SOUTH ASIA SRI LANKA World Bank Group © 2025 The World Bank Group 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA), collectively known as The World Bank, with external contributors. The World Bank does not guarantee the accuracy, reliability, or completeness of the content included in this work, or the conclusions or judgments described herein, and accepts no responsibility or  liability for any omissions or errors (including, without limitation, typographical errors, and technical errors) in the content whatsoever or for reliance thereon. 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All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@ worldbank.org. i Country Climate and Development Report Acknowledgements The Sri Lanka Country Climate and Development Report (CCDR) was produced by a core team led by Tom Kerr (TTL), Amelia Midgley (co-TTL), and Richard Walker (co-TTL), and comprised Stephen Danyo, Kamalika Das, Priyanka Dissanayake, Joao Morgado, Tehmina Nawab, Katherine Polkinghorne, Ashley Pople, Imran Sajid, Phoram Shah, Shawn Tan, Baris Tercioglu, and Hafiz Zainudeen. The CCDR synthesizes analytical work undertaken by an extended technical team comprising Tijen Arin, Margaret Arnold, Karina Baba, Henry Bagazonzya, Prajakta Chitre, Matias Ciaschi, Di Dong, Matthew Gough, Till Hartmann, Dung Anh Hoang, Michael Iveson, Sameera Jayawardena, Anders Jensen, John Keyser, Nandini Krishnan, Monika Kumar, Junko Narimatsu, Lan Thi Thu Nguyen, Cecile Pot, Jorge Puig, Nadeera Rajapakse, Swati Sachdeva, Sheu Salau, Ashini Samarasinghe, Athula Senaratne, Marta Schoch, Yujia Tao, Monyl Toga, Michael Vaislic and Jari Vayrynen. Brent Boehlert, Diego Castillo, Ken Strzepek and Kim Smet (Industrial Economics, Inc.) provided modelling support on climate scenarios and biophysical impacts. The team benefited greatly from comments and suggestions from the peer reviewers Kamal Dorabawila, Bernard Haven, William Rex, Joanna Masic, Daniel Mira-Salama, and Arame Tall. Several other colleagues provided additional helpful inputs, including Kevin Carey, Stephane Hallegatte, Craig Meisner, Sebastian Molineus, Victor Bundi Mosoti, Benjamin Reese, Lindsey Jones, and Dena Ringold. The Sri Lanka CCDR was a collective effort of the World Bank Group, including the World Bank, International Finance Corporation (IFC), and Multilateral Insurance and Guarantee Agency (MIGA), and was prepared under the guidance of David Sislen, Gevorg Sargsyan, Dina Umali-Deininger, Mathew Vergis, Moritz Nebe, Ann Jeannette Glauber and Shabih Ali Mohib. Support with logistics and communications was provided by Ayoni Nishanthi Rangala, Dilinika Pieris and Buddhi Feelixge. Ananda Swaroop and Cucumber Design provided editing and graphics support, respectively. This CCDR benefited from discussions and input from the Presidential Secretariat, Clean Sri Lanka Initiative, Prime Minister’s Office, Ministry of Finance, Ministry of Environment, Ministry of Power and Energy, Ministry of Foreign Affairs, Foreign Employment and Tourism, Ministry of Urban Development and Housing, Ministry of Irrigation and Water Resources Management, Sustainable Energy Authority, Sustainable Development Council, Land Development Corporation and Colombo Municipal Council. Analytical work for the Sri Lanka CCDR benefited from generous support from the Climate Support Facility – Whole of Economy Program (CSF-WOE) and the Global Program on Sustainability (GPS) multi-donor trust fund managed by the World Bank. This CCDR draws on the following background research papers and inputs prepared: • “Estimating the Economic Damage of Climate Change” prepared by Industrial Economics, Incorporated  • “Energy Transition for Sri Lanka” prepared by Deloitte • “Decarbonizing Transport” Working Paper prepared by the World Bank Transport team ii Country Climate and Development Report Table Of Contents EXECUTIVE SUMMARY.........................................................................................................................................................ix 1 DEVELOPMENT AND CLIMATE PRIORITIES.................................................................................................................... 1 1.1 Sri Lanka emerges from a crisis, with a focus on growth and resilience.............................................................. 1 1.2 Sri Lanka is highly vulnerable to climate change, with direct impacts on its development................................ 2 2 COUNTRY CLIMATE COMMITMENTS, POLICIES, AND CAPACITIES............................................................................... 7 3 RURAL RESILIENCE AND PROSPERITY.......................................................................................................................... 9 3.1 The importance of integrated landscape management......................................................................................... 