Attachments
Abstract
Sri Lanka is emerging from the recent economic crisis with a renewed focus on sustainable growth and resilience. Following a series of policy reforms and successful debt restructuring, the economy has stabilized, though poverty rates remain high. As the country charts its growth path, prioritizing investments in resilient, inclusive development is both an urgent necessity and a strategic opportunity to boost economic activity, create jobs, and improve overall welfare, while safeguarding against the growing impacts of climate change. Climate change poses significant challenges for Sri Lanka: potential economic losses could range from 3.3 to 3.5 percent of gross domestic product (GDP) by mid-century due to reduced labor productivity from heat stress, decreased agricultural yields, and intensified flooding in both urban and rural areas. These adverse effects disproportionately affect the poorest and most vulnerable populations, particularly those in agriculture and coastal areas, potentially increasing poverty rates by 1.7 to 1.8 percentage points. Strategic investments in resilience can substantially mitigate these risks while unlocking economic opportunities and creating jobs. Several no regrets measures are already outlined in Sri Lanka’s Nationally Determined Contributions, National Adaptation Plan, and Climate Prosperity Plan. These include expanding clean energy sources, modernizing transportation systems, improving energy efficiency, enhancing irrigation, and upgrading water and sanitation services. These investments offer a host of other benefits, including lower energy costs, improved air quality, enhanced urban livability, and increased agricultural productivity. Transforming Sri Lanka's energy sector presents substantial opportunities for economic growth, investment, and improved welfare. Currently, imported coal and petroleum products comprise more than half the total energy supply, exposing Sri Lanka to energy security risks and commodity price fluctuations. Its reliance on fossil fuels and biomass also contributes to air pollution and public health deterioration. Scaling up domestic renewable energy, improving energy efficiency, and adopting clean transport solutions can lower energy costs, enhance energy security, and improve air quality. Achieving near-term investments will set Sri Lanka on the path to achieving its longer-term goals of a net-zero transition. Mobilizing private and public capital for these longer-term goals at the desired pace and scale may prove challenging due to the country’s limited financial sector and persistent structural inefficiencies in tax policy and administration. Nevertheless, advancing no-regrets investments alongside continued reforms can enhance long-term growth, create jobs, and encourage greater private investment, while supporting the country’s ambitious energy transition goals.