Sustaining transformative growth in Sri Lanka 2025-2030: Report of an Independent Growth Study Group under the auspices of ODI Global and the Centre for Poverty Analysis (CEPA)

Independent Growth Study Group on Sustaining Transformative Growth in Sri Lanka Research Report Sustaining transformative growth in Sri Lanka 2025-2030: Report of an Independent Growth Study Group under the auspices of ODI Global and the Centre for Poverty Analysis (CEPA) ODI Global Report Provided in Cooperation with: ODI Global, London Suggested Citation: Independent Growth Study Group on Sustaining Transformative Growth in Sri Lanka (2025) : Sustaining transformative growth in Sri Lanka 2025-2030: Report of an Independent Growth Study Group under the auspices of ODI Global and the Centre for Poverty Analysis (CEPA), ODI Global Report, ODI Europe, London, https://odi.org/en/publications/sustaining-transformative-growth-in-sri-lanka-odi-cepa-growthstudy-report/ This Version is available at: https://hdl.handle.net/10419/321350 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/ Report Sustaining transformative growth in Sri Lanka 2025–2030 Report of an Independent Growth Study Group under the auspices of ODI Global and the Centre for Poverty Analysis (CEPA) July 2025 Sustaining transformative growth in Sri Lanka 2025–2030 Report of an Independent Growth Study Group under the auspices of ODI Global and the Centre for Poverty Analysis (CEPA) July 2025 ODI Global 203 Blackfriars Road London SE1 8NJ United Kingdom Readers are encouraged to reproduce material for their own publications, as long as they are not being sold commercially. ODI Global requests due acknowledgement and a copy of the publication. For online use, we ask readers to link to the original resource on the ODI Global website. The views presented in this publication are those of the author(s) and do not necessarily represent the views of ODI Global or our partners. © ODI Global 2025 This work is licensed under CC BY-NC-ND 4.0. How to cite: ODI Global and CEPA (2025) Sustaining transformative growth in Sri Lanka 2025–2030. ODI Global report. London: ODI Global (www.odi.org/ publications/sustaining-transformative-growth-in-sri-lanka-odi-cepagrowth-study-report) i Sustaining transformative growth in Sri Lanka 2025–2030 Acknowledgements About this publication This report has been drafted by Sirimal Abeyratne, Chandranath Amerasekera, Ravin Basnayake, Indrajit Coomaraswamy, Yvette Fernando, Dirk Willem te Velde, Esala Weerakoon, Shea Wickremasinghe and Ganeshan Wignaraja. Under the auspices of two think tanks – ODI Global in London and the Centre for Poverty Analysis (CEPA) in Colombo, these individuals formed an Independent Growth Study Group with Ganeshan Wignaraja as the convenor. The Independent Study Group consists of professionals with deep experience in the public sector, the private sector, think tanks and international financial institutions. The following members have served in their personal capacities, and the findings should not be attributed to the organisations they represent or were affiliated with. About the authors Sirimal Abeyratne is Executive Director of CEPA and Emeritus Professor at Colombo University. Chandranath Amerasekera is Assistant Governor at the Central Bank of Sri Lanka. Ravin Basnayake is Managing Director/Citi Country Officer at Citi Sri Lanka. Indrajit Coomaraswamy is former Governor of the Central Bank of Sri Lanka andformer Director of the Economic Affairs Division of the Commonwealth Secretariat, London. Yvette Fernando is former Senior Deputy Governor at the Central Bank of Sri Lanka. Dirk Willem te Velde is Director and Principal Research Fellow at ODI Global’s International Economic Development Group. He is also Professor of Practice at SOAS, University of London. Esala Weerakoon is former Secretary General of the South Asian Association for Regional Cooperation; former Foreign Secretary of Sri Lanka; and former Senior Additional Secretary to the President of Sri Lanka. Shea Wickremasinghe is Group Managing Director at CBL Group. ii Sustaining transformative growth in Sri Lanka 2025–2030 Ganeshan Wignaraja is Convenor of the Independent Growth Study Group. He is Visiting Senior Fellow at ODI Global; former Executive Director of Sri Lanka’s Foreign Ministry think tank; and former Director of Research, Asian Development Bank Institute. The Secretariat consisted of Anishka De Zylva, Angela Kolongo, and Christeen Masha. Background information was provided by Max Mendez-Parra, Phyllis Papadavid and Sherillyn Raga. The work of this group builds on the ODI Global book of essays, Sri Lanka: from debt default to transformative growth, whose second edition (updated to events in April 2025) is available at: www.odi.org/publications/srilanka-from-debt-default-to-transformative-growth-second-edition. The group met five times during the course of January to June 2025 to prepare this report. The members of the Independent Growth Study Group on Sustaining Transformative Growth in Sri Lanka are grateful for the numerous comments, suggestions and inputs of many individuals and institutions during the course of this work, including business associations, universities, government officials, diplomatic corps, development partners and ODI Global and Centre for Poverty Analysis colleagues. iii Sustaining transformative growth in Sri Lanka 2025–2030 Contents Acknowledgements / i Table and figures / iv Acronyms / v Executive summary / vi 1 Introduction: overview and policy proposals / 1 2 Causes of the economic crisis / 3 3 Remarkable economic stabilisation – but risks remain / 6 4 Key ingredients of and policies for a growth plan / 10 4.1 Sound macroeconomic policy / 10 4.2 Structural reforms / 12 4.3 Potential high-growth sectors / 13 4.4 Improved policies to reduce poverty / 16 5 Lessons for implementing reforms / 18 5.1 A lack of political consensus / 18 5.2 Weak state capacity / 19 5.3 Limited project monitoring / 20 5.4 Key actions for effective implementation / 21 6 A last word / 23 References / 24 Appendix 1 Goods and services exports, FDI inflows and tourism earnings, country comparison / 28 Appendix 2 Good practice project monitoring / 30 iv Sustaining transformative growth in Sri Lanka 2025–2030 Table and figures Table Table ES1 Proposals for accelerating growth and reducing poverty in Sri