A 2025–2026 World Bank enterprise survey reveals Sri Lanka’s post-crisis recovery is a “growth mirage” where firms are increasing sales and employment, but not labor productivity. While exporters are innovating, they are underperforming domestic-facing firms, indicating a structural crisis where productivity declines as firm size increases.
To drive sustainable growth, policy must shift toward improving the broader business environment, including technology adoption, infrastructure and reducing regulatory burdens, Amila Dahanayake, Economist World Bank opined at a National SME Strategy unveiling event held in Colombo recently.
She said that enterprise policy should emphasize efficiency over expansion, urging technology, process innovation, and workforce upskilling. Sri Lanka faces negative labour productivity growth in 2024, lagging behind regional competitors.
Exporters are underperforming, indicating a deeper issue in the business environment rather than firm-level practices, risking a decline in competitiveness and productivity.
The economist pointed out that the focus shifts from firm performance to market structure, revealing that concentration, not innovation, determines winners. Productivity peaks at firms with 49-99 employees but declines past 100, indicating penalties for scaling in Sri Lanka’s operating environment, counter to global norms.
Structural distortions hinder firm growth, as scaling without upgrading leads to inadequate innovation and investment in capital. Low education levels among workers and insufficient training exacerbate productivity decline despite good management practices.
She said addressing the skill gap while enhancing management practices is crucial for Sri Lanka’s competitive growth. The 2025 enterprise survey identifies further private sector constraints.
“Process innovation at 4.9% in Sri Lanka versus 21.3% for aspirational peers such as Malaysia means Sri Lankan firms are innovating at roughly one quarter the rate of the countries they aspire to compete with fixed assets investment at 13.9% in Sri Lanka versus 38.9 for structural peers such as Costa Rica and Vietnam means less than half of the investment intensity of comparable economies. Without capital deepening, productivity gains are nearly impossible,” she noted.
Between June 2025 and January 2026, the World Bank surveyed 607 Sri Lankan firms, identifying tax rates as the top obstacle. Other major issues include business licensing, access to finance, and workforce education. The World Bank aims to address these challenges through coordinated reforms and collaboration with government agencies.
Source : Daily News
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