The World Bank's recent semi-annual update projects Sri Lanka's economy to grow modestly at 2.2% in 2024, signaling a stabilization phase after the severe economic challenges of 2022. However, the nation continues to grapple with high poverty rates, income inequality, and persistent labor market issues.
Positive Economic Developments
The Sri Lanka Development Update highlights several areas of progress. Inflation has shown a marked decline, easing pressure on households, while government revenue has grown due to the implementation of new fiscal measures. Notably, Sri Lanka has reported a current account surplus for the first time in nearly 50 years. This improvement is attributed to increased remittances from overseas workers and a resurgence in tourism, both of which have significantly contributed to the country’s foreign exchange reserves.
Challenges: Persistent Poverty and Labor Issues
Despite these positive developments, Sri Lanka continues to face substantial socio-economic challenges. Poverty remains a critical issue, with 25.9% of the population estimated to be living below the poverty line in 2023. This marks the fourth consecutive year of rising poverty levels. Labor force participation has also declined, particularly among women and in urban areas. The closure of numerous micro, small, and medium-sized enterprises (MSMEs) has exacerbated unemployment and reduced household incomes. Many households are resorting to debt to meet basic needs and to afford essential services like healthcare and education, further compounding the economic strain.
World Bank’s Recommendations
Faris Hadad-Zervos, the World Bank Country Director for Maldives, Nepal, and Sri Lanka, emphasized the importance of a dual-focused strategy to address these issues. He underscored the need to maintain macroeconomic stability through consistent implementation of reforms while promoting private investment to attract capital inflows. These measures are essential for sustainable economic growth and poverty reduction.
Future Projections and Risks
Looking ahead, the report forecasts a slight increase in economic growth to 2.5% in 2025. However, inflation is expected to rise gradually during this period. The current account surplus is predicted to continue, albeit modestly. Poverty levels, on the other hand, are expected to remain above 22% until 2026.
The report also highlights several risks and challenges. Debt restructuring poses significant strain due to high debt servicing obligations. There is a risk of reform rollbacks, which could reverse key economic policy gains. The financial sector remains vulnerable, reflecting the lingering effects of the economic crisis. Additionally, managing risks associated with state-owned enterprises (SOEs) is crucial for ensuring long-term stability.
The report concludes by underscoring the critical importance of robust reform implementation to build a resilient economy. It calls for a sustained focus on maintaining macroeconomic, fiscal, and financial stability, promoting private sector investment, and addressing vulnerabilities related to state-owned enterprises.
References
- World Bank. (2024). Sri Lanka Development Update. Washington, DC: World Bank Publications.
- Hadad-Zervos, F. (2024). Commentary on Sri Lanka’s Economic Outlook. Colombo: World Bank Office.
- Daily News Sri Lanka. (2023). Analysis of MSME Challenges in Post-Crisis Sri Lanka. Colombo: Daily News Publications.
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