By Philippe Le Houérou
In many ways, Sri Lanka is a development success story. Its economy has been growing steadily and this has lifted millions of people out of poverty and boosted shared prosperity. Moving higher up on the economic ladder, however, will require addressing new challenges involving bold decisions.

Sri Lanka’s social achievements are impressive. Since the war ended in May 2009, economic growth has been robust (at an average of 7.4 percent) and prosperity has been spread widely despite a difficult external environment due to the global financial crisis.

Sri Lanka stands out as a lower middle-income country in a region that hosts the world’s greatest concentration of poor. The number of people living in poverty in Sri Lanka has fallen to 9 percent in 2009 from 23 percent in 2002. Measures of education, health and life expectancy are amongst the highest in South Asia and compare well to countries around the world with similar per capita income.

The potential for Sri Lanka is huge. Peace has created an opportunity for reconciliation and the reaping of a peace dividend.  In my first visit here as the Vice President for South Asia at the World Bank I have seen tangible progress in realizing this vision -- from globally successful private apparel industry in Panadura to efficient healthcare facilities in the Trincomalee District Hospital to the newly built highways and trunk roads that create greater connectivity and easier long distance travel. I noted the huge potential for ecotourism at the Minneriya National Park and for cultural tourism in Kandy. Sri Lanka can use its comparative advantages and strategic geographic location to reinforce its key link between the East and the West.

Sustaining its economic growth trajectory to become an upper level middle-income country presents challenges that will differ from Sri Lanka’s past experience. Much has been done, but there will be much more to do. Experience in other rapidly developing countries points to three particular areas of focus.

Sri Lanka has an opportunity to eliminate its remaining poverty and ensure wider prosperity. In addition to the poor segment of the population, a further 8 percent of Sri Lankans survive just above the poverty line and are vulnerable to fall into poverty.  To address these risks, Sri Lanka can better target its anti-poverty measures.  Since many poor live in rural areas -- making up 20 percent of the population in some districts -- a renewed effort to promote agriculture-based livelihoods and improve access to markets is merited. At the same time, reforms in the social safety net to achieve greater value for money are needed.  

Sri Lanka can also promote smarter investment in people through education and healthcare. In education, this requires investment in both higher education and vocational training institutions to substantially increase skills beyond general education. To support the development objectives of Mahinda Chinthana, education needs to be more responsive to global market needs, requiring improvements in English language, technology and soft skills. In healthcare, more can be done to address the middle-income health challenges of non-communicable diseases.  

As Sri Lanka becomes more prosperous, people live longer and have fewer children. By 2036, more than 22 percent of the population will be over 60 and there will be 61 dependents per 100 adults. A small number of employed may have to provide for a large number of non-working people -- straining the budgets of families and the government. These are challenges the World Bank Group is familiar with in other regions, where we support the progressive adaptation of national systems in health, education and pensions.

Last, but most importantly, Sri Lanka has a great opportunity to draw investment to build the economy of the future. To achieve its growth target of 8 percent per year over the medium term would require raising investment from the current 29 percent to 35 percent of gross domestic product (GDP) and even more over the medium term. As President Rajapakse clearly stressed during our conversation, increasing foreign direct investment (FDI) is critical. Foreign funds are more likely to flow to Sri Lanka if it becomes a more attractive investment destination. This requires building stronger institutions and strengthening the rule of law to ensure a business-friendly environment with a level playing field for all economic actors – local and foreign. The public sector also can play an important role through its own investment but this will require continuing to widen the tax base to more people and companies.

Sri Lanka is an exciting place with an exciting future. Whether it is through the International Finance Corporation (IFC), our private sector arm working to improve the business climate and investing in businesses, or through our operations to build infrastructure and better deliver services, the World Bank Group is looking forward to help end poverty and increase shared prosperity in Sri Lanka.

The World Bank Group has had a long relationship with Sri Lanka.  For more information about our activities please visit www.worldbank.lk.

(Philippe Le Houérou is the Vice President, South Asia Region,The World Bank)