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A development success story in many ways, Sri Lanka still faces critical challenges as it strives to become an upper middle-income country. The World Bank Group supports Sri Lanka’s transition to a more competitive, inclusive, and resilient upper-middle income country.

Overview

Sri Lanka is a Lower Middle-Income country with a GDP per capita of USD 4,073 (2017) and a total population of 21.4 million people.

Following 30 years of civil war that ended in 2009, Sri Lanka’s economy grew at an average 5.8 percent during the period of 2010-2017, reflecting a peace dividend and a determined policy thrust towards reconstruction and growth; although there were some signs of a slowdown in the last few years.

The economy is transitioning from a predominantly rural-based economy towards a more urbanized economy oriented around manufacturing and services. The country has made significant progress in its socio-economic and human development indicators.

Social indicators rank among the highest in South Asia and compare favorably with those in middle-income countries.

Economic growth has translated into shared prosperity with the national poverty headcount ratio declining from 15.3 percent in 2006/07 to 4.1 percent in 2016.

Extreme poverty is rare and concentrated in some geographical pockets; however, a relatively large share of the population subsists on slightly more than the extreme poverty line.

The country has comfortably surpassed most of the MDG targets set for 2015 and was ranked 73rd in the Human Development Index in 2015

RECENT ECONOMIC DEVELOPMENTS

The country-wide drought conditions continue to take a toll on macroeconomic performance.

The economy is estimated to have grown by 3.6 percent in the first half of 2018, following a 16-year low growth of 3.3 percent in 2017.

Agriculture and related industry sectors are expected to have recovered in the first half of 2018 with relatively benign weather. However, the ongoing episode of drought, which has been more pronounced from the beginning of the third quarter of 2018, has already impacted more than 900,000 people in 18 districts.

Increased agriculture output led to benign inflation in the first quarter of 2018. Favorable inflation outlook prompted the central bank to marginally relax policy rates in April, as the growth in monetary aggregates decelerated in response to a tight monetary policy.

However, subsequent currency depreciation and spill-over effects of increasing fuel prices increased inflation to 5.6 percent by August 2018. On the external front, exports rebounded thanks to the reinstatement of GSP+ preferential access to the European Union. Nevertheless, the gradually rising fuel bill and increased imports of vehicles and gold widened the trade deficit.

External liquidity received a boost from the proceeds of sovereign bonds and increased FDI compared to the previous year. While reserve cover of imports has improved from 2017, external vulnerability remains elevated with relatively high short-term liabilities. Amid tightening global financial conditions, the Sri Lankan Rupee depreciated by 5.6 percent against the USD by end-August 2018.

Albeit lower than expected, the government recorded a primary surplus for the first quarter of 2018; however, the higher than budgeted interest costs masked the 2017

The debt portfolio of the central government is subject to important risks with over 50 percent being denominated in foreign currencies, of which around 30 percent is expected to mature in the next five years.

While implementation of the cost-reflective fuel pricing will enhance fiscal sustainability, the flip side will be the need for targeted measures to protect the poor and vulnerable who may be affected more.

The gradual rebound of growth from last year’s record-low rate is expected to have helped improve the incomes of the poor. However, droughts continue to disrupt livelihoods and agricultural activities, and may have contributed to the recent notable drop in employment, especially among women in rural areas. In addition, inflation reached 6.5 percent in 2017, its highest levels since 2014, which likely offset some of the gains.

OUTLOOK

The outlook remains stable, conditional on reforms to improve competitiveness, governance and public financial management. Together with the IMF program, these reforms will add to confidence and lead to sustained growth and development.

Growth is projected to rebound in 2018 from a low base and continue to be marginally above 4.0 percent in the medium term, driven by private consumption and investment.

Inflation will hover around mid-single digit level, although currency depreciation and rising oil prices may exert some upward pressure. Despite global uncertainties, exports will benefit from spill-over effects of the reinstatement of GSP+, while tourism and remittances support the external balances. With improved hydropower generation, the growth in imports will normalize in the medium-term.

External reserves are expected to improve, thanks to debt inflows to the government, providing a buffer for debt redemptions. The Liability Management Act, passed in early 2018, will provide the flexibility for managing some important risks of the debt portfolio. The overall fiscal deficit is projected to fall in the medium term, supported by the implementation of revenue measures.