Lanka, 2025–2030 / viii Figures Figure ES1 Economic performance: from crisis to recovery / vii Figure 1 GDP per capita (current US$) / 1 Figure 2 Public debt as a share of GDP (%) / 3 Figure 3 Poverty headcount ratio at $3.65 a day, 2017 PPP (% of population) / 4 Figure 4 Gross Official Reserves, excluding People›s Bank of China Swap / 7 Figure 5 Sri Lanka’s annual and quarterly GDP growth rates (%) / 8 Figure 6 Untapped Potential for Sri Lanka’s Growth – trade and investment / 12 v Sustaining transformative growth in Sri Lanka 2025–2030 Acronyms ASEAN Association of Southeast Asian Nations CEPA Centre for Poverty Analysis CSF Centre for a Smart Future EU European Union FDI foreign direct investment FIT flexible inflation targeting FTA free trade agreement GDP gross domestic product ICT information and communication technology ID identification IMF International Monetary Fund IT information technology MSMEs micro, small and medium enterprises NPP National People’s Power PPP purchasing power parity SOE state-owned enterprise UK United Kingdom UNDP United Nations Development Programme US United States WTO World Trade Organization xii Sustaining transformative growth in Sri Lanka 2025–2030 Proposal Remarks 24. Invest in digital public infrastructure, improve e-government public services and increase the attractiveness of digital payments. Expedite the introduction of the digital ID with strong data protection and cybersecurity standards and regulatory reforms. Prepare a database on the digital economy and services (e.g. a survey on e-commerce and e-payments). Reducing poverty 25. Reduce post-harvest losses and tackle shortages to improve food security and reduce high food prices. Liberalise food imports as an emergency measure (as needed) to alleviate shortages to reduce food prices. Partner with supermarkets/traders in better cold storage systems, introduce modern cold storage containers for transporting perishable food, explore a pilot project to use CTB buses to transport food and invest in rail transport (where possible) to reduce post-harvest losses. Upgrade Sathosa outlet networks to sell a basket of basic food at controlled prices to those on a low income. 26. Under the Aswesuma programme, better target time-bound cash transfers towards the poorest to sustain essential consumption for a temporary period while providing coordinated support for graduation into quality work. Household electricity consumption or mobile data usage, for instance, may be used as an income proxy in the absence of more precise targeting. Expedite implementation of the Unique Digital ID Scheme to enable e-cash transfers and improve cybersecurity capabilities. Encourage the poor to open bank accounts to enable e-cash transfers. 27. Study the fixability of increased development finance for micro, small and medium enterprises (MSMEs) through existing financial institutions (and or new institution) and setting up a credible credit scoring system nationally. Seek long-term credit lines from the Asian Development Bank or Japan to reduce the maturity mismatch that increases the risks of MSME lending. Focus on finance for sectors like tourism and agriculture. Expand the credit scoring services of the Credit Information Bureau of Sri Lanka by incorporating all relevant data sources. Encourage industries with more value addition targeted towards export diversification Strengthen the services of Export Development Board, the Industrial Development Board, the Commerce Department, the Sri Lanka Export Credit Insurance Corporation, etc. to facilitate MSMEs to access financing and markets. Address the low penetration of insurance products to mitigate business risks. Implement the National Financial Inclusion Strategy of the Central Bank of Sri Lanka (including the Financial Literacy Roadmap) in collaboration with all stakeholders. xiii Sustaining transformative growth in Sri Lanka 2025–2030 Proposal Remarks Build policy consensus and state capacity 28. Government to appoint an independent growth commission to formulate a national growth plan drawing on examples of successes like Korea, Malaysia, Singapore, Thailand, Viet Nam, the United Arab Emirates and India. Government to convene a national conference with key stakeholders to develop a consensus on the plan and long-term implementation. Ideas from this should inform the revision of the Economic Transformation Act. 29. Develop a laser-like focus on policy implementation and project monitoring through setting up a committee of secretaries of development ministries to strengthen priority-setting and coordination for implementation; a national operations room for monitoring of all policies, programmes and projects; a rigorous process for onboarding projects; and a project monitoring committee to monitor the progress of prioritised large-scale projects. Such initiatives should also be guided by the need to sustain macroeconomic stability. 30. Significantly upgrade training on public policy and administration for public servants and members of parliament. Establish a top public policy and public administration school for executive education for public servants and members of parliament by partnering with a world class international university (e.g. Science Po in Paris, the Crawford School of Public Policy at the Australian National University in Canberra and Lee Kuan Yew School in Singapore). Explore tying the Sri Lanka Institute of Development Administration with international equivalents (e.g. Malaysia, India and Australia) to train public servants in modern public service management, value for money service delivery and integrity. 