew by 4.7% in the first half of 2026, bringing economic output back to 2018 levels. Fiscal performance has also strengthened, with the primary budget surplus increasing significantly.

However, inflation has picked up in recent months, driven largely by higher energy and food prices, while poverty remains substantially above pre-crisis levels at 16.9%.

The World Bank said Sri Lanka’s next phase of development would require a shift in the drivers of growth away from government spending towards private investment, exports and productivity gains.

This would require improved infrastructure, a predictable investment environment and greater private-sector participation in key areas of the economy, it said.

The report identifies agribusiness and the broader agrifood sector as a major source of future growth, employment and poverty reduction.

While primary agriculture accounts for around 8% of GDP, the wider agrifood system, including food processing, logistics, trade and food services, accounts for an estimated one-sixth of GDP and more than 40% of employment.

Agribusiness also generates nearly 30% of Sri Lanka’s goods exports, making the sector an important source of foreign exchange and rural livelihoods.

The report noted that Sri Lanka already has strong positions in international markets for products including tea, coconut, cinnamon, seafood and rubber.

However, the World Bank said targeted reforms in trade policy, public spending, infrastructure and access to finance could unlock greater private investment and expand opportunities throughout agricultural value chains, particularly for small-scale farmers and rural communities.

It recommended establishing a more predictable and export-oriented policy environment while redirecting public spending away from inefficient subsidies towards productivity-enhancing investments in agricultural research and climate-smart technologies.

Improvements in quality infrastructure, digital traceability and cold-chain logistics, together with reforms to land tenure and access to finance, could also help attract long-term private investment, particularly to smallholder agriculture and agribusinesses, the report said.

The Sri Lanka Development Update is published alongside the World Bank Group’s twice-yearly South Asia Economic Update, which examines economic developments and policy challenges across the region.

The October 2026 edition, titled ‘Adopting AI for Growth’, projects South Asian economic growth to reach 6.9% in 2026, supported by strong domestic demand despite global uncertainties.

The regional report examines how greater adoption of artificial intelligence could create new sources of growth by increasing labour productivity, expanding export opportunities and improving the delivery of public services.

–ENCL

Editor_1
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