World Bank Sees Strong Growth for Sri Lanka Despite Risks Ahead

COLOMBO (News 1st) - Sri Lanka's economy has surpassed pre-crisis levels and is expected to grow by 4.4% in 2026, with the World Bank describing the country's return to upper-middle-income status as a significant milestone in its recovery journey.

According to the latest Sri Lanka Development Update, titled From Recovery to Transformation, released on Tuesday (6), Sri Lanka's economic growth has exceeded earlier projections, supported by strong performance in industry and continued expansion in the services sector.

The report notes that the economy has now recorded growth for twelve consecutive quarters, with real GDP expanding by 4.7% during the first half of 2026 and returning to levels last seen in 2018. The World Bank says the achievement marks a major step forward following the country's economic crisis, although the benefits of the recovery have not yet been felt evenly across society.

Despite the broader economic rebound, household incomes and labour market outcomes continue to lag behind overall growth, while poverty remains significantly above pre-crisis levels at 16.9%. The report also points to rising inflation in recent months, driven largely by higher food and energy prices.

Looking ahead, the World Bank projects growth to moderate slightly to 4.2% in 2027 as the post-crisis recovery phase begins to ease. The institution warns that external shocks, including volatility in global energy markets and the potential effects of El Niño, could weigh on productivity and food security.

World Bank Group Country Manager for Sri Lanka, Gevorg Sargsyan, said Sri Lanka's reclassification as an upper-middle-income country demonstrates both the resilience of its people and the government's commitment to economic recovery. However, he stressed that the latest milestone should be viewed as the beginning of a broader transformation process rather than the final destination.

According to the report, sustaining growth will require shifting the country's economic model away from reliance on government spending and toward greater private investment, stronger exports, and higher productivity. The World Bank says this transition will depend on improved infrastructure, a stable investment environment, and increased private sector participation across key sectors of the economy.

A major focus of the report is the potential of Sri Lanka's agribusiness sector to drive the next stage of economic growth. While primary agriculture contributes around 8% of GDP, the broader agrifood system, which includes food processing, logistics, trade, and food services, accounts for approximately one-sixth of the economy and supports more than 40% of employment.

The World Bank notes that agribusiness generates nearly 30% of Sri Lanka's goods exports and remains a crucial source of foreign exchange earnings and rural livelihoods. The country continues to maintain a strong global presence in products such as tea, coconut, cinnamon, seafood, and rubber.

However, the report highlights significant untapped potential within the sector. It states that reforms to trade policies, public spending, infrastructure development, and access to finance could unlock a new wave of private investment while expanding opportunities for smallholder farmers and rural communities.

Among its recommendations, the World Bank calls for a more predictable and export-oriented policy environment, alongside a reallocation of public spending away from inefficient subsidies and toward productivity-enhancing investments. These include agricultural research, climate-smart technologies, quality infrastructure, digital traceability systems, cold-chain logistics, improved land tenure arrangements, and expanded access to finance.

The findings were released alongside the World Bank's latest South Asia Economic Update, which forecasts regional growth of 6.9% in 2026. The report, titled Adopting AI for Growth, highlights the potential for artificial intelligence to boost productivity, expand export opportunities, and improve public service delivery across South Asia, helping drive the region's next phase of economic development.