• World Bank report suggests that sustained 5% growth can also reduce poverty to pre-crisis levels by 2031
• Warns the economic recovery is vulnerable to shocks like higher interest rates and climate events

Sri Lanka is projected to regain its 2018 real GDP level by 2026, while a higher growth rate of 5% is expected to bring poverty levels to pre-crisis levels by 2031 and reduce primary surplus to under 1.5% sufficient to meet debt targets, the World Bank said.

In a recent report, the World Bank said that sustaining higher economic growth could ease the burden on fiscal adjustment to achieve debt targets.

“The 5% growth in 2024 stems from a low base, and Sri Lanka is projected to regain its 2018 real GDP level only by 2026. If Sri Lanka can sustain growth beyond the base effect, the primary surplus target could be lowered while still meeting debt objectives,” it said.

The report said that if the government’s anticipated growth of 5% can be realised, a primary surplus of just under 1.5% will be sufficient to meet debt targets.

Moreover, the World Bank said that economic growth can make a significant dent in poverty and bring it back to pre-crisis levels if growth is sufficiently pro-poor.

“Assuming that 75% of economic growth translates into household income growth, a baseline 3.1% growth rate from 2026 would bring the poverty rate to 20.4% in 2027,” the report said, adding that at this baseline growth rate, the poverty level is projected to return to pre-crisis levels only in 2034.

However, it said that a higher growth rate of 5% would lower poverty to 19.1% in 2027, and return to pre-crisis poverty levels of 12.3% by 2031, reversing nearly a decade of poverty reduction due to the economic crisis.

Further, the World Bank said that Sri Lanka must carefully manage risks to fiscal recalibration, as the current trajectory remains highly vulnerable to shocks.

“Higher-than-expected interest rates, a growth shock, an exchange rate shock, revenue slippage, or a climate shock could undermine progress towards debt targets,” it added.

The Gross Financing Need (GFN) target is also highly sensitive to the financing mix, and meeting the GFN target will be challenging if the domestic market is unable to absorb substantial volumes of long-term government securities that could gradually replace the existing Treasury bill stock.