Sri Lanka’s Economic Turnaround: World Bank Highlights Path to Smarter Public Finances

Sri Lanka has made significant progress in stabilizing its economy, completing one of the most ambitious fiscal adjustments in its history. According to a newly released World Bank report, the country has achieved a fiscal correction equal to nearly 8 percent of GDP over just three years, placing it among the fastest and most substantial fiscal adjustments globally since 1980.

The World Bank’s Sri Lanka Public Finance Review: Towards a Balanced Fiscal Adjustment, launched today, commends the government’s efforts to restore macroeconomic stability. The report compares Sri Lanka’s reform drive with over 330 similar fiscal adjustments in 123 countries and finds its pace and scale to be exceptional by international standards.

However, while the reforms have stabilized the economy, they have come at a cost. The report acknowledges the burden placed on households due to higher indirect taxes, diminished real public-sector wages, and slower economic growth caused by reduced public investment.

As Sri Lanka moves beyond stabilization, the World Bank stresses the importance of making public finances work better for all Sri Lankans.

“Now that Sri Lanka has largely stabilized its economy, the challenge is to get better results from every rupee collected and spent,” said David Sislen, World Bank Division Director for Maldives, Nepal and Sri Lanka. “This means modernizing tax administration, focusing on direct taxes, and making sure public spending is both efficient and fair—especially for the most vulnerable.”

A Blueprint for Smarter, Fairer Public Spending

The review outlines a roadmap for Sri Lanka’s next phase of fiscal reform, focusing on raising revenues more equitably and improving the efficiency of public spending. Key recommendations include:

1. Raising Revenue Fairly and Efficiently

• Shift toward direct taxes, including the introduction of a minimum corporate income tax.
• Digitize tax administration to make tax compliance easier, more transparent, and harder to evade.
• Sri Lanka could boost revenues by up to 2 percent of GDP by 2029 without harming growth or fairness.

2. Spending Smarter—Not Necessarily More or Less

Rather than increasing or cutting overall spending, the report emphasizes better use of existing resources to improve public service delivery.

This includes:

• Public Sector Wage Management: Protecting essential services, streamlining pay structures, and modernizing payment systems.
• Capital Investment: Prioritizing infrastructure projects that close key gaps, speeding up project completion, and strengthening planning and maintenance.
• Social Protection: Enhancing targeting mechanisms to ensure support reaches the most vulnerable, expanding the national social registry, and transitioning from universal subsidies to more focused assistance.

Building Long-Term Fiscal Resilience

The World Bank also calls on Sri Lanka to design its next phase of reforms to build sustainable fiscal resilience. Strengthening the links between planning and budgeting, improving government accountability, and focusing on measurable outcomes are critical for delivering better public services and inclusive economic growth.

About the Public Finance Review

The Public Finance Review (PFR) is a core diagnostic tool used by the World Bank every five years in member countries. It provides an in-depth analysis of a country’s fiscal policy, revenue generation, and spending efficiency. The latest Sri Lanka PFR was developed in close partnership with the Ministry of Finance and supported by technical assistance in key reform areas.

Sri Lanka’s progress offers a unique opportunity to build a more equitable and efficient fiscal system. With the right balance of policy reform and implementation, the country is poised to convert its hard-earned stability into lasting prosperity for all its citizens.