RISKS AND CHALLENGES

A further slowdown in reform implementation, in a challenging political environment, remains the key domestic risk to the baseline. Impending election cycle exacerbates this risk.

External risks include steeper than expected global financial conditions that would increase the cost of debt and make rolling over the maturing Eurobonds from 2019 more difficult; disappointing growth in key countries that generate foreign exchange inflows to Sri Lanka through exports, tourism, remittances, FDI, and other financing flows; faster than expected rises in commodity prices that would increase pressure on the balance of payments; and capital outflows that would further increase currency pressure.

On the fiscal and debt management front, risks include the delay in implementing revenue measures, and slower than expected improvement in tax administration. The increasing occurrence and impact of natural disasters could have an adverse impact on growth, the fiscal budget, the external sector and poverty reduction.

Sri Lanka needs to address several challenges that increasingly put its economic growth and stability at risk, through macroeconomic and structural reforms: (1) continue fiscal consolidation by broadening the tax base and aligning spending with priorities: this is important given high public debt, contingent liabilities and large gross financing needs; (2) shift towards a private investment-tradable sector-led growth model by improving trade, investment, innovation and the business environment; (3) improve governance and accountability and improve SOE performance; and (4) reduce vulnerability and risks by enhancing disaster preparedness and mitigating the impact of reforms on the poor and vulnerable with well-targeted spending.

The government recently announced plans to expand coverage of the main social protection program (Samurdhi), but details remain unclear.

lastupdated: Oct 17, 2018

THE WORLD BANK GROUP AND SRI LANKA

The World Bank Group has supported Sri Lanka’s development for nearly six decades. Although in many ways it is a development success story, Sri Lanka still faces critical challenges as it strives to become an upper middle-income country. WBG’s Country Partnership Framework (CPF) for FY2017-20, endorsed by the Institution’s Board of Directors in June 2016, is based on the 2015 Systematic Country Diagnostics (SCD) and the country’s priorities.

The World Bank Group supports Sri Lanka’s transition to a more competitive, inclusive, and resilient upper-middle income country including through promoting macro-fiscal stability and competitiveness and creating conditions where there are opportunities for all. There is also a focus on seizing green growth opportunities, improving environmental management and adapting to, and mitigating, the impact of climate change. Sri Lanka graduated from IDA in FY2017 and is receiving IDA transition financing during IDA18 period (FY2018-20).

As Sri Lanka works to end extreme poverty and promote shared prosperity, some of its key challenges identified in the 2015 SCD are to achieve fiscal sustainability, enhance competitiveness and promote more and better jobs for the bottom 40 percent, advance social inclusion for disadvantaged people and attain longer term sustainability. Strengthening governance is a cross-cutting challenge.

The Government’s Vision 2025 largely confirmed the SCD findings and identified four main constraints to growth: (i) structural weaknesses in a growth model which did not foster productive investments, competitiveness and innovation; (ii) inward rather than outward- and export-led growth, which would leverage the global market and international supply chains; (iii) public finances dogged by increasing debt repayments and inefficient State-Owned Enterprises which crowded out more productive investments and development spending; and (iv) regulatory barriers that stifled private sector development and job creation. The World Bank is supporting government reforms aimed at addressing these constraints.

WORLD BANK PROGRAM

The current active IDA-IBRD portfolio consists of 14 projects with a total net commitment of nearly USD 1.7 billion (12 IDA, 1 IBRD and 1 Blend). Urban operations account for 24% (USD 415mn) the overall portfolio. The education (20% - USD 351mn) and health (12% – USD 200mn) also continue to be core sectors for Bank support.The World Bank has provided a mix of financing – investment project, development policy, and program-for-results – to meet the country’s development needs. The first development policy financing (approved in July 2016) focused on policy reforms to strengthen the country’s trade and competitiveness while the first program-for-results financing (approved in May 2017) supports the government’s program to improve higher education.