1 Sustaining transformative growth in Sri Lanka 2025–2030 1 Introduction: overview and policy proposals 1 Explanations for Sri Lanka’s development slippage are to be found in Kelegama (2000) and Amerasekera and Venuganan (2021). At Independence in 1948, Sri Lanka was second to Japan on most socioeconomic indicators; in 1960 it was ahead of Korea on per capita income. It has since slipped behind most Asian neighbours (see Figure 1 and table in Appendix 1).1 Far worse in terms of the impact on the economy and the Sri Lankan people, in 2022 the country fell into its worst economic crisis since Independence, precipitated by defaulting on its foreign debt, and entered its 17th International Monetary Fund (IMF) programme. Sri Lanka’s experience offers valuable lessons for middle-income countries grappling with post-Covid debt distress. While the economy is showing signs of stabilisation since 2024 – bolstered by positive growth, low inflation, a boom in tourism and a bullish stock market (IMF, 2025) – the challenges to achieving continued inclusive growth and economic transformation are far from over. Figure 1 GDP per capita (current US$) Bangladesh $2,551 Cambodia $2,430 Korea, Rep. $33,121 Sri Lanka $3,828 Thailand $7,182 Viet Nam $4,282 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 Source: World Bank World Development Indicators database Sri Lanka finds itself on the precipice of both opportunity and risk. In this context, it is crucial that the new National People’s Power (NPP) government chart a new path towards inclusive and transformative growth that ensures debt sustainability, avoids future crises and delivers for all Sri Lankans. ‘Business as 2Sustaining transformative growth in Sri Lanka 2025–2030 usual’ represents a cul de sac of lower competitiveness, petering out of growth and indebtedness. To address this critical need, ODI Global has initiated a study group with eminent Sri Lankan economic thinkers to develop a new growth plan for the country. This exercise builds on our co-edited essay series, Sri Lanka: from debt default to transformative growth, which presents 27 pragmatic policy proposals drawing on insights by leading Sri Lankan and international experts (Wignaraja and te Velde, 2025). Within its recovery programme, Sri Lanka must navigate emerging global challenges resulting from the introduction of US reciprocal tariffs. If implemented as proposed, these tariffs would have direct impacts on a quarter of Sri Lanka’s exports, while eroding the country’s export competitiveness with its rivals. Global trade tensions, policy uncertainties and a potential downturn in the world economy further complicate Sri Lanka’s recovery trajectory. These challenges highlight the complexities of Sri Lanka’s protective trade policy regime but also present opportunities for necessary reforms. In light of the lingering effects of the economic crisis and these external pressures, achieving transformative and sustained growth is critical for Sri Lanka. Growth is essential to support the recovery programme via fiscal consolidation and debt sustainability. Furthermore, better fiscal spending delivers faster growth. It would reduce the country’s vulnerability to external shocks, helping avert any future economic crisis. Growth serves as a pathway to address crisis-induced income losses and mass poverty levels by creating jobs and generating incomes. Finally, a sustained higher growth momentum is the underlying requirement for achieving Sri Lanka’s ambitious high-income target within next 25 years. This report is structured as follows. Section 2 briefly discusses the causes of the economic crisis. Section 3 reviews the remarkable economic stabilisation Sri Lanka has achieved, albeit with growing risks. Section 4 sets out the key ingredients of and policies for a growth plan. Section 5 discusses lessons for implementing reforms. Section 6 concludes. Table ES1 in the Executive Summary provides proposals for accelerating growth and reducing poverty in Sri Lanka. 3 Sustaining transformative growth in Sri Lanka 2025–2030 2 Causes of the economic crisis Achieving higher growth in Sri Lanka is a priority for the NPP government, led by President Anura Kumara Dissanayake, which entered office in late 2024 at a pivotal moment (Wignaraja, 2024a). Sri Lanka is emerging from its worst post-Independence economic crisis (2022–2023), which resulted in a default on external debt obligations in April 2022 (Basu, 2022; East Asia Forum, 2023). Sri Lanka’s public debt to gross domestic product (GDP) ratio increased significantly from 84% to 116% between 2018 and 2022 (see Figure 2). The default follows a 15-year period during which Sri Lanka’s debt profile changed significantly in terms of composition and risks, including a move to less concessional financing, loss of access to international capital markets, bigger bilateral borrowing and a lack of revenue (Smith, 2025). Figure 2 Public debt as a share of GDP (%) 83.6 82.6 96.9 102.7 115.9 110.4 99.4 0 20 40 60 80 100 120 2018 2019 2020 2021 2022 2023e 2024e Note: e = estimate Source: IMF World Economic Outlook April 2025 database The default represented a development setback for Sri Lanka, which was often cited as a ‘basic needs’ success story as early as the 1970s despite being a poor country (Isenman, 1980). The World Bank estimates the share of the population in poverty (income poverty measured at $3.65 a day) to have more than doubled from 11.3% to 27.1% between 2019 and 2023 (see Figure 3). 4Sustaining transformative growth in Sri Lanka 2025–2030 The reversal in poverty reduction gains during the crisis has taken Sri Lanka back to the high poverty levels of the early 2000s. Figure 3 Poverty headcount ratio at $3.65 a day, 2017 PPP (% of population) 51.8 49.9 47.6 42.2 29.8 23.8 19.7 13.8 11.3 12.7 13.1 22.7 27.1 24.5 0 10 20 30 40 50 60 1985 1990 1995 2002 2006 2009 2012 2016 2019 2020e 2021e 2022e 2023e 2024e Notes: e = estimate. Estimates for 2020–2024 are based on World Bank’s nowcast. Sources: World Development Indicators for 1985–2019 data; World Bank Group (2023 for 2020– 2021 data; World Bank Group (2025a) for 2022–2024 data Furthermore, based on the 2022–2023 National Citizen Survey of 25,000 households, the United Nations Development Programme (UNDP) estimates that 55.7% of the population in Sri Lanka is multidimensionally vulnerable (UNDP, 2023). This means that an eye-catching 12.3 million people are deprived on at least three out of the 12 indicators that span the critical dimensions of education, health, disaster and living standards. However, some double-counting may be involved, leading to higher-than-expected depravation numbers. The causes of this crisis are complex and widely debated. Broadly speaking, they can be categorised into external and internal to Sri Lanka (Weerasinghe, 2021; Abeyratne, 2023; Wignaraja, 2024b; Athukorala, 2025; Devarajan, 2025). The external factors include external shocks like the fallout from the Easter Bomb attacks in 2019, the Covid-19 pandemic, the Russia–Ukraine crisis and the Red Sea conflict. The internal factors include an inadequate shift of the economy to tradable production and export growth; commercial borrowing from China’s policy banks for a plethora of low-return infrastructure projects (e.g. Hambantota Port and Mattala Airport); persistence of fiscal and balance of payments deficits and acute economic mismanagement during 2019–2022 (locally known as 5 Sustaining transformative growth in Sri Lanka 2025–2030 ‘homegrown solutions’); lack of attention to productivity growth; and limited accountability of entrepreneurs to markets and governments to citizens. There is growing consensus that the internal factors have greater explanatory power than the external ones. President Dissanayake and the NPP campaigned on a platform of compassionate and corruption-free governance, promising a clear pathway out of the crisis for all Sri Lankans (NPP, 2024). 