Sri Lanka’s economy has returned to pre-crisis levels after expanding for 12 consecutive quarters, but household incomes, employment outcomes and poverty levels continue to lag behind the broader economic recovery, the World Bank said.
In its latest Sri Lanka Development Update, titled “From Recovery to Transformation,” the World Bank projected the economy to grow by 4.4% in 2026, higher than earlier forecasts, supported by strong industrial activity and steady growth in services.
Real GDP grew 4.7% during the first half of 2026, bringing the economy back to its 2018 level, according to the report.
However, the World Bank warned that the recovery remains incomplete and uneven, with poverty still significantly above pre-crisis levels at 16.9%.
Economic growth is expected to moderate to 4.2% in 2027 as the post-crisis rebound loses momentum and weak productivity continues to constrain expansion.
The World Bank also identified risks from prolonged volatility in global energy markets and the potential effects of El Niño, which could affect 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,” World Bank Group Country Manager for Sri Lanka Gevorg Sargsyan 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 added.
The World Bank said Sri Lanka’s fiscal performance has strengthened, with the primary budget surplus increasing sharply. However, inflation has risen in recent months due to higher energy and food prices.
According to the report, sustaining growth will require Sri Lanka to shift away from government spending as an engine of economic expansion and rely more heavily on private investment, exports and productivity improvements.
The World Bank said this would require better infrastructure, a stable investment environment and greater private-sector participation in key areas of the economy.
The report identified agribusiness as one of the sectors with significant potential to generate growth, employment and poverty reduction.
While primary agriculture accounts for around 8% of GDP, Sri Lanka’s wider agrifood system — including food processing, logistics, trade and food services — contributes an estimated one-sixth of GDP and more than 40% of employment.
Agribusiness also represents nearly 30% of Sri Lanka’s goods exports, with the country maintaining a strong position in international markets for tea, coconut, cinnamon, seafood and rubber.
The World Bank said reforms covering trade policy, public expenditure, infrastructure and access to finance could encourage further private investment across agricultural value chains, particularly benefiting smallholders and rural communities.
It recommended moving public expenditure away from inefficient subsidies toward investments in agricultural research and climate-smart technologies, alongside improvements in quality infrastructure, digital traceability and cold-chain logistics.
Reforms to land tenure and access to finance could also help unlock longer-term private investment in agriculture and agribusiness, the report said.
The World Bank said Sri Lanka has reached an important stage in its economic recovery, but maintaining the momentum will depend on converting the rebound into sustained private-sector-led growth, higher productivity and more jobs. (Newswire)