The ongoing Country Partnership Framework (CPF) for Sri Lanka, reflects the development vision of the government. The CPF’s policy reform emphasis mirrors the strong policy reform orientation of the government, particularly in the areas related to improving macro-fiscal stability, enhancing the enabling environment for private sector development, export competitiveness and global integration. Support for improving living standards in the lagging regions, including the conflict-affected areas of the Northern and Eastern regions, and strengthening education and training systems are viewed as indispensable to promoting social inclusion. Additionally, there is a focus on balancing development with environmental conservation and enhancing resilience to climate change, which entails protecting and managing the country’s extraordinary natural assets for sustained growth. The Bank continues to provide policy advice, analytical support and technical assistance, funded both through trust funds and its own budget, to assist government efforts on fiscal reform, the governance and efficiency of public enterprises, pension reform, trade and competitiveness, and sustainable urban development.

WORLD BANK – IFC COLLABORATION

IFC’s activities in Sri Lanka support the World Bank Group’s CPF goals. By working closely with the private sector, the government, and the World Bank, IFC focuses on facilitating inclusive growth by attracting private sector finance.

IFC in Sri Lanka addresses key development gaps by focusing on financial and social inclusion, infrastructure, productivity, and sustainability. To foster inclusion, IFC is working on increasing access to finance, especially to SMEs and women, and seeking opportunities to help expand quality healthcare, affordable housing, and training and education for skills development. IFC in partnership with the Government of Australia launched in April 2017 the “Women in Work” program to demonstrate that corporate performance can improve by closing gaps between men and women in the private sector. IFC’s support for sustainable infrastructure aims to improve electricity service, complete critical last mile infrastructure, and revamp logistics and services infrastructure. In sustainability, IFC will promote renewable solutions, narrow the green/affordable housing gap and support climate change adaptation and resource efficiency applications IFC is also targeting sectors with significant job creation impacts especially agribusiness, tourism, and pharmaceuticals.

As of June 30, 2017, IFC’s total committed investment portfolio stood at about $334 million. IFC also has an advisory program comprising 12 portfolio projects with a combined value of $12.8 million. IFC’s advisory projects are helping boost access to finance and insurance, build business skills for entrepreneurs, develop supply chains, and promote the growth of tourism.

MIGA

MIGA has no exposure in Sri Lanka. However, the Agency stands ready to consider productive projects, across sectors, as appropriate opportunities emerge. In assessing potential transactions, MIGA will coordinate closely with the World Bank and IFC, to maximize collaboration across the World Bank Group.

lastupdated: Oct 17, 2018

Education

Sri Lanka’s achievements in education have been impressive, including universal access and participation in primary education, high enrollment in secondary education, and gender parity in general education. The primary education net enrollment rate is 99 percent and the primary education completion rate is over 95 percent. Gender parity in the education system is high compared with many other South Asian countries, with an equal proportion of girls and boys enrolled in primary education and a slightly higher number of girls than boys in secondary education.

The World Bank is helping the development of human capital across all levels of education and training. The Sri Lanka Early Childhood Development Project will increase the ability of children from disadvantaged households to access early learning opportunities. World Bank assistance to the general education sector will be strengthened through a new General Education Modernization project which is expected to commence in mid-2018.

This project will enhance quality and strengthen the stewardship of the general education system. It will also contribute to improve learning outcomes in English and Mathematics, and enhance teacher performance. The Accelerating Higher Education Expansion and Development (AHEAD) Operation is new in the higher education sector and will help the country to increase enrollment in priority disciplines for economic development, improve the quality of degree programs, and promote research and innovation. This AHEAD Operation is the first Program for Results (PforR) Operation in Sri Lanka and in the higher education sector worldwide.

Health

The World Bank has been supporting Sri Lanka’s health sector through analytical work and credits from the International Development Association since the late 1980s.

Sri Lanka’s health system has a long track record of strong performance. For at least 50 years it has achieved much better outcomes in maternal and child health and infectious disease control than would have been predicted by its income level. The remarkable success in reducing maternal and infant mortality to very low levels (30 per 100,000 and 8 per 1,000 live births, respectively) in the last half-century is in part due to effective and integrated maternal and child health services.

A national health sector program is currently being supported under a $200-million Second Health Sector Development Project (approved in FY2013), designed to improve the standards of performance of the public health system and enable it to better respond to the challenges of malnutrition and NCDs. The project is also supporting innovation, results monitoring, and capacity building in the health sector.

The project supports the achievement of 20 results (a subset of the National Health Development Plan results). So far, after three years of implementation and results reporting (2015), several third-year targets have been met or surpassed. Of particular note:

58 percent of the 3,883 Maternal and Child Health (MCH) clinics across the country supported to reach full capacity to provide MCH services have achieved the target; 260 Medical Officer of Health areas out of 330 have at least three Health and Nutrition Community Support Groups, surpassing the target.