6Sustaining transformative growth in Sri Lanka 2025–2030 3 Remarkable economic stabilisation – but risks remain Sri Lanka’s recent economic outlook offers reasons for cautious optimism (Wignaraja and te Velde, 2025). Thanks to prudent monetary and financial stability policies by the Central Bank of Sri Lanka, a $3 billion four-year IMF programme and $4 billion of bridging finance from India, the economy appears to have stabilised after severe macroeconomic turbulence (Breuer and Woldemichael, 2025; Weerasinghe et al., 2025). To his credit, President Dissanayake has committed to the IMF programme, but with increased social spending to reduce high poverty. The recent completion of the debt restructuring process also provides much-needed continuity. A $17.5 billion debt restructuring deal with private bondholders and China has provided much-needed breathing room, and a resurgence in tourism has boosted foreign exchange reserves (Ministry of Finance, Economic Stabilisation and National Policies, 2024). Figure 4 shows the gradual build up of gross official reserves (US$) from a historic low at the sovereign default in April 2022 and May 2025. The data exclude the People's Bank of China (PBoC) swap, originally signed in 2021, of about $1.4 billion. The agreement was renewed in December 2024, extending the PBoC swap for another three years. The swap becomes usable once gross foreign reserves rise above three months of the previous year's import cover. 7 Sustaining transformative growth in Sri Lanka 2025–2030 Figure 4 Gross Official Reserves, excluding People’s Bank of China Swap Source: Central Bank of Sri Lanka The new government’s first budget, in mid-February 2025, suggests continuity with fiscal consolidation and economic reform efforts. It highlights the new government’s pragmatic attempt to balance meeting the requirements of the IMF programme with fulfilling its mandate of equitable growth. The focus is on revenue-raising measures amid gradual fiscal consolidation, increased spending on social welfare and education, reforms to enhance the digital economy, meeting debt repayments and economic stability (Parliament of Sri Lanka, 2025). Through these measures, the new government expects economic growth of 5% in the medium term. In this environment, the new government has inherited a stabilising economy. Figure 5 shows that growth picked up from -2.3% to 5.0% between 2023 and 2024. The pick-up continued in early 2025 with growth of 4.8% in 2025Q1. However, IMF forecasts published after the budget project growth as slowing from 4.5% to 3.0% between 2024 and 2025 and to remain around 3% for the next five years till 2030 (IMF, 2025). Interestingly, World Bank growth forecasts also point to growth slowing, from 5.0% in 2024 to 3.5% in 2025 (World Bank, 2025b). The road ahead is still fraught with uncertainty. The best way to overcome this uncertainty is to have a robust growth plan in place to address potential risks. 7.2 7.6 7.2 5.7 4.5 1.6 0.3 0.5 1.3 3.0 3.9 4.7 5.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 End Apr 2019 End Dec 2019 End Apr 2020 End Dec 2020 End Apr 2021 End Dec 2021 End Apr 2022 End Dec 2022 End Apr 2023 End Dec 2023 End Apr 2024 End Dec 2024 End May 2025 USD billions 8Sustaining transformative growth in Sri Lanka 2025–2030 Figure 5 Sri Lanka’s annual and quarterly GDP growth rates (%) Source: Central Bank of Sri Lanka Annual Reports, various years While the economic outlook is positive, there are looming risks that the new government must tackle head-on. One significant risk is external to Sri Lanka. This relates to an unpredictable international trade policy environment, wherein the US Administration’s signature tariff-raising policies and tough policies towards China and tit-for-tit actions by trading partners could affect the geoeconomics of the Indo-Pacific and lead to a trade war (Takada, 2025). On 2 April 2025, the US announced 44% reciprocal tariffs on Sri Lanka based on a formula incorporating a trade surplus vis-à-vis the US, national trade barriers and exchange rate policy. If the US implements reciprocal tariffs as announced, Sri Lanka is likely to lose export competitiveness, affecting a quarter of its exports to the US market. Additionally, the country may face a disadvantage compared with most competitor nations, which would be subject to lower reciprocal tariffs than those imposed on Sri Lanka. While it is too early to judge the impacts on the Sri Lankan economy, the overall direction will be negative on foreign exchange earnings, with implications for growth, jobs and poverty. Some say that, globally, this could be a return to a gloomy 1930s global economic scenario of beggarthy-neighbour tariffs and, ultimately, a deep global economic recession. Sri Lanka needs a more resilient approach to deal with this uncertain international trade policy environment. Other issues are internal to Sri Lanka. For instance, public debt levels could remain high (at about 95% of GDP in 2027 after the end of the current IMF programme) despite the restructuring deal with private and official creditors. There are Quarterly GDP growth (%) Annual GDP growth (%) 2.3 -0.2 -4.6 4.2 -7.3 -2.3 5 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3 2021 Q4 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 2022 Q3 2022 Q4 2024 Q1 2024 Q2 2024 Q3 2024 Q4 2025 Q1 -15 -10 -5 0 5 10 15 15 Sustaining transformative growth in Sri Lanka 2025–2030 4.3.3 Manufacturing