ECONOMYNEXT – Sri Lanka should liberalize factors of production including land and labour, and liberalize trade to push growth to a higher level, the World Bank said in a report as the country recovers from a currency crisis that ended in default and high levels of poverty.
Sri Lanka is expected to grow 4.6 percent in 2025, and it may slow to 3.5 percent in 2026, the World Bank said in a Development Update for the island.
Though revenues are increasing with higher taxes, high debt levels require that money is better spent.
After finishing incomplete infrastructure, money should continue to be spent on maintenance but new investments must be carefully chosen to fill actual gaps, the report said.
“Within sectors, it would be important to reallocate spending to projects that need to be completed urgently, improve portfolio quality, and also ensure that projects are completed so that assets can be built rather than increasing the time spent for a project,” Shruti Lakhtakia, World Bank Country Economist for Sri Lanka said.
“Improve project execution and implementation and monitoring through a more integrated public investment management system that streamlines planning, screening, appraisal, monitoring, and take a more data-driven approach to selecting and implementing projects.
“Finally, continue to invest in maintenance of the assets to elongate their life where possible.”
To get into a higher growth path, reforms were needed in land and labour to get private investments.
“In terms of the labor market this is conversation we’ve had a lot,” it’s
Right now there’s multiple legislation that goes back even 60-70 years that investors and firms have to wade through and as a result this means firms and potential hirers of labor are a bit more cautious about taking on labor,” Richard Walker, World Bank Senior Country Economist for Sri Lanka said.
“And also it has implications particularly for female labor force participation which is something we’ve highlighted and stressed on many occasions that this is to some extent and sort of a low-hanging fruit.”
Sri Lanka’s state also controlled about 80 percent of the land.
“But you find that there’s these sort of overlapping mandates. it’s unclear sometimes which institutions manage and own what land this makes it difficult for investors,” Walker said.
“It affects farmers’ agricultural productivity and also ultimately the sustainable use and management of land.”
Sri Lanka should also reform public sector wages which is now a mix of allowances and base wages, the report said.
Sri Lanka started giving ad hoc wage hikes as the central bank printed money and depreciated the currency creating inflation and social unrest, leading to demands for ad hoc salary hikes, critics say.
Hiring sprees, including unemployed graduates after 2004, then followed, while the war also resulted in an expansion of the military. However there was no demobilization in Sri Lanka, analysts say.
Sri Lanka public sector wages in nominal terms was not very high compared to some other countries, but the head count was very high for a country of this size, officials said
Poverty was also high and high food prices were a concern, the World Bank said.
Sri Lanka’s poverty rocketed after rate cuts for potential output targeting led to a steep currency crisis and external default.
Since 2022 Sri Lanka’s central bank has provided a strong foundation for economic growth to recover and to for people to lift themselves out of the poverty of the currency crash.
However going forward a 5-7 percent rise in annual cost-of-living is threatened by macro-economists.
Meanwhile the World Bank said poverty may fall to around 22.3 percent in 2025, from 24.9 percent in 2024. Around another 10 percent remained teetering in the margins.
The high inflation target which can push up food prices further up, especially if the currency is depreciated to achieve the inflation target analysts.
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