55 percent of the 330 Medical Officer of Health areas report having at least two functioning Healthy Lifestyle Centres, surpassing the target.

National guidelines for rehabilitation services for disabled persons have been developed.

The percentage of hospitals linked to the quality assurance program for laboratory tests conducted by the Medical Research Institute surpassed the target, reaching 94 percent.

Guidelines for Quality Management Units were prepared and training for administration of the guidelines was completed, with Quality Management Units functional in more than 95 percent of secondary care hospitals.

Sri Lanka’s economic growth has been primarily driven by the Colombo Metropolitan Region (CMR), which currently generates 45 percent of the country’s GDP and is home to 28 percent of its population. Sustainable growth and long-term prosperity are expected to result from a more balanced distribution of economic opportunity, which in addition to Colombo also includes other major urban centers such as Kandy, Galle, and Jaffna. The World Bank is supporting Sri Lanka to implement its urbanization and rural-urban integration agenda.

The Metro Colombo Urban Development Project (MCUDP), approved in 2013, is assisting the Colombo Metropolitan Region to upgrade basic urban infrastructure and to implement an innovative integrated urban flood control and urban wetland management approach. Results achieved: 3 km of primary canals have been completed, 2 micro-drainage subprojects have been implemented, and 29 km of roads that have been built or rehabilitated based on prescribed standards. The newly opened Beddegana Wetlands Park aids in flood control and allows the public to experience the city’s unique urban wetlands. In addition, the project rehabilitated the Town Square and Viharamahadevi Park, which included the creation of playgrounds, bicycle paths and public facilities.

The Strategic Cities Development Project and the Additional Financing to the project (approved in May 2016) are expanding the approach to urban infrastructure upgrading to Kandy, Galle and Jaffna—three strategic city regions in the center, south, and north—and supporting investments in urban water supply, sewage and drainage systems, cultural heritage rehabilitation, urban transport and traffic management, among other areas.

Environment, Climate Change and Disaster Risk Management

In recognition of the social and economic effects of climate-related hazards, the government has made it a priority to strengthen the country’s resilience to natural disasters and climate change. Responding to the government’s expression of interest for assistance in this regard, a comprehensive program of support involving adaptation-enhancing investments and a Catastrophe Deferred Draw-Down Option (CAT-DDO) was prepared and approved in FY14. To increase resilience, physical investments will be financed to address short-term infrastructure weaknesses, coupled with a contingent credit line to safeguard against immediate fiscal impacts of a disaster.

Trade and Competitiveness

The Trade and Competitiveness program is a package of technical assistance to support GoSL’s economic reform objectives to ultimately create more and better private sector jobs and become an upper-middle income country. The program is a joint initiative from the World Bank and the Australian Department of Foreign Affairs and Trade (DFAT).

All activities in the program are underscored by a strong focus on gender, youth, disability and poverty. Specifically, the program intends to enhance the trade and competitiveness of the private sector as a way to support private-sector led growth, increase economic diversification and enhance the volume and value addition of exports via the following areas:

Enhancing Sri Lanka’s Trade Potential: via the establishment of a more open trade policy regime; the development of an agile trade facilitation system and the reduction of regulatory barriers to trade.

Firm Growth, Productivity and Jobs: Building a more resilient innovative economy and entrepreneurial society; also inclusive of a Public Expenditure Review that will comprises of a functional and institutional review of current R&D, innovation and entrepreneurship programs and GoSL spending.

Tourism: Leveraging on the Sri Lanka Tourism Strategic Plan 2017-20’s recommendations, a new Sustainable Tourism Development project will focus on enhancing the sustainable growth of the tourism sector by leveraging PPPs, strengthening local economy linkages and building institutional capacity for planning and implementing tourism-related projects.

Logistics: Sri Lanka’s geographically strategic location suggests enormous potential for the country to thrive in the logistics sector, provided an enabling regulatory environment.

SMEs: Inclusive of a Financial Sector Modernization Projecttogether with complementary technical assistance for capital market development; a proposed innovative SME project focuses on business development and innovative finance for SMEs and entrepreneurs.