The World Bank and the Government of Sri Lanka have signed an agreement for an additional $200 million(Economic Reforms) under the Second Resilience, Stability, and Economic Turnaround (RESET) Development Policy Operation (DPO). This agreement, signed on October 8, 2024, marks another important step in Sri Lanka’s journey toward economic recovery and stability. Present at the signing were David Sislen, the World Bank’s Regional Country Director for Maldives, Nepal, and Sri Lanka, Treasury Secretary Mahinda Siriwardena, and President Anura Kumara Dissanayake.
Background and Purpose of the RESET DPO
The Second RESET DPO is part of a larger two-phase operation that began in 2022. The first phase of this initiative provided $500 million, distributed in June and December 2023, to support critical reforms in Sri Lanka. The main goal of these initiatives is to help the country rebuild its economy, enhance its competitiveness, and protect vulnerable populations affected by the ongoing economic crisis.
The focus of the second phase, which provides $200 million, is on further strengthening the economy through governance reforms, promoting growth, and ensuring the protection of the poor and vulnerable. These efforts aim to build resilience and support a more inclusive and equitable economy for the future.
Key Reforms and Objectives
The RESET DPO emphasizes several key reforms to improve Sri Lanka’s economic governance, restore stability, and foster growth. Some of the main objectives of this operation include:
- Improving Economic Governance: One of the top priorities is creating a stable macroeconomic environment. This will involve reforms like enacting a new Public Debt Management Act, which aims to enhance the country’s ability to make informed borrowing decisions. Additionally, reforms in tax administration are expected to increase revenue collection, which will support the government’s fiscal plans.
- Addressing Financial Sector Risks: To maintain a stable financial environment, measures will be introduced to tighten single borrower limits, ensuring that individual institutions or borrowers do not overextend themselves. Additionally, better mechanisms for resolving non-performing loans will be implemented to strengthen the banking sector.
- Boosting Private Sector Development: A key aspect of Sri Lanka’s long-term economic recovery is improving the efficiency of the private sector. Amendments to the Telecommunications Act and a new Electricity Act are part of the plans to improve services in these sectors. Moreover, the government aims to enhance export competitiveness by reducing para-tariffs and customs duties, making it easier for businesses to operate and thrive in global markets.
- Social Protection for the Poor and Vulnerable: One of the main priorities of this operation is to protect vulnerable groups affected by the economic downturn. The program will revitalize Sri Lanka’s social protection system to ensure that the poor and disadvantaged are better equipped to cope with the ongoing crisis and the impact of macroeconomic adjustments, such as price increases and fiscal reforms. This effort will also focus on empowering women and reducing gender discrimination to promote more sustainable and inclusive growth.
Commitment to Economic Stability and Growth
David Sislen, the World Bank’s Regional Country Director, expressed his appreciation for the Sri Lankan government’s commitment to economic reforms. “We are proud of the excellent collaboration with Sri Lankan authorities. The reforms supported by this operation are central to stabilizing the economy,” he said.
Sislen also emphasized the importance of maintaining the hard-earned stability achieved so far, noting that investing in the private sector is crucial to transforming Sri Lanka’s economic growth. “Focusing on private sector investment is vital for creating jobs and ensuring that the benefits of a stronger, more resilient economy reach everyone,” he added.
First Phase of RESET DPO and its Impact
The first phase of the RESET DPO, approved by the World Bank’s Board of Directors in June 2023, provided essential budget support to the Sri Lankan government. It helped lay the foundation for macroeconomic stability and supported reforms that benefited the poor and vulnerable.
Some of the notable achievements of the first phase include:
- Improved Social Welfare: A new social welfare benefit payment scheme was established, with better targeting mechanisms and an adequate budget allocation for the program’s first year. This reform has been crucial in ensuring that those most affected by the economic crisis receive the necessary support.
- Enhancing Export Competitiveness: The government initiated the simplification of the tariff structure by reducing para-tariffs, which helped improve the country’s export competitiveness. Lowering trade barriers has made Sri Lankan products more attractive in international markets, boosting the country’s economic prospects.
- Strengthening the Banking Sector: The first phase also focused on strengthening the banking sector through reforms in deposit insurance and a more effective framework for resolving issues related to problem banks. These measures boosted confidence in the financial system, which is critical for overall economic stability.
Future Outlook
The success of these programs relies on the Sri Lankan government meeting specific milestones or “prior actions” required by the World Bank. Only when the government demonstrates satisfactory progress in implementing these reforms will the funds be released.
The signing of the Second RESET DPO signals continued international support for Sri Lanka’s economic reforms. The collaboration between the World Bank and the Sri Lankan government highlights the importance of addressing the country’s economic challenges through well-planned reforms and policies.
Sri Lanka’s path to recovery is not without challenges, but with the support of international partners like the World Bank, the country is taking the necessary steps to stabilize its economy, improve governance, and create opportunities for growth. Through these efforts, Sri Lanka aims to build a more resilient, inclusive, and competitive economy for the future, benefiting all citizens.
Conclusion
The $200 million agreement under the Second RESET Development Policy Operation is a crucial milestone in Sri Lanka’s ongoing economic recovery efforts. With a focus on governance, growth, financial stability, and protecting the most vulnerable, these reforms are designed to put Sri Lanka on a path toward sustainable and inclusive economic growth. The collaboration between the World Bank and the Sri Lankan government continues to play a pivotal role in addressing the country’s challenges and building a stronger future for its people.
