The World Bank forecasts Sri Lanka’s GDP growth at 2.5 per cent in 2025, potentially exceeding 5 per cent with effective reforms, boosted by exports, investment, and increased female and youth workforce participation.

The World Bank has urged Sri Lanka to undertake deep structural reforms in land, labour, and trade sectors to boost long-term economic growth and attract investment, warning that the country risks falling into a low-growth trap if it delays modernisation.

In its latest Sri Lanka Development Update, the World Bank said the island nation’s economy, though stabilising after the 2022 debt crisis, remains constrained by structural bottlenecks that have discouraged private sector participation and productivity. The report identified rigid labour laws, inefficient land-use policies, and trade protectionism as key obstacles to competitiveness and sustainable development.

“The economy has shown resilience in the face of crisis, but future growth will depend on how effectively Sri Lanka can address long-standing structural barriers,” said Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka. “Reforming land and labour markets and liberalising trade are critical for building a dynamic, inclusive economy.”

Reforms for Modernisation

According to the World Bank, Sri Lanka’s regulatory framework in land ownership remains overly restrictive, deterring both domestic and foreign investors. Large tracts of agricultural land remain underutilised or inefficiently managed due to fragmented ownership patterns, unclear tenure rights, and cumbersome leasing procedures.

The report called for digitising land records, easing restrictions on land transfers, and clarifying property rights to enable greater investment in high-value agriculture, manufacturing, and tourism. These measures, the World Bank said, could unlock productivity and help integrate rural communities into the formal economy.

Similarly, the labour market is constrained by outdated regulations and limited flexibility, making it difficult for firms to adapt to changing economic conditions. The World Bank highlighted that Sri Lanka’s labour laws – particularly those concerning hiring and retrenchment – are among the most rigid in South Asia.

“Modernising labour laws to balance worker protection with business flexibility is essential,” the report said. “Reforms could include updating employment protection legislation, improving skills training, and expanding access to social protection for informal workers.”

Trade Liberalisation Key to Growth

Trade openness has long been a contentious issue in Sri Lanka’s economic policy. Despite its strategic location along major Indian Ocean trade routes, the country’s tariff and non-tariff barriers remain high compared to regional peers. The World Bank urged Sri Lanka to reduce protectionist measures, diversify exports, and deepen regional and global trade integration.

It said a more open trade regime could help the country attract export-oriented investments, integrate into global value chains, and leverage its proximity to major markets such as India and ASEAN. “Sri Lanka’s long-term prosperity depends on its ability to become a competitive, export-driven economy rather than one reliant on domestic consumption and imports,” the report noted.

Balancing Growth and Inclusion

The World Bank acknowledged that while structural reforms could initially face political resistance and social adjustment costs, they are necessary to sustain growth beyond short-term macroeconomic stabilisation. The government’s recent fiscal and monetary discipline – supported by the IMF’s Extended Fund Facility – has helped restore stability, but deeper reforms are needed to build resilience and inclusion.

The World Bank emphasised that reforms must be accompanied by targeted social protection measures to safeguard vulnerable groups affected by transitions in agriculture and labour markets. It also called for greater investment in education, technology, and infrastructure to ensure that economic liberalisation benefits all Sri Lankans.

Government Response

Sri Lanka’s government has expressed broad agreement with the World Bank’s assessment, though officials have cautioned that reform sequencing and social safeguards are essential. The ministry of finance said that while liberalisation and deregulation are key priorities, reforms will be implemented “in a manner that ensures fairness, employment stability, and equitable growth.”

Economists have noted that reform momentum has been slow despite repeated recommendations from multilateral lenders. Political sensitivities around land ownership, union opposition to labour flexibility, and fears of foreign competition have historically hindered major policy changes. However, analysts say that the post-crisis recovery period presents a crucial opportunity.

The World Bank projects Sri Lanka’s GDP growth to remain modest at around 2.5 per cent in 2025, with potential to rise above 5 per cent if reforms are implemented effectively. Stronger export performance, improved investment climate, and greater participation of women and youth in the labour force could transform the economy over the next decade.

“Reforms are not an option but a necessity,” the World Bank report concluded. “By creating efficient markets for land, labour, and trade, Sri Lanka can move toward a more resilient, inclusive, and competitive growth model.”