World Bank calls for new growth engine as Sri Lanka moves beyond crisis recovery

Sri Lanka has largely won back economic stability, but now comes the harder part, which is finding a new engine for growth.

The World Bank yesterday said the country must pivot towards a growth model powered by private investment, exports and productivity, warning that the post-crisis rebound alone will not generate the jobs, incomes and investment needed for a durable economic transformation.

“Moving from recovery to transformation requires a new growth model in which private investment, exports, and productivity, rather than public spending, drive growth,” the World Bank said at the launch of the latest ‘Sri Lanka Development Update: From Recovery to Transformation.’

After several years dominated by debt restructuring, fiscal consolidation and restoring macroeconomic stability, the World Bank said the challenge at present is to convert those gains into sustained, private sector-led growth.

“Macroeconomic stability remains a necessary foundation for growth and job creation, but on its own it is insufficient,” the Bank said.

The Sri Lanka report was presented by WB Acting Country Manager for Sri Lanka and Maldives Stephan Massing, WB Senior Country Economist for Sri Lanka Jakob Engel, WB Senior Country Economist Sri Lanka Anthony Obeysekera, and WB Regional Practice Manager -Poverty Alan Fuchs.

The World Bank warned that Sri Lanka’s present growth trajectory was inadequate to create more and better jobs, durably reduce poverty and raise incomes.

“The next phase of Sri Lanka’s recovery will require more private investment, faster export growth, and meaningful productivity improvements to raise medium-term GDP growth toward the government’s target of 7 percent,” it said, calling for greater ambition and faster implementation of structural reforms. It noted that the challenge is becoming more pressing as the powerful rebound from the economic crisis begins to fade.

The World Bank upgraded Sri Lanka’s 2026 growth forecast to 4.4 percent, from 3.6 percent projected in April. Growth, however, is expected to ease to 4.2 percent in 2027 and 4.0 percent in 2028, with weak productivity weighing on the economy’s ability to maintain a faster expansion. The Bank noted that while stabilisation is necessary, it is not enough to resolve the structural weaknesses that predated the crisis, including the economy’s inability to generate sufficient productive, high-quality jobs.

Its prescription it gave to remedy the challenge did not focus on more investments alone. The World Bank stressed the need for a more predictable business environment, stronger infrastructure, clearer rules governing investment and competition, and the mobilisation of private finance into sectors capable of generating exports and employment. Agribusiness, tourism, logistics and the digital economy were singled out as areas with the potential to carry more of the growth burden. The urgency is stressed by what the World Bank describes as Sri Lanka’s “productivity dilemma”.

New evidence highlighted in the report showed that the post-crisis rebound in company sales and employment has not translated into a comparable improvement in productivity. Between 2023 and 2025, sales and employment increased by about 15 percent, while overall labour productivity improved by just 0.3 percent.

Productivity among medium and large manufacturing firms fell by between 3.8 and 8.3 percent, while exporters recorded a 4.1 percent decline in sales and an 8.3 percent fall in productivity, despite investing more in research and development than non-exporters.

In 2024, Sri Lanka was also the only country among its South Asian and lower-middle-income peers to record negative labour productivity growth, while manufacturing value added per worker stood at less than half that of Vietnam, according to the report. 

The Bank linked the problem to weak competition rather than an absence of capability among Sri Lankan firms, arguing that businesses were not investing sufficiently in efficiency improvements. Meanwhile, despite stronger headline growth, the World Bank said many families had not regained the living standards lost during the crisis. Poverty is expected to continue declining, but remain above its pre-crisis level even by 2028.

Higher fuel prices and inflation are also expected to weigh on real income growth this year, slowing the pace at which households recover. The World Bank warned of risks from slower global growth, geopolitical and trade disruptions, persistently high energy and food prices, weak foreign investor appetite and climate-related shocks.

Sri Lanka therefore enters the next stage of its recovery with less room for policy complacency.

“Stabilisation has been necessary but is not enough to meet Sri Lanka’s core development challenges,” the Bank said.

The upside, however, could be significant if reforms unlock constraints on land, labour and investment and strengthen investor confidence. A faster tourism and remittance recovery could bolster external buffers, while sustained macroeconomic credibility and normalisation of commercial debt relations could accelerate credit-rating upgrades and restore international market access on more favourable terms.