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.

Not reported

None of the filings gives the Bank’s 2026 poverty headcount in absolute numbers, states which quarter the twelve-quarter run began, or explains how the 16.9% current rate and the ~14% projection are sequenced. No government response to the under-execution finding had been reported at the time of writing.