Manufacturing, within a conducive environment, is pivotal in accelerating growth to higher levels in the medium term and sustaining it over the long term, ultimately transitioning the country to a high-income status. A conducive environment encompasses integration with the global economy, addressing the ‘small market’ issue. Such integration enables industries to expand and capitalise on economies of scale. Additionally, it attracts FDI targeting international markets and global supply chains. FDI brings not just capital but also technology, management expertise, professionalism and access to input and output markets – fostering spillover benefits for the host country. Possible areas include joining global value chains (e.g. high-value added textiles and garments, food processing and niche manufacturing [auto parts, boat-building and electronic components]). Manufacturing also facilitates the transition of excess labour from domestic agriculture while enhancing innovation and productivity growth in the agriculture sector. Furthermore, it bolsters service sector growth, generating value additions during the manufacturing process and preventing the ‘non-tradable bias’ in economic growth. To support manufacturing effectively, policies and reforms must focus on eliminating barriers and improving competitiveness. Key actions include the following: • Simplify and rationalise regulations, institutions and procedures to create a more conducive environment for business operations. • Ensure the availability, affordability and quality of inputs – both primary and secondary – to maintain an uninterrupted industrialisation process and international competitiveness of industries. • Reform cross-border policies and regulations while adopting digitalised processes and a ‘single window’ system to streamline trade and investment flows. • Align industrialisation with 21stcentury requirements by embracing sustainability standards and advanced digital processes. • Expand the government’s role in thrust areas such as the small and medium enterprise sector, regional industrialisation and targeted industries to foster more equitable growth and support strategic industries. 4.3.4 Digital economy The digital economy is emerging rapidly in Sri Lanka and could be on course to contribute 12% of GDP by 2030. As the president’s budget speech of 2025 shows, the government recognises the transformative aspect of this sector. The current focus is on the provision of digital public infrastructure; extending e-government services (e.g. digitisation 16 Sustaining transformative growth in Sri Lanka 2025–2030 of tax collection and customs revenue collection) and frameworks; setting up rules to foster innovation; and adoption of digital technologies and digital payment systems4 throughout the economy. Increasing digital awareness and skills across the population and better cybersecurity systems5 are other important aspects of digital economy development. 4.4 Improved policies to reduce poverty Sri Lanka’s British-style welfare system provides free universal healthcare through a system of public hospitals and universal education through state schools and universities. Sri Lanka has also implemented various income transfer programmes, including the Janasaviya and Samurdhi Programmes. Aswesuma, a new cash subsidy programme, has been in place since 2023 and is being improved with World Bank support. It aims at addressing post-crisis poverty by tackling the inherent weaknesses of the previous cash transfer programmes. This improved, targeted and time-bound programme operates on a digitised platform, with bank transfers as its foundation. It currently benefits 2 million people; this reach appears 4 The government needs to work with banks and payment gateways to negotiate better merchant discount rates so as to create a level playing field for digital payments. Currently, Sri Lanka is reputed to have high merchant discount rates of as much as 2.5% to 3% of the cost of goods and services. This means that digital transactions are relatively expensive compared with cash payments. 5 This is especially important in a world experiencing a growing spread of new technologies such as artificial intelligence and rising cyberattacks by state and non-state actors. 6 https://uidai.gov.in/en/ limited when compared with the postcrisis mass poverty level, estimated to be 7–10 million individuals. Recent surveys by the Centre for Poverty Analysis (CEPA) suggest that Aswesuma could be further refined by addressing exclusion and inclusion errors and adopting more realistic proxies to minimise targeting inaccuracies (CEPA, forthcoming). Despite the quick turnaround of the economy since the crisis and the rapid recovery, the IMF notes that social spending continues to lag behind expectations (IMF, 2025). In an ideal world, targeted cash transfers should be introduced at the onset of an economic crisis, along with a rationing of basic food and fuel where necessary. Eligibility also should be determined through a Unique ID System, and the benefits should be transferred directly to the bank accounts of beneficiaries (as in the Unique Identification Authority of India’s Aadhar System)6 to eliminate rent-seeking and inefficiencies. Aswesuma will include a Unique ID System to ensure better targeting, reduce leakages and expand bank account access for the poor. Addressing crisis-driven poverty requires a distinct approach, as it 17 Sustaining transformative growth in Sri Lanka 2025–2030 differs significantly from poverty under normal circumstances. In Sri Lanka, pre-crisis poverty was predominantly a ‘development issue’, stemming from individuals being excluded from the mainstream development process. In contrast, crisis-driven poverty is a ‘macroeconomic issue’, triggered by factors such as economic instability – debt defaults, inflation, interest rate hikes and currency depreciation – and economic contraction, which results in business closures, job losses and declining livelihoods and incomes. In addition, the immediate policy response to the crisis has inadvertently exacerbated poverty levels, further complicating efforts to mitigate its impact. This distinction underscores that postcrisis poverty cannot be effectively addressed through social protection measures alone, as these provide only temporary relief. Instead, the focus must shift to achieving and sustaining higher growth momentum. By fostering job creation and income generation, such growth becomes the cornerstone for driving long-term economic recovery and alleviating crisis-driven poverty. 