The Sri Lanka Development Update (SLDU) has two main aims. First, it reports on key developments over the past 12 months in Sri Lanka¡¯s economy, places these in longer term and global contexts, and updates the outlook for Sri Lanka¡¯s economy. Second, the SLDU provides a more in-depth examination of selected economic and policy issues. It is intended for a wide audience, including policymakers, business leaders, financial market participants, think tanks, non-governmental organizations and the community of analysts and professionals interested in Sri Lanka¡¯s evolving economy.
RECENT ECONOMIC DEVELOPMENTS
The economy grew by 5 percent in 2024, driven by a construction-led rebound in industry and strong performance in tourism-related services. Headline inflation, measured by the Colombo Consumer Price Index, has remained negative since September 2024 (reaching -4.2 percent, in February 2025) due to downward adjustments in energy prices, currency appreciation, and subdued household demand. With declining inflation, the central bank reduced policy rates by 150 basis points in 2024, totaling a 800 basis points reduction since 2023. As commercial lending rates followed suit, private credit began to recover, growing by 10.7 percent in December 2024.
The merchandise trade deficit widened by 23.9 percent in 2024, as imports grew faster than exports. However, strong tourism revenues and remittances flows supported a current account surplus for the second consecutive year in 2024. Foreign exchange purchases by the central bank, amid the continued debt service suspension, and inflows from development partners, bolstered usable reserves to 3.0 months of imports. This enabled the government to remove all remaining import restrictions, primarily on vehicles. The rupee gained a cumulative 19.4 percent against the US dollar compared to end-2022.
The primary surplus reached 2.2 percent of GDP in 2024, surpassing the IMF EFF¡¯s 2024 target (at Board approval) of 0.8 percent. This was driven by higher VAT revenues (due to increased rates and the removal of exemptions) and under-execution of the capital budget. Alongside growth and currency appreciation, the improved primary balance helped reduce estimated PPG debt to 102.4 percent of GDP at end-2024. External debt restructuring is nearly concluded, with nearly 98 percent of Eurobonds exchanged and strong progress made towards finalizing bilateral agreements with official creditors. The IMF EFF¡¯s third review was completed in March 2025.
Growth resulted in a poverty reduction of 2.7 percentage points in 2024, as 60 percent of the poorest quintile work in industry and services. However, the economic recovery has not translated into widespread welfare improvements, with poverty (below $3.65 per person per day, 2021 PPP), still at 24.5 percent, twice the 2019 level. Despite easing inflation, food prices more than doubled between 2021 and 2024, contributing to elevated malnutrition and food insecurity. The employment ratio declined from 46.0 percent in the second quarter of 2023 to 45.5 percent in the second quarter of 2024, and real wages remain below their 2019 levels. Limited economic opportunities are driving emigration, with applications to the Foreign Employment Bureau increasing in the first nine months of 2024.
KEY CONDITIONS AND CHALLENGES
The economy began stabilizing in mid-2023, following the country¡¯s worst post-independence economic crisis. Long-standing macroeconomic mismanagement and structural weaknesses, exacerbated by exogenous shocks, led to the depletion of foreign reserves and a public debt default in 2022. Poverty increased by 10 percentage points between 2021 and 2022 due to declining real incomes amid job losses and high inflation. Reforms under an IMF Extended Fund Facility (EFF) program helped stabilize the economy, limiting the cumulative GDP contraction to 9.5 percent between 2021 and 2023. Headline inflation eased (to 4 percent in December 2023 from 69.8 percent in September 2022), usable official reserves rose (to 2.1 months of imports by end-2023 from 0.3 months at end-2022), and the public and publicly guaranteed (PPG) debt-to-GDP ratio fell (to 111.7 percent at end-2023 from 119.2 at end-2022). However, the reforms, including utility pricing adjustments and new revenue mobilization measures, strained household budgets. Facing higher living costs, households adopted risky coping strategies, such as cutting human capital spending, borrowing more, and reducing nutritious food intake.
OUTLOOK
Despite the recovery in 2024, medium-term growth is expected to remain modest, reflecting the scarring effects of the crisis, structural impediments to growth, and global economic uncertainties. The current account is expected to be in deficit in 2025, as the impact from reduced exports (due to trade-related uncertainties), outweighs the impact on imports (from reduced demand and global oil prices). With a revival in domestic demand, inflation is projected to turn positive by mid-2025 but remain below the central bank¡¯s medium-term target. Despite continued fiscal consolidation, financing pressures will persist due to large T-bill refinancing needs. Reflecting the crisis¡¯s continued impact, over a third of the population is expected to be in, or at the risk of falling into, poverty in 2025.
Although fiscal and external buffers are being rebuilt, downside risks remain exceptionally high. Moderating global growth, high global interest rates, and unprecedented trade policy uncertainty are likely to constrain capital inflows, deter investment, and weaken export demand, resulting in potential trade-related job losses. Further regressive indirect taxes could worsen the poverty outlook. The increased prevalence of stunting and malnutrition raises concerns about long-term human capital development and intergenerational poverty transmission. Limited economic opportunities and consequent increased outmigration of skilled workers pose concerns for the recovery, and the quality of public service delivery, particularly in an aging society.
To ensure stronger medium-term growth, it is critical to maintain policy consistency and pursue structural reforms that support macro-fiscal-financial stability, enhance competitiveness, and attract fresh, non-debt-creating capital inflows. Developing human capital by improving education and health service delivery standards is equally critical. Strengthening the social protection system will safeguard the most vulnerable and ensure the recovery¡¯s benefits are inclusive and broad-based.
Last Updated: Apr 23, 2025
While Sri Lanka's economy is bouncing back stronger than expected, a significant portion of the population¡ªabout a third¡ªremains in poverty or is at risk of falling back into poverty. To ensure this recovery works for everyone, especially those who have been hit hardest, Sri Lanka can focus on policies that create jobs and support the poor.
PAST ISSUES
- October 2024:
- April 2024:
- October 2023:
- April 2023:
- October 2022:
- April 2021:
CONTACTS
Richard Walker
Senior Country Economist | rwalker3@worldbank.org
Shruti Lakhtakia
Country Economist | sslakhtakia@worldbank.org
Buddhi Feelixge
External Affairs Officer | bfeelixge@worldbankgroup.org