By The Pulseline News Desk
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 poverty still lagging behind the broader economic rebound, the World Bank has said.
In its latest Sri Lanka Development Update, titled From Recovery to Transformation, the World Bank has projected the economy to grow by 4.4% in 2026, an upward revision from its earlier forecast, supported by strong industrial activity and continued growth in services.
However, growth is expected to moderate to 4.2% in 2027 as the post-crisis recovery loses momentum and underlying productivity weaknesses become more prominent.
The World Bank has cautioned that heightened external risks, including continued volatility in global energy markets and the potential effects of El Niño, could put additional pressure on productivity and food security.
Economy back at 2018 levels
Sri Lanka’s real GDP has grown by 4.7% during the first half of 2026, bringing economic output back to levels recorded in 2018.
The recovery has also been accompanied by a marked improvement in fiscal performance, with the primary budget surplus increasing significantly.
However, the World Bank has noted that the economic recovery has not translated evenly across households.
Poverty remains at 16.9%, substantially above pre-crisis levels, while household incomes and labour market outcomes continue to lag behind the wider economic recovery.
Inflation has also accelerated in recent months, driven largely by increases in energy and food prices.
The World Bank has therefore cautioned that the return of GDP to pre-crisis levels should not be viewed as the completion of Sri Lanka’s recovery.
“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,” World Bank Group Country Manager for Sri Lanka Gevorg Sargsyan has said.
“But reaching this milestone marks a beginning, not the end — the country needs to seize this momentum to transform its economy and create jobs,” he has said.
From recovery to transformation
The World Bank has said Sri Lanka now needs to move beyond a recovery model driven largely by government spending and shift towards private investment, exports and productivity growth.
Such a transition would require better infrastructure, a more predictable investment environment and greater private-sector participation in key areas of the economy.
The Bank has identified agrifood and agribusiness as one sector with significant potential to drive the next phase of 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 as well as rural livelihoods.
Sri Lanka already has established global markets for products including tea, coconut, cinnamon, seafood and rubber.
“Sri Lanka can capitalize on sectors with immense potential such as agrifood, investing in the policies, infrastructure, and enabling environment that allow farmers, businesses, and investors to drive the next phase of growth,” Sargsyan has said.
Reforms needed to unlock agribusiness
Despite the sector’s importance, the World Bank has said significant opportunities remain untapped across Sri Lanka’s agricultural value chains.
It has identified reforms to trade policy, public spending, infrastructure and access to finance as key measures that could encourage new private investment, particularly benefiting smallholder farmers and rural communities.
The report has recommended creating a more predictable and export-oriented policy environment while redirecting public spending away from inefficient subsidies towards investments that improve productivity.
These investments could include agricultural research and climate-smart technologies, which would help address both productivity constraints and growing climate-related risks.
The World Bank has also called for improvements to quality infrastructure, digital traceability and cold-chain logistics, alongside reforms to land tenure and access to finance.
Such measures, it has said, could help unlock long-term investment by both agribusinesses and small-scale producers.
South Asia growth remains resilient
The Sri Lanka Development Update forms part of the World Bank Group’s twice-yearly assessment of the country’s economic performance and policy challenges.
It is accompanied by the October 2026 South Asia Economic Update, titled Adopting AI for Growth.
The regional report has projected South Asia’s growth to reach 6.9% in 2026, with strong domestic demand helping the region remain resilient despite global economic shocks.
The report has also examined the potential role of artificial intelligence in creating new sources of growth across South Asia.
According to the World Bank, wider AI adoption could raise labour productivity, expand export opportunities and improve the delivery of public services.
For Sri Lanka, the latest assessment therefore presents a transition point: the economy has recovered the output lost during the crisis, but the next challenge is ensuring that the recovery translates into higher productivity, more private investment, stronger exports and better jobs and incomes for households.
Leave a comment