18 Sustaining transformative growth in Sri Lanka 2025–2030 5 Lessons for implementing reforms The importance of some economic policies has been known for some time. However, Sri Lanka’s development history is replete with examples of partial and inconsistent implementation of economic policies, and this has constrained the country’s growth performance. This section looks at the sixth policy area – of implementing the first five growth policies – namely, how to build political consensus and state capacity. It can be argued that lack of full and effective policy implementation owes largely to: 1. a lack of a political consensus over the direction of economic policy 2. weak state capacity and political incentives 3. a lack of project monitoring. 5.1 A lack of political consensus A political economic viewpoint suggests that the roots of the current economic crisis in Sri Lanka lie in the lack of political consensus on a clear and consistent development strategy. Since the 1960s, Sri Lanka has seen a series of repeating cycles characterised by constant policy reversals, which have bred economic instability and uncertainty. Sri Lanka pursued inward-looking import substitution policies in the 1960s and 1970s. This is perhaps attributable to lack of political consensus on reforms triggered by vested interests; for many years, there was a tension among those who emerged after the ‘1956 Revolution’, which gave prominence to inwardlooking nationalist-thinking policies. The upshot was an economy characterised by low investment, low growth and high unemployment. This meant, in turn, that Sri Lanka was not able to replicate the economic success of export-led neighbours in East and Southeast Asia. By 1977, the country was ripe for economic reform. The 1977 parliamentary elections resulted in a United National Party government committed to extensive policy reforms to create an economy more oriented to international trade and markets. The package of policy reforms included trade policy liberalisation, fiscal policy reform, elimination of price controls, financial liberalisation, public enterprise reform and industrial policy reform. The policy reforms introduced in 1977 focused on creating more appropriate incentives and strengthening the framework for private sector development. The objective was to shift the emphasis away from production for the domestic market to exports. However, the momentum for reforms soon stalled owing to a lack of political will to deepen structural 19 Sustaining transformative growth in Sri Lanka 2025–2030 reforms in product (e.g. reforms to SOE and domestic competition) and factor markets (e.g. land, labour and capital). Indeed, a lack of consensus on the direction of the country’s trade and growth strategies over the decades has also contributed to the current economic predicament. A consensus on a new five-year vision for national economic development should be reached among political parties, business organisations, trade unions and civil society (Coomaraswamy and Wignaraja, 2023). Conferences and seminars co-hosted by think tanks and the media can facilitate candid conversations on the merits of inwardversus outward-looking policies in an uncertain global economy, and what could be credible sources of economic growth and transformation. Areas of agreement should be codified into a readable national economic development vision document for the next decade outlining: • economic development achievements and failures 7 Surprisingly, there are very few studies on the effectiveness of state capacity for public policy management in Sri Lanka. One early study is Wanasinghe and Gunaratna (1996). • realistic targets for economic development including investment and productivity change • an outward-oriented, market-friendly policy agenda • risks to implementation To raise public awareness of the national vision for economic development, nationwide outreach activities should be conducted. Often cited success stories of Korea, Malaysia, Singapore, Thailand, Viet Nam, the United Arab Emirates and India offer practical lessons in crafting and implementing such national visions for economic development. 5.2 Weak state capacity A related concern is having the requisite legislative and technical capacity to enact the critical/crucial economic reforms, as well as good oversight.7 On oversight, many recent parliaments have had a mixed experience. Some say there is a trend towards parliaments with large cohorts of untested firsttime representatives, which has raised concerns about the legislative and 20 Sustaining transformative growth in Sri Lanka 2025–2030 technical capacity in place to enact the economic reforms Sri Lanka so desperately needs. Furthermore, recruitment to the civil service is usually from among graduates from a variety of disciplines, and the main mode of training is on the job. The Central Bank of Sri Lanka provides opportunities for mid-career professionals to pursue graduate studies in economics and related subjects in overseas universities and continuous learning through shortterm training, which has improved the institution’s technical capacity and supported career advancement. However, this practice of supporting foreign graduate-level training does not apply to many other state institutions. Instead, there is a heavy reliance on state institutions (which may lack finance and faculty) or donor-funded ad hoc short courses to provide formal training. As such, the government must prioritise public sector service delivery, retain key talent within the state sector and create policies that encourage the development of expertise in governance and public administration. Improved planning to undertake market-oriented public policies, digitisation of public services, training of legislators and understanding the complexities of economic reforms, are also crucial. Establishing a state-ofthe-art public policy training institute for capacity-building for legislators and senior administrators would be a valuable addition to Sri Lanka’s university network. 