Sri Lanka's 2024 Economic Recovery Outpaces Forecasts, but Inequality Persists

Despite this promising headline figure, the World Bank tempers optimism with a sobering reality: many Sri Lankans remain in economic distress.

Sri Lanka’s economy has staged a striking comeback in 2024, growing by 5 percent, surpassing the World Bank’s projected growth rate of 4.4 percent. This unexpected economic rebound is a significant milestone for a nation that, just two years ago, was engulfed in its worst financial crisis since independence. According to the World Bank’s newly released bi-annual report, Sri Lanka Development Update: Staying on Track, the resurgence has been driven primarily by the robust recovery in industry and services, with construction and tourism-related sectors showing especially strong performance.

Despite this promising headline figure, the World Bank tempers optimism with a sobering reality: many Sri Lankans remain in economic distress. The effects of the 2022-2023 crisis continue to linger, especially for low-income households and marginalized communities.

Economic Gains Shadowed by Human Costs

While the economy is technically in recovery, the social and human impact of the crisis still looms large. Household incomes remain well below pre-crisis levels, and the labor market has not fully bounced back. The unemployment rate remains elevated, and underemployment is widespread, especially among the youth and women.

In 2024, the national poverty rate stood at an alarming 24.5 percent, a stark reminder that the benefits of the recovery have not been evenly distributed. Many families continue to face rising living costs, unstable employment, and limited access to basic services. These factors are contributing to a noticeable uptick in emigration, particularly among the younger population, who are seeking better economic opportunities abroad.

David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka, emphasized the dual nature of the current moment:

“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. 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.”

Challenges on the Road Ahead

The World Bank projects that economic growth will moderate to 3.5 percent in 2025, reflecting both the lingering "scarring effects" of the crisis and structural impediments to sustainable growth, including low productivity, a rigid labor market, and weak public institutions. These challenges are compounded by global headwinds such as geopolitical tensions, fluctuating commodity prices, and unprecedented uncertainty in global trade policies.

For 2026, growth is forecast to decelerate further to 3.1 percent, unless Sri Lanka can undertake and successfully implement deep structural reforms.

The World Bank notes that policy reforms aimed at improving trade, investment climate, competition, and female labor force participation will be essential to unlocking the country's full growth potential. These reforms must be accompanied by continued efforts to maintain macroeconomic stability, strengthen public finances, and build fiscal resilience.

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Spotlight on South Asia and Tax Reforms

The Sri Lanka Development Update accompanies the broader South Asia Development Update released in April 2025, titled Taxing Times. This regional report forecasts that South Asia’s overall growth will slow to 5.8 percent in 2025, 0.4 percentage points below the October 2024 projection. It is expected to rebound to 6.1 percent in 2026, though this outlook remains fragile given domestic vulnerabilities and the increasingly volatile global economic environment.

The Taxing Times report places special emphasis on the urgent need for improved domestic resource mobilization across South Asia. It notes that, despite relatively high tax rates, tax revenues remain significantly below the global average for emerging markets and developing economies. This is due to both inefficient tax policy frameworks and weak administrative capacity.

To enhance resilience and support inclusive development, the World Bank recommends that countries in the region—including Sri Lanka—focus on broadening their tax bases, improving compliance, and closing loopholes that undermine public trust in tax systems.

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Policy Priorities for Inclusive and Sustainable Recovery

Looking ahead, Sri Lanka’s policymakers face a delicate balancing act. They must preserve the momentum of economic recovery while also addressing deep-rooted inequities and vulnerabilities exposed by the recent crisis. Key policy recommendations from the World Bank include:

• Enhancing job creation, particularly for youth and women

• Investing in education and upskilling to match labor market needs

• Improving social protection systems to shield the most vulnerable

• Strengthening public financial management and fiscal transparency

• Removing regulatory barriers to encourage private sector investment

As Sri Lanka seeks to transition from crisis response to long-term development, ensuring that growth is inclusive and sustainable will be critical. The road ahead is undoubtedly challenging, but with consistent reform and international support, the country can aspire to rebuild a more resilient and equitable economy.