Sri Lanka’s economy has made a remarkable recovery in 2024, surpassing growth expectations by recording 5 percent growth, compared to the projected 4.4 percent, says the World Bank. This growth has been driven by strong performances in industry and services, particularly in construction and tourism-related services.

According to the report in 2025, growth is expected to moderate to 3.5 percent reflecting scarring effects of the crisis and structural impediments to growth, amid global headwinds and unprecedented trade policy uncertainty.

Released on Wednesday (23), the World Bank’s bi-annual Sri Lanka Development Update, titled Staying on Track, highlights that despite the positive growth and fiscal performance, significant challenges remain. While the economy is recovering, many Sri Lankans are still struggling. Household incomes, employment, and overall welfare are still well below pre-crisis levels, and the poverty rate remained alarmingly high at 24.5 percent in 2024 according to the report. The labor market continues to struggle, leading to increased emigration as people look for opportunities abroad.

“While Sri Lanka’s economy is bouncing back stronger than expected, a significant portion of the population—about a third—remains in poverty or is at risk of falling back into poverty,” said David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka. “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.”

The report underscores that medium-term growth and poverty reduction depend on maintaining macroeconomic stability and implementing key structural reforms amid an increasingly uncertain global environment. The World Bank forecasts moderate growth of around 3.1 percent for Sri Lanka in 2026.

Shifting to a higher growth trajectory through the successful implementation of reforms that enhance trade, investment, competition and female labor force participation, among others, is essential to ensure that all Sri Lankans benefit from the recovery. Looking ahead, the World Bank emphasizes the continued need for policy reforms to maintain macro-fiscal and financial stability, boost competitiveness, increase productivity, and expand job opportunities.

The Sri Lanka Development Update is a companion piece to the South Asia Development Update, a twice-a-year World Bank report that examines economic developments and prospects in the South Asia region and analyzes policy challenges countries face. The April 2025 edition, Taxing Times, projects regional growth to slow to 5.8 percent in 2025—0.4 percentage points below October projections—before ticking up to 6.1 percent in 2026.

This outlook is subject to heightened risks, including from a highly uncertain global landscape, combined with domestic vulnerabilities including constrained fiscal space. It includes a special chapter analyzing the state of domestic resource mobilization in the region. Despite often higher tax rates, the region’s tax revenues remain below the average for emerging markets and developing economies. The report outlines how countries can address inefficiencies in tax policy and administration to increase revenues so they can enhance resilience amid an increasingly challenging global economic environment.