The World Bank has raised its growth forecast for Sri Lanka to 4.4% for 2026 and says national output has returned to pre-crisis levels — while warning that the recovery is “uneven and incomplete” and that poverty remains far above where it stood before the collapse.
The findings come in the twice-yearly Sri Lanka Development Update, titled From Recovery to Transformation, released on Tuesday. The projection exceeds the Bank’s earlier forecasts and is driven by strong industrial performance and steady growth in services, EconomyNext reported.
The economy has now expanded for twelve consecutive quarters, with real GDP growing 4.7% in the first half of 2026 and output returning to levels last seen in 2018. Growth is projected to slow to 4.2% in 2027 as the post-crisis rebound fades and productivity remains weak.
The part that has not recovered
Household incomes and labour market outcomes continue to lag the broader rebound, and poverty remains at 16.9% — well above pre-crisis levels, the Daily Mirror reported. NewsFirst reports the Bank expects poverty to fall to around 14% but to stay above pre-crisis levels even then.
Inflation has picked up in recent months on higher food and energy prices. NewsFirst reported that headline inflation is expected to stay elevated at 5.7% on a year-average basis in 2026, easing to the 5% target by 2028, with a weaker rupee and higher energy prices still working through the economy.
“Reaching this milestone marks a beginning, not the end — the country needs to seize this momentum to transform its economy and create jobs,” said Gevorg Sargsyan, World Bank Group Country Manager for Sri Lanka, who called the country’s reclassification as an upper-middle-income economy “a testament to the hard work of its people.”
A budget surplus built partly on money not spent
Fiscal performance was strong in the first half: revenue rose 27.2% year-on-year and tax collections 25.9%, driven by VAT and vehicle import duties after import curbs were lifted. With spending up just 7.9%, the government posted a primary surplus of Rs. 1,233.1bn and an overall surplus of Rs. 9.5bn, against a Rs. 406bn deficit a year earlier.
But the Bank attributes part of that surplus to under-execution, not strength. Only about 8% of the Rs. 500bn allocated for Cyclone Ditwah reconstruction had been disbursed by mid-year, and just 16.7% of the full-year capital budget. “This under-execution reflects weaknesses in public investment management, including project selection, procurement, and implementation capacity — rather than financing constraints,” the report said.
Interest costs consumed about 46% of government revenue in 2025, down from nearly 80% at the 2022–23 peak, and are expected to fall to roughly 34% by 2028.
Agribusiness as the next engine
The report’s special focus argues the growth model must shift from government spending toward private investment, exports and productivity. While primary agriculture is about 8% of GDP, the wider agrifood system — processing, logistics, trade and food services — accounts for roughly one-sixth of GDP, over 40% of employment and nearly 30% of goods exports, with Sri Lanka competing globally in tea, coconut, cinnamon, seafood and rubber.
The Bank recommends repurposing public money away from inefficient subsidies toward agricultural research, climate-smart technology, cold-chain logistics, digital traceability and land tenure reform.
It flags two main downside risks: prolonged volatility in global energy markets and the potential impact of El Niño on productivity and food security.
The update was published alongside the regional South Asia Economic Update, titled Adopting AI for Growth, which forecasts regional growth of 6.9% this year.
The poverty figures in this update are a revised series, not a fall
One point needs stating plainly, because the numbers in this release are not directly comparable with the ones the Bank published before it: the World Bank has changed how it measures Sri Lankan poverty.
An FAQ accompanying the update explains that estimates for 2020–2024 have been rebuilt using annual household-level data from the Labour Force Survey, rather than relying primarily on macroeconomic aggregates, Newswire reported. The change also feeds through to the estimates and projections for 2025–2028.
On the revised basis, poverty at the Bank’s US$4.20-a-day line runs:
| Year | Poverty rate |
|---|---|
| 2019 (pre-crisis) | 11.5% |
| 2023 (crisis peak) | 20.7% |
| 2024 | 18.4% |
| 2025 | 16.9% |
| 2026 (projected) | 15.8% |
| 2027 (projected) | 14.8% |
| 2028 (projected) | 14.0% |
That sequence answers a question this article previously left open: the ~14% figure is the 2028 projection, not a near-term one, and the path from 16.9% to it is gradual.
The crucial caveat is the Bank’s own. Under the previous methodology, the 2023 peak was estimated at 27.6% — so the revision lowers the measured crisis peak by about seven percentage points. The Bank is explicit that this is a measurement change and not an improvement in conditions:
“The estimated crisis peak is about 7 percentage points lower than under the earlier method, but poverty on the ground has not changed, it is now measured more accurately.”
The 2019 baseline is unchanged, and the Bank’s conclusion is unchanged with it: poverty still roughly doubled during the crisis, an estimated two million people were pushed below the line between 2019 and the 2023 peak, and poverty is expected to remain above pre-crisis levels through at least 2028.
The Bank also notes these are not Sri Lanka’s official poverty statistics — the official benchmark remains the Household Income and Expenditure Survey conducted by the Department of Census and Statistics.
Two in five, and six in ten
The Bank’s headline framing is that two in five Sri Lankans are poor or vulnerable to falling into poverty in 2026 despite the recovery, EconomyNext reported — the point being that the timing is bad: “The increase in living costs comes before many households have rebuilt the financial buffers depleted during the crisis.”
A second, larger figure in the same release measures something different and should not be read as a poverty rate. Following Sri Lanka’s reclassification as an upper-middle-income country, the Bank also applied the US$8.30-a-day benchmark used for that income group, against which close to six in ten Sri Lankans fall below the threshold. The Bank stresses this is not a new estimate of Sri Lankan poverty but a yardstick for living standards typical of upper-middle-income economies.
What has not recovered, in numbers
The revision does not soften the household-level picture, which the update sets out in some detail:
- Real labour incomes fell by more than 40% between 2019 and 2023 and have yet to fully recover.
- Labour force participation dropped from 52.3% in 2019 to 47.4% in 2024, recovering partially to 49.4% in 2025.
- Female labour force participation fell from 34.5% in 2019 to 32.4% in 2024.
- Stunting among children under five rose from 7.4% in 2021 to 10.1% in 2025.
The recovery is also geographically uneven in a way the national rate hides: poverty outside the Western Province is estimated at two to three times the rate within it, and poverty in the estate sector runs at three times the national average.
Not reported
None of the filings gives the Bank’s 2026 poverty headcount in absolute numbers or states which quarter the twelve-quarter growth run began. No filing explains how the 16.9% current rate and the ~14% projection are sequenced. — answered: the revised series above runs 16.9% in 2025 to 14.0% in 2028. No government response to the under-execution finding, or to the methodology revision, had been reported at the time of writing, and the Department of Census and Statistics has not commented on how its official HIES-based figures compare with the Bank’s revised series.