9 3.2 Managing peaks and scarcity: an increasingly challenging water future...........................................................10 3.3 Ensuring resilience and food security through climate-smart agriculture..........................................................13 3.4 Leveraging nonfarm livelihoods for rural development........................................................................................16 3.5 Sustainable fisheries are critical for food security...............................................................................................17 3.6 Ensuring connectivity through resilient transport networks................................................................................18 3.7 Water supply and sanitation services for rural resilience....................................................................................18 4 INVESTING IN LIVABLE CITIES.......................................................................................................................................20 4.1 Sri Lanka can leverage urbanization to create livable and more productive cities............................................20 4.2 Managing climate risks will be paramount for productivity and livability...........................................................23 4.3 Sri Lankan cities have strong potential to invest in climate-smart solutions.....................................................28 5 EXPANDING CLEAN AND RELIABLE DOMESTIC ENERGY............................................................................................30 5.1 Sri Lanka is expected to experience rapid growth in energy demand.................................................................31 5.2 Scaling up renewable energy to ensure energy security and affordability.........................................................33 5.3 Strengthening hydropower resilience....................................................................................................................36 5.4 Electrifying the transport sector to reduce dependence on imported fossil fuels.............................................37 5.5 Enhancing energy efficiency to manage rising energy demand..........................................................................38 5.6 Managing energy affordability to protect poor and vulnerable households.......................................................38 iii Country Climate and Development Report 6 ASSESSING SRI LANKA’S PATH TO ENHANCED AND RESILIENT DEVELOPMENT....................................................40 6.1 Illustrative pathways to efficient and resilient development................................................................................40 6.2 Projected impact of climate change on Sri Lanka’s economy.............................................................................42 7 FINANCING AND POLICIES TO ACHIEVE SUSTAINED, RESILIENT GROWTH..............................................................49 7.1 Financing needs......................................................................................................................................................49 7.2 Public finance and financial sector development context....................................................................................50 7.3 Public finance interventions...................................................................................................................................55 7.4 Mobilizing private finance.......................................................................................................................................56 7.5 Sectoral opportunities............................................................................................................................................57 7.6 International climate finance..................................................................................................................................58 7.7 Implementing a national climate finance strategy................................................................................................59 8 PRIORITY RECOMMENDATIONS....................................................................................................................................60 iv Country Climate and Development Report List of Figures Figure ES1. Sri Lanka’s Climate and Development Priorities............................................................................................x Figure 1. Structure of the Economy .................................................................................................................................. 1 Figure 2. Average Real GDP Growth .................................................................................................................................. 1 Figure 3. Changes in Irrigated Crops Productivity and Value of Produced Crops, by District (Dry/Hot climate future)..................................................................................................................................... 4 Figure 4. Changes in Rainfed Crops Productivity and Value of Produced Crops, by District (Dry/Hot climate future) ................................................................................................................................... 