The Systematic Country Diagnostic is a comprehensive assessment of constraints and drivers of progress towards the twin goals of ending poverty and boosting shared prosperity. It is an important input to how the World Bank Group engages with its client countries.
Sri Lanka is in many respects a development success story. Growth has averaged over 6 percent per year in the past decade and poverty declined from 22.7% in 2002 to 6.1% in 2012/13. Sri Lanka performed very well on the Millennium Development Goals and has ended its internal armed conflict. The country has ample opportunities to build on its success due to its enviable location for trade, relatively educated work force and remarkable natural assets.
In order to sustain its progress on the twin goals and fulfill its development potential, there are five challenges which need to be addressed.
1. The Fiscal Challenge. Sri Lanka has one of the lowest tax-to-GDP ratios in the world, with a tax and customs systems characterized by a large number of exemptions and weak administration. While the government has maintained solid fiscal discipline, the revenue squeeze undercuts its ability to invest in people and infrastructure.
2. The Challenge of Fostering Growth and Jobs for the Bottom 40 Percent. Sri Lanka’s industrial policy has been broadly market-oriented since liberalization in the 1970s, but the degree of outward orientation has wavered in the past decade. The introduction of para-tariffs has effectively doubled the protection rates, making the present import regime one of the most complex and protectionist in the world. Foreign direct investment (remains below 2 percent of GDP, far lower than the levels of FDI in other middle-income countries, particularly in Southeast Asia. Sri Lanka also suffers from a skills mismatch, a result of the education system not equipping people with the abilities that businesses want.
3. The Social Inclusion Challenge. The highest numbers of people living in poverty and the bottom 40 percent are located within the multi-city agglomeration areas of Colombo, Kandy and Galle-Matara. A critical means to end poverty and achieve greater shared prosperity is to harness urbanization for inclusive growth. There are also pockets of high rates of poverty in the Northern and Eastern Provinces, in Moneragala, and within the estate sector. The high poverty rates in these areas are characterized by weaker access to services and poor links to the labor market. Women can play a stronger role in Sri Lanka’s development. Females made up 53 percent of the working-age population in 2012 but only 34 percent of the employed population, a figure that has remained static for decades.
4. The Governance Challenge. Ineffective governance critically impedes the ability of the state to mobilize revenues and spend effectively. Governance issues are integral to problems with regulation that have resulted in restrictive land and labor markets and inefficient subsidies. An additional issue is the 50 percent increase in the size of the public sector in the last decade and the continuing large state presence in key economic sectors, including banking.
5. The Sustainability Challenge. Over the longer term, the country will need to provide for a durable framework for reconciliation to address grievances which fueled past conflict, carry through with institutional reforms, proactively manage the challenge of an aging population as Sri Lanka moves past its demographic peak, and preserve its natural assets and provide for resilience to climate change.
Effective leadership will be needed to steer Sri Lanka forward on a path that will continue its strong progress in ending poverty and promoting shared prosperity, The World Bank Group stands ready to partner with the country to take on these challenges.
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Some important points from the report:
Sri Lanka is in many respects a development success story. With economic growth averaging more than 7 percent a year over the past five years on top of an average growth of 6 percent the preceding five years, Sri Lanka has made notable strides towards the goals of ending extreme poverty and promoting shared prosperity (the “twin goals”). The national poverty headcount rate declined from 22.7 to 6.7 percent between 2002 and 2012/13, while consumption per capita of the bottom 40 percent grew at 3.3 percent a year, compared to 2.8 percent for the total population.
Despite the low levels of extreme poverty, roughly one quarter of Sri Lankans are nearly poor, as defined by living above the official poverty line (equivalent to about $1.50 per day in 2005 purchasing power party, PPP, terms) but below $2.50 per day in 2005 PPP terms. The living standards of the near poor are closer to those of the poor than those living above $2.50 per day.
In addition to the need to foster new sources of growth, Sri Lanka is in the process of major governance reforms following the election of a new government in early 2015. The Constitution has been amended to overhaul the structure of government by reducing the power of the presidency and providing for more internal checks and accountability mechanisms. There is also now a constitutional guarantee of citizens’ right to information. At the same time, while reforms to promote transparency and accountability in government should lead to better performance, a political settlement around the new governance structure will need to emerge.
Despite past achievements, the quality of general education lags behind higher middle-income countries and firms have difficulty accessing the skills they need. Although human development indicators are ahead of regional peers, the quality of education, as measured by periodic internationally comparable tests, lags behind that of higher middle-income countries, particularly in language and numeracy skills. Sri Lanka also lacks the kind of vocational and technical skills in its workforce that are increasingly in demand, reflecting constraints on the quality and relevance of higher education and research. For instance, over 75 percent of employers expect a high-skilled worker to know English and have computer skills, but only 20 percent of Sri Lankans are fluent in English and only 15 percent can use computers.
The highest numbers of people living in poverty and the bottom 40 percent are located within multi-city agglomeration areas. At the same time, urbanization in Sri Lanka has been a strong driver of growth and that trend will continue.
The poor in more isolated regions of the country represent a different challenge. There are high rates of poverty in the Northern and Eastern Provinces, the center where the estate sector (plantation-based agriculture) is concentrated, and Moneragala in the south east.
Poverty rates are highest in portions of the Northern and Eastern provinces, which were most affected by the internal conflict. The high poverty headcount rates in these regions are associated with weak links to the labor market, particularly among the youth and educated women. People with physical disabilities and psychological problems due to conflict, in particular ex-combatants and widows, are particularly vulnerable to exclusion.
Poverty measured by consumption has dropped significantly among estate workers, but non-monetary measures of poverty and vulnerability remain high. Estate workers continue to be largely dependent on the estate’s management for many basic needs, particularly housing. While poverty in the estate sector fell markedly in the past decade, poverty rates continue to be higher compared to both urban and rural sectors, pointing to continued vulnerability. This is particularly evident when looking at health and nutrition indicators.
Estates have the highest maternal mortality rates in the country, and both estate women as well as children suffer from high rates of malnutrition that are double national averages. Estate-sector households are less likely to have drinking water, sanitary facilities or electricity within their households. Moreover, access to services and the quality of services in the estates is comparatively low.
Poor outcomes in education impede the ability of the estate population to participate in Sri Lankan society. The youth are increasingly leaving the estate sector but they face difficulties in accessing salaried employment when competing with other youth. Women tend to be employed for the lowest-paying unskilled tasks that require intense labor, such as tea plucking or rubber tapping. Despite being income earners, there is substantial anecdotal evidence that the wages of estate women are often collected by their husbands or fathers who often spend it on alcohol. Alcoholism and associated abuse of women is much higher in the estate sector.