5.3 Limited project monitoring Most development projects in Sri Lanka have failed to deliver their intended benefits in a timely manner to the public, for various reasons, such as lack of preparedness, delays in procurements, poor performance of contractors, delays in receiving thirdparty clearance, insufficient allocations, suspension of loan disbursements and poor project management. If development projects are to be effectively implemented, they need to be endorsed by the highest levels of government in order to ensure concrete action. A strong leader or political champion will have the ability to push the process ahead. Cooperation between ministries, high-level officials and the various stakeholders is indispensable. Project monitoring is crucial for government projects as it ensures accountability, transparency and efficient resource allocation. A monitoring framework helps in tracking progress, identifying issues and making informed decisions, ultimately leading to better project outcomes and increased public trust. Most project management systems involve a variety of processes through which projects are implemented. Such systems can be divided into five main categories: initiating, planning, executing, monitoring and controlling, and closing. Each category comprises several separate processes; often, it is necessary to update or add information on a particular stage of the project management system. Project management is a continuous process, requiring appropriate changes to work 21 Sustaining transformative growth in Sri Lanka 2025–2030 conducted previously and plans in line with end objectives/goals. Moreover, project scope management includes actions guaranteeing the identification and inclusion of activities necessary to create the project product and its successful completion. 5.4 Key actions for effective implementation This section discusses organisational innovations which can support effective implementing of reforms suggested in Table ES1. • Establish a committee of secretaries of development ministries, chaired by the secretary to the president, to improve consistency and predictability of policy-making as well as to strengthen priority-setting and coordination for implementation. • Establish a national operations room or a policy implementation and monitoring division in the Presidential Secretariat under the purview of a senior additional secretary to the president, for the monitoring of all policies, programmes and projects, and ensure timely implementation and the achievement of desired targets. • Set up a rigorous process for onboarding projects in accordance with national economic priorities. Consider the importance of selecting high-priority/mega-scale development projects, in line with the needs of the people, and implement the projects efficiently and effectively, including by establishing a high-level committee, chaired by the prime minister or a senior minister, to prioritise and oversee regional development projects, such as: – projects implemented under the Decentralised Capital Budget Programme – projects implemented by cabinet ministries – projects implemented by provincial councils. – foreign funded projects • Note: A senior additional secretary to the president will function as the secretary and convenor of this highlevel committee. • Establish a project monitoring committee to monitor the progress of the prioritised large-scale projects (over Rs 1,000 million) to ensure their timely implementation and the achievement of targets, chaired by a senior additional secretary to the president. Members of this committee should include the directors general of the following: – Department of External Resources – Department of National Planning – Department of Project Management and Monitoring – Department of National Budget – Department of Treasury Operations • Note: An additional secretary to the president, may function as the secretary and convenor of the project monitoring committee. 22 Sustaining transformative growth in Sri Lanka 2025–2030 Public officials who have been involved in strategic trade and investment efforts in previous years must be brought in from across the civil service, as they possess institutional memory, technical expertise and practical insights (CSF, 2025). The government should engage the expertise available in the country and ensure an inclusive and transparent process for dialogue and consultation. Advisory committees and special working groups, when appointed, should be truly representative of all sectors/ stakeholders in the relevant fields. All committees and working groups should have action-oriented terms of reference with time-bound deliverables and periodic progress reporting to the appropriate authorities. (See Appendix 2 for more details on good practice project monitoring.) 23 Sustaining transformative growth in Sri Lanka 2025–2030 6 A last word Sri Lanka stands at a crossroads and the world is watching. The new government has made a promising start. There has been impressive stabilisation of the economy. The IMF programme is on track and the complex negotiations on debt restructuring have been completed successfully. Above all, there is now a new paradigm for macroeconomic policymaking, with clear frameworks that are embedded in laws. Fiscal rules have been tightened and the channels for fiscal forbearance in monetary policy have been eliminated, with greater autonomy for the Central Bank of Sri Lanka. Under this new regime, the exchange rate will be managed flexibly. The repeating bouts of macroeconomic stress should hopefully be a matter of the past. Taking steps to improve the sovereign rating and business confidence is essential to attract much-needed FDI. However, there are still formidable challenges ahead in achieving inclusive and transformative growth in these uncertain global economic times. A ‘big bang’ approach to structural reforms is required to transform the economy, strengthen and diversify its production base and thereby raise growth from 3% to a sustained 5% over the next five years. We think 5% growth is the minimum necessary to avoid another debt restructuring in 2027/28, with more austerity. Growth acceleration is also needed to make material headway in reversing the sharp increase in poverty and vulnerability that has occurred in Sri Lanka. For this, the commitment in the budget speech to implement the Economic Transformation Act (with amendments) must be given effect with the utmost urgency. This growth plan charts pathways for doing this effectively. It also advocates building state capacity for effective implementation. Successful outcomes will require pragmatic leadership, bold policy decisions, a clear vision for Sri Lanka’s future prosperity and support from development partners. Now is the time for such leadership to grasp the opportunities for transformative growth and avoid sliding back into another macroeconomic crisis. 