4 Figure 5. Average Annual Runoff relative to No Climate Change Reference, 2041-50 ..............................................11 Figure 6. Average Annual Unmet Irrigation Water Demand by Climate Scenario, 2041-50 .......................................11 Figure 7. Irrigated Rice Impact by Basin and Development Scenario, Dry/Hot Mean, 2041-50 ................................12 Figure 8: Urban Growth Within and Outside Municipal Boundary in Key Cities from 1975 to 2014 .........................21 Figure 9. Investment Needs under the IPS and NZS Pathways (% of Baseline of GDP) .............................................33 Figure 10. Solar and Onshore Wind Capacity Additions (2014-23) ..............................................................................34 Figure 11. Climate Change Damages as % of GDP, by Climate and Policy Scenario ...................................................44 Figure 12. Climate Damages by Channel/Scenario, % of GDP by 2053 ......................................................................44 Figure 13. Climate-induced Household Income Losses by Quintile 2023-53 (Dry/Hot & Wet/Warm Scenarios vs Baseline Development Pathway) ........................................................................44 Figure 14. Marginal Impact of Targeted Adaptation on Household Income by Quintile by 2053 (Dry/Hot + Adp vs Dry/Hot; Wet/Warm + Adp vs Wet/Warm) .......................................................................................44 Figure 15. Targeted Adaptation Investments vs Avoided GDP Loss, Dry/Hot Scenarios ...........................................45 Figure 16. Targeted Adaptation Investments vs Avoided GDP Loss, Wet/Warm Scenarios ......................................45 Figure 17. Combined Marginal Impact of Net Zero Investments & Carbon Taxation on Household per Income by Quintile ......................................................................................................................................................46 Figure 18. Net Zero Investment vs GDP Gains (% GDP) ................................................................................................47 Figure 19. Net Zero Investment vs GDP Gains, Discounted at 6% (% GDP) ................................................................47 Figure 20. Incremental Public Debt as % of Baseline GDP across Climate & Policy Scenarios ...............................48 Figure 21. Current Account Balance as % Baseline GDP across Climate and Policy Scenarios..................................48 v Country Climate and Development Report List of Tables Table ES1. Key Recommendations ...................................................................................................................................xii Table 1. Key Climate Policy Commitments........................................................................................................................ 7 Table 2. Relevant Sectoral Policies ................................................................................................................................... 7 Table 3. Policy Pathways for Sri Lanka’s Energy Supply and Demand...........................................................................32 Table 4. Climate Policy Scenarios ....................................................................................................................................43 Table 5. Investment Needs 2024-53 ...............................................................................................................................50 Table 6. Priority Climate Investments .............................................................................................................................52 Table 7: CSA Investment Opportunities for the Private Sector .......................................................................................57 Table 8. Access to International Dedicated Climate Finance - Active Projects ............................................................58 Table 9. Priority Recommendations..................................................................................................................................61 List of Boxes Box 1. Digital infrastructure and literacy in rural areas ..................................................................................................16 Box 2. Hazards and climate risks in 12 Sri Lanka cities ................................................................................................24 Box 3. SMART transport ...................................................................................................................................................29 Box 4. Smart grids.............................................................................................................................................................34 vi Country Climate and Development Report Abbreviations and Acronyms °C degree Celsius AI artificial intelligence CBSL Central Bank of Sri Lanka CEB Ceylon Electricity Board CO2 carbon dioxide CMC Colombo Municipal Council CPP Climate Prosperity Plan CSA climate-smart agriculture CSE Colombo Stock Exchange EDGE Excellence in Design for Greater Efficiencies EV electric vehicle EWR Extreme Weather Resilience EWS early warning system FDI foreign direct investment GDP gross domestic product GHG greenhouse gas GoSL Government of Sri Lanka GW gigawatt GWh gigawatt hour IMF International Monetary Fund IoT Internet of Things IPS Intended Policy Scenario IPP individual power plant km 2 square kilometer LEED Leadership in Energy and Environmental Design LNG liquefied natural gas LPG liquefied petroleum gas LTGEP Long-Term Generation Expansion Plan m3 cubic meter mm millimeter MOF Ministry of Finance MoIWRM Ministry of Irrigation and Water Resource Management MoUDH Ministry of Urban Development and Housing MoPE Ministry of Power and Energy MOT Ministry of Technology vii Country Climate and Development Report MSME micro, small, and medium enterprise MW megawatt NBRO National Building Research Organization NbS nature-based solution NDC Nationally Determined Contribution NPL nonperforming loan NWSDB National Water Supply and Drainage Board NZS Net Zero Scenario OSR own source revenue PM particulate matter PPP public-private partnership RCP