WORLD BANK WARNS SRI LANKA'S FRAGILE RECOVERY UNDERWAY, BUT MAJOR RISKS REMAIN

Sri Lanka is slowly recovering from its unprecedented economic crisis, but the road ahead is riddled with risks and challenges.

This is the warning the World Bank had for Sri Lanka in its latest country development update.

The World Bank projects that medium-term growth for Sri Lanka will be around 3.1%.

This reflects what the bank calls the “scarring effects” of the crisis, ongoing structural issues, and global economic uncertainties.

It adds that the current account is expected to revert to a modest deficit in 2025.

This is due to trade-related uncertainties, which are expected to reduce exports more than imports, even with some relief from lower global oil prices.  

However, the World Bank notes that Sri Lanka has restored macroeconomic stability following the severe economic crisis of 2022-23.

Output grew by 5% in 2024, driven by a rebound in the industrial sector and strong performance in tourism.

It was further reported that Sri Lanka's current account and fiscal balances improved, and attributed it to the suspension of external debt servicing, strong tourism activity, and robust remittance inflows amongst other things.

A revival in domestic demand is also forecast, with the inflation expected to hit the target level, reversing the deflationary trend by mid-2025.

Speaking on the fiscal front, however, the World Bank emphasised that despite continued fiscal consolidation, fiscal financing pressures will persist due to large T-bill refinancing needs.

Looking at the broader picture, the report suggested that following continued macroeconomic stabilisation, the poverty rate in Sri Lanka is expected to decline to 22.7 % this year.

However, the bank also cautions that the recovery remains fragile.  

The World Bank's report emphasises that Sri Lanka's prospects for both growth and poverty reduction are dependent on maintaining macro stability and the sustained and successful implementation of structural reforms, adding that the country is returning to its pre-crisis average growth rate more slowly than other emerging economies affected by debt crises.