World Bank urges businesses to lead Sri Lanka’s comeback

Private sector or bust!

• Says there is no fiscal space in the public sector and that the government cannot rely on public investment to drive growth
• Asserts active efforts needed to remove barriers to trade, improve investment climate, and make it easier for businesses to grow and create jobs
• Commends SL for the real progress achieved thus far, but stresses there is still much to do

By Shabiya Ali Ahlam

The World Bank yesterday placed the private sector at the heart of Sri Lanka’s growth strategy as it acknowledged the government’s limited fiscal space that leaves little room for state-led investment. 

Another reason, according to the lender is also that the island nation’s fragile recovery could stall without urgent reforms to boost productivity and inclusion.

“I keep stressing private sector–led growth for a simple reason. There is currently no fiscal space in the public sector. The government cannot rely on public investment to drive growth. 

“Sri Lanka must remove barriers to trade, improve the investment climate, and make it easier for businesses to grow and create jobs,” said World Bank Country Manager for Sri Lanka and the Maldives Gevorg Sargsyan while addressing the launch of the Sri Lanka Development Update. 

The Bank’s latest update, titled ‘Better Spending for All’, asserted that Sri Lanka’s fiscal room has narrowed drastically, with about 80 percent of state expenditure consumed by public sector salaries, welfare, and interest payments. 

“Sri Lanka has made real progress, but there is still much to do. The recovery is fragile, and many vulnerable citizens have yet to feel its benefits,” said Sargsyan.

The report calls on the island nation to focus not on bigger budgets but on smarter, more efficient spending to ensure every rupee delivers value through better-targeted investments in infrastructure, health, and education.

In the first half of 2025, the economy grew by about 5 percent, supported by recovering industry and steady service activity. Consumer spending has picked up, inflation has stabilised, and government finances have strengthened on the back of improved revenue collection and lower deficits. However, despite these gains, the World Bank cautioned that Sri Lanka’s recovery “remains incomplete and uneven.”

The Bank projects growth at 4.6 percent in 2025, supported by modest gains in industry and services, but warns it could slow to 3.5 percent by 2026 if reforms falter. Without deeper structural adjustments, particularly in trade liberalisation, tax modernisation, and labour market flexibility, growth is likely to remain consumption-driven, leaving little room for new investment or export expansion.

While poverty is expected to decline this year, it still remains twice as high as before the 2022 crisis, with around 22 percent of Sri Lankans living below the poverty line and another 10 percent hovering just above it. According to the World Bank, the wages and employment remain below pre-crisis levels, and malnutrition persists among vulnerable groups, despite headline economic recovery.

Sargsyan said improving the efficiency of public spending was essential to create fiscal space for growth. By enhancing spending efficiency, Sri Lanka can create room for growth and increase investment in infrastructure, education, and health, he said adding that public wage and investment reforms would help ensure that limited fiscal resources deliver greater impact.

The World Bank acknowledged as positive steps such as the establishment of a Public Investment Programme System, which consolidates projects into a single pipeline to strengthen planning, evaluation, and monitoring. Reason being, it would help prioritise ongoing infrastructure projects and prevent wasteful duplication.

Despite improvements in inflation management and foreign reserves, the Bank warned that food prices remain elevated and reserve accumulation has slowed, reflecting global uncertainty and structural fragilities at home.

The lender noted that Sri Lanka’s challenge is to transition from crisis management to competitiveness, anchoring growth on private investment, trade, and technology adoption. 

“Stronger and more sustainable growth will require stable and consistent policies,” Sargsyan emphasised, calling for reforms that “allow businesses to expand, innovate, and create jobs.”

Meanwhile, World Division Director for Sri Lanka, Nepal, and Maldives David Sislen, said the economy’s progress “is encouraging but incomplete.” 

“To build a stronger, fairer economy that benefits all households, in a fiscally constrained environment, Sri Lanka needs the private sector to invest and create jobs and ensure that every rupee of public money is well-spent,” he said in a statement that followed the report launch.