Sri Lanka's Economic Outlook Brightens with Projected 4.4% Growth in 2024, but Challenges Remain

Released today, the World Bank's bi-annual Sri Lanka Development Update, titled Opening Up to the Future, warns that while the recovery is encouraging, it remains fragile.

Sri Lanka's economy is on a path of recovery, with growth expected to reach 4.4% in 2024, surpassing earlier forecasts. This positive trend follows four consecutive quarters of growth, primarily driven by the industrial and tourism sectors, and is supported by crucial structural and policy reforms, according to the World Bank.

Key Insights from the Sri Lanka Development Update

Released today, the World Bank's bi-annual Sri Lanka Development Update, titled Opening Up to the Future, warns that while the recovery is encouraging, it remains fragile. The sustainability of this recovery hinges on maintaining macroeconomic stability, successfully restructuring debt, and implementing ongoing structural reforms aimed at increasing medium-term growth and reducing poverty.

The report emphasizes the importance of several key reforms, including:

Boosting exports and attracting foreign investment.

Enhancing female labour force participation.

Improving productivity across sectors.

Addressing pressing issues such as poverty, food insecurity, and vulnerabilities in the financial sector.

These reforms are essential for achieving more inclusive and sustainable growth.

Untapped Export Potential

The World Bank highlights Sri Lanka's substantial potential for higher and sustainable growth through trade. The country has an estimated untapped export potential of $10 billion annually, which could create approximately 142,500 new jobs. There are significant opportunities for diversifying and expanding exports in manufacturing, services, and agriculture, contingent upon the implementation of necessary reforms.

David Sislen, World Bank Regional Country Director for Maldives, Nepal, and Sri Lanka, stated, "Sri Lanka's recent economic stabilization, marked by four quarters of growth and a current account surplus in 2023, is a significant milestone. At this moment, Sri Lanka has a real opportunity to realize its export potential, which we estimate at $10 billion annually. There is an opening for Sri Lanka to deepen its participation in global value chains and take advantage of its geography and an evolving global landscape to generate jobs and sustain growth."

Future Growth Projections

Looking ahead, the report forecasts a modest growth rate of 3.5% in 2025, with growth expected to follow a gradual trajectory over the medium term due to the lingering effects of the economic crisis. Although poverty rates are projected to decline, they are expected to remain above 20% until 2026. Inflation is likely to stay below the central bank’s target of 5% in 2024, gradually increasing as demand picks up. The current account is projected to remain in surplus throughout 2024, bolstered by tourism and remittances.

Context within the South Asia Region

The Sri Lanka Development Update serves as a companion piece to the South Asia Development Update, a semi-annual World Bank report that examines economic developments and prospects in the South Asia region while analyzing the policy challenges faced by countries in the area. The October 2024 edition of the South Asia report projects a growth rate of 6.4% for the region this year, making it the fastest-growing emerging market and developing economy (EMDE) region in the world. It emphasizes that increasing women’s participation in the labor force and further opening up to global trade and investment could enhance growth and help the region achieve its development goals.

As Sri Lanka navigates its path toward recovery, the implementation of critical economic and governance reforms will be essential for maximizing its growth potential and ensuring sustainable development in the years ahead.