The World Bank reported that Sri Lanka’s macroeconomic outlook has improved, with short-term growth expected to reach 4.4 per cent in 2024. However, it also stressed the importance of continuing structural reforms to ensure sustained growth in the medium to long term.

Sri Lanka’s President Anura Kumara Dissanayake recently met with World Bank Vice President for South Asia, Martin Raiser, to discuss securing financial and technical support for several key initiatives aimed at boosting the country’s economic and social development. The meeting, held in Colombo, focused on youth employment, the ‘Clean Sri Lanka’ initiative, rural poverty alleviation, and digital transformation, according to the President’s Media Division (PMD).

“We agreed on timely disbursement of funds and explored new projects in education, energy, and public transport,” President Dissanayake shared on the social media platform X. “I emphasized the need for agricultural sector improvements, enhanced facilities for our population, and plans to boost tourism and expedite port development.”

Martin Raiser, in a statement, reiterated the World Bank’s commitment to supporting Sri Lanka’s economic recovery. “We discussed World Bank support to the digital economy, rural and skills development, affordable energy, and lagging regions, with a focus on the North of Sri Lanka,” he stated.

The discussions also covered education reforms, development plans for the northern region, upgrades to the public transport system, and strategies to accelerate tourism growth in 2025. The World Bank reaffirmed its commitment to ensuring the timely release of funds to help drive Sri Lanka’s progress.

Raiser also held meetings with Prime Minister Harini Amarasuriya and officials from the Ceylon Chamber of Commerce to further explore collaborative opportunities.

Fragile Macroeconomic Stability

The World Bank reported that Sri Lanka’s macroeconomic outlook has improved, with short-term growth expected to reach 4.4 per cent in 2024. However, it also stressed the importance of continuing structural reforms to ensure sustained growth in the medium to long term. Despite the positive outlook, poverty remains a pressing concern, with the poverty rate projected to stay above 20 per cent until 2026.

Inflation is forecast to remain below the central bank’s target of 5 per cent throughout 2024, gradually increasing as demand picks up. The current account is expected to remain in surplus, supported by tourism growth and remittances, with the phased lifting of personal vehicle import restrictions starting in 2025.

Sri Lanka’s recent economic performance has shown resilience, but challenges persist. The World Bank cautioned that macroeconomic stability is contingent on the consistent implementation of fiscal, financial, and monetary policies. Risks such as prolonged debt restructuring, policy uncertainties, and potential fiscal impacts of electoral promises could hinder progress. Furthermore, financial sector vulnerabilities, including high non-performing loans and exposure to sovereign debt, require close monitoring.

Poverty reduction efforts will depend on the effectiveness of reform implementation and the targeting of social assistance programs. Inequality levels remain high, and increases in stunting and malnutrition are likely to exacerbate intergenerational disparities without appropriate interventions.

Despite these challenges, strong and sustained implementation of structural reforms could enhance investor confidence and attract fresh capital inflows, providing a much-needed boost to the economy.

Increased Tourism Receipts

Headline inflation, as measured by the Colombo Consumer Price Index, remained in the low single digits throughout 2024, with a recorded rate of 0.5 per cent in August. This was attributed to downward adjustments in administered prices, currency appreciation, and improved supply conditions, while demand remained subdued. In response to the low inflation, the central bank adopted an accommodative stance, reducing policy rates by 75 basis points between March and July 2024, resulting in a cumulative reduction of 725 basis points since May 2023. Consequently, commercial bank lending and deposit rates also declined, although private sector credit growth remained sluggish at 6.9 per cent in July.

The merchandise trade deficit widened by 18.3 per cent in the first seven months of 2024 due to recovering import demand. However, increased tourism receipts, which rose by 66.1 per cent, and remittances, which grew by 11 per cent in the first eight months, contributed to a balance of payments surplus. The continued suspension of debt servicing and inflows from development partners further bolstered foreign exchange reserves.

By the end of August 2024, Sri Lanka’s usable official reserves had increased to US$4.5 billion, equivalent to three months’ worth of imports. Additionally, the net foreign assets of the banking system turned positive in May 2024 for the first time in four years. Improved foreign exchange liquidity also resulted in a 7.3 per cent appreciation of the Sri Lankan rupee between January and August 2024.

According to the World Bank, while Sri Lanka’s economic indicators show positive signs, maintaining stability will require sustained policy efforts and strategic reforms.