24 Sustaining transformative growth in Sri Lanka 2025–2030 References Abeyratne, S. (2023) ‘Economic crisis in Sri Lanka: the way-in and the way-out’. Sri Lanka Economic Journal 20: 1–16 Abeyratne, S. (2025) ‘Tourism: perils of playing it by ear!’ Sunday Times, 30 March (www.sundaytimes.lk/250330/business-times/tourism-perils-of-playing-it-byear-2-593418.html). Amarasekara, C. and Venuganan, P. (2021) ‘Comparative review of the human capital development journeys of Vietnam and Sri Lanka’. Vietnam Journal for Indian and Asian Studies 9(106): 14–27. Athukorala, P. (2025) ‘The Sri Lankan economy: from optimism to debt trap’. Working Paper 2025-1-3. Tokyo: Japan Center for Economic Research. Basu, K. (2022) ‘Why Sri Lanka imploded., Project Syndicate, 20 July (www. project-syndicate.org/commentary/sri-lanka-why-it-has-collapsed-by-kaushikbasu-2022-07). Breuer, P. and Woldemichael, M. T. (2025) ‘Sri Lanka’s economic reform program is delivering—keep going for a full recovery’. IMF Op-Ed, 25 March (www.imf. org/en/News/Articles/2025/03/25/032525-breuer-and-woldemichael-oped-srilanka-economic-reform-program-is-delivering). CEPA – Centre for Poverty Analysis (forthcoming) ‘Crisis-driven poverty dynamics in Sri Lanka’. Colombo: CEPA. Coomaraswamy, I. and Wignaraja, G (2023) ‘What can we learn from Sri Lanka’s debt default?’ LSE Blog, 16 October (https://blogs.lse.ac.uk/southasia/2023/10/16/ what-can-we-learn-from-sri-lankas-debt-default/). CSF – Centre for a Smart Future (2025) ‘Responding to global economic challenges: eight priority trade and competitiveness reforms for Sri Lanka’. Policy Note, 15 April (www.csf-asia.org/wp-content/uploads/2025/04/CSF-PolicyNote_Eight-Priority-Trade-and-Competitiveness-Reforms-Sri-Lanka_15042025. pdf). Devarajan, S. (2025), ‘Accountability: the key to sustained and inclusive growth in Sri Lanka’ in G. Wignaraja and D.W. te Velde (eds) Sri Lanka: from debt default to transformative growth. Second edition. London: ODI Global. East Asia Forum (2023) ‘In Sri Lanka, economic necessity collides with political reality’. East Asia Forum, 18 December (https://eastasiaforum.org/2023/12/18/insri-lanka-economic-necessity-collides-with-political-reality/). 31 Sustaining transformative growth in Sri Lanka 2025–2030 • quality: assessing the quality of deliverables and ensuring they meet expectations • risks: identifying and mitigating potential threats to project success • stakeholder communication: maintaining open and effective communication with all stakeholders Monitoring methods Monitoring is a crucial component in project management, research and various fields that require systematic tracking of activities and outcomes. It involves the regular collection, analysis and use of information to ensure a project or programme is on track to achieve its goals. Different types of monitoring methods serve various purposes, each providing unique insights and data that can drive effective decisionmaking. Key monitoring methods are stated below: • regular meetings: project status meetings, steering committee meetings • progress reports: written reports, dashboards, presentations • key performance indicators: key metrics that measure project performance • issue tracking systems: tools for identifying and resolving issues • risk registers: tools for identifying, assessing and mitigating project risks Best practices Best practices in monitoring and evaluation are essential to ensure the success of any project or programme. The process of monitoring and evaluation helps highlight any areas that need attention or any changes that need to be made to ensure the desired outcomes are achieved. Moreover, an effective monitoring and evaluation process can provide more accurate and timely data to inform decision-making. By following these best practices, organisations can ensure the monitoring and evaluation process is successful and helps them reach their goals. These practices include: • establish a clear monitoring plan: define what to monitor, how to monitor and who is responsible • use a data-driven approach: collect and analyse data objectively to inform decisions • regularly review and adjust: continuously refine the monitoring process based on feedback and lessons learned • involve stakeholders: keep stakeholders informed and engaged throughout the monitoring process • focus on continuous improvement: use monitoring data to identify areas for improvement and enhance future projects ODI is an independent, global affairs think tank. We work to inspire people to act on injustice and inequality. Through research, convening and influencing, we generate ideas that matter for people and the planet. ODI Global 203 Blackfriars Road London SE1 8NJ, UK +44 (0)20 7922 0300 [email protected] odi.org/iedg LinkedIn: ODI Trade and Economic Development Sri Lanka stands at a crossroads. Having emerged from its worst economic crisis since independence, the country faces the dual challenge of maintaining hard-won macroeconomic stability while igniting transformative growth. This report, a collaborative effort by ODI Global and the Centre for Poverty Analysis (CEPA), offers a crucial roadmap for navigating this complex landscape. While recent stabilisation efforts have yielded positive results, including renewed growth and reduced inflation, poverty levels remain alarmingly high. This study argues that continued structural reforms are essential to avert future crises and unlock Sri Lanka’s vast potential. By focusing on six key policy areas – macroeconomic stability, global supply chain integration, improved factor markets, targeted sectoral policies, poverty reduction and consensus-building – Sri Lanka can capitalise on opportunities in tourism, the digital economy, niche manufacturing and agriculture to achieve sustainable and inclusive growth between 2025 and 2030.