The World Bank has approved $700 million in budgetary and welfare support for Sri Lanka, the most significant funding tranche for the crisis-hit island nation since an International Monetary Fund (IMF) deal in March. About $500 million of the funds will be allocated for budgetary support to help improve financial management and economic reform, while the remaining $200 million will be for welfare support earmarked for those worst hit by the crisis.
Despite its considerable resilience in various challenges, the Sri Lankan economy faces severe stress. In the coming months, the government will seek to ease the pressure on its fiscal balance by implementing structural reforms to strengthen macroeconomic stability and growth, including through a comprehensive domestic debt restructuring program launched this week. This will include negotiating new debt relief with bondholders and bilateral creditors, such as China, India, and Japan.
The government is also working to reduce its dependence on imports by strengthening domestic production and encouraging private-sector investment in critical sectors. However, the Bank notes that the Sri Lankan economy is weighed down by high public debt and a large trade deficit. The Bank recommends that the government continue to reduce its external imbalance while improving productivity and achieving higher growth through sustainable structural reforms.
In addition, the World Bank is urging the government to tackle corruption in its institutions. It has been observed that in the case of SOEs, corruption is prevalent through discretionary approaches to trade policies; tax advantages granted to specific industries or firms; conflicts of interest and opaque decision-making regarding oversight of state enterprises; and misallocation of resources and competitive disadvantages due to weak governance and management. These issues need to be addressed for SOEs to be more efficient and productive and reduce risks.
To address these and other challenges, the World Bank Group’s Board of Executive Directors approved a new Country Partnership Framework for Sri Lanka this morning at its meeting in Washington. The CPF will leverage close cooperation between the World Bank, IFC, and MIGA to support Sri Lanka’s recovery and development. It will also support the World Bank’s efforts to fully incorporate women’s economic empowerment into its work with Sri Lanka.
The CPF will be funded through a combination of IBRD and IDA financing. As Sri Lanka lost IBRD creditworthiness in 2022, the Board also approved reverse graduation to allow the country to regain access to its concessional International Development Association (IDA) financing until it can re-establish its IBRD creditworthiness.
The new CPF will support the government’s ongoing implementation of its strategy for the next three years and beyond to restore economic stability, build a strong foundation for green, resilient, and inclusive development, and strengthen poverty reduction efforts. The World Bank will closely monitor progress and provide additional support as needed, including through a further review of the IMF program in September/October 2023.