Representative Concentration Pathway SLR sea level rise SOE state-owned enterprise SME small and medium enterprise SSP Shared Socioeconomic Pathway SWM solid waste management tCO2 total carbon dioxide tCO2e tons of carbon dioxide equivalent TWh terawatt hour UHI urban heat island viii Country Climate and Development Report Executive summary 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. Priorities for achieving climate-resilient, job-creating growth Key priorities for Sri Lanka’s development in response to a changing climate include advancing rural resilience and prosperity, investing in livable cities, and expanding clean domestic energy. To achieve these priorities, the country should use an integrated approach to landscape management, utilize digital solutions, and mobilize private finance (Figure ES1). Given Sri Lanka’s diverse social fabric and regional disparities, climate interventions must be carefully designed to promote inclusion and adopt safeguards to prevent exacerbating social tensions, historical grievances, or inequalities. ix Country Climate and Development Report Figure ES1. Sri Lanka’s Climate and Development Priorities Rural resilience Investing in Expanding clean and prosperity livable cities domestic energy Enablers Facilitating Mobilizing Leveraging digital Integrated landscape inclusion private finance technology management Rural resilience and prosperity Sri Lanka’s rural economy is deeply intertwined with its natural capital, making it highly vulnerable to climate change impacts. The country’s natural resources are drivers of growth and buffers against climate impacts for the 80 percent of Sri Lankans residing in rural areas and working in key sectors like tourism, agriculture and fisheries. However, these resources face continued degradation, amplified by climate impacts such as severe floods, droughts, landslides, and heatwaves. Sri Lanka faces the challenge of managing increasing volumes of water and more intense rainfall, along with higher uncertainty around water availability. To build resilience, the country must effectively manage its water resources to ensure a sustainable supply of quality water that meets demand. This requires stronger integrated water resource management, which includes better coordination among institutions, improved data collection, and enhanced decision- making capabilities to adapt to the country’s changing water cycle. Expanding irrigation is a key investment for resilience, but it should be done with careful consideration of water availability. Investments in water storage should incorporate watershed management and nature-based solutions, alongside efforts to improve water usage. If water demand is not met, it could lead to increased competition between sectors in the Northern part of the island, exacerbating poverty in an area already vulnerable economically and socially. Climate-smart agriculture (CSA) can strengthen value chains, improve extension services, and expand market access for all farmers, especially the most vulnerable. Repurposing fertilizer subsidies can free resources to promote and adopt CSA, while providing better-targeted social protection for poor and vulnerable farmers. Enhancing resilience through integrated land-use assessments and ecosystem conservation also holds promise. Identifying critical transport and infrastructure at risk from climate impacts and enhancing their resilience will deliver continued growth in rural economies. With 98 percent of Sri Lanka’s freight traffic dependent on road transport, the growing vulnerability of the road network to flooding poses a significant threat to economic activity. Infrastructure investments to ensure sustainable and equitable access to safe water and sanitation services will strengthen the resilience of people and businesses. x Country Climate and Development Report Integrated landscape management can build climate resilience by connecting urban and rural areas and enhancing ecosystem services. Sri Lanka’s diverse landscapes—from coastal zones to central highlands—are multifunctional systems where ecological, social, and economic processes interact. Achieving climate resilience requires managing these interconnected systems holistically. Restoring ancient irrigation systems can enhance water security for both agricultural and urban areas. Urban wetland ecosystems are crucial for mitigating floods. Expanding reforestation and sustainable farming in upstream catchment areas can reduce erosion, landslides, and sedimentation buildup in hydropower generation. Investing in livable cities Sri Lankan cities are crucial drivers of growth, but climate risks pose mounting threats to urban productivity and livability. Flooding remains the greatest threat, but urban heat is also intensifying, with land surface temperatures increasing by 30 percent in recent years. Urban ecosystems, particularly wetlands and green spaces, are essential for mitigating floods, regulating temperatures, and improving air quality. National and local governments can identify flooding hotspots and other climate risks and update urban development plans to boost resilience in these locations. This is particularly important as urban poverty has tripled since 2019, weakening households’ ability to cope with future shocks. Sri Lankan cities can seize opportunities for green investment and job creation. As urban air pollution increases, there are opportunities to cut emissions and enhance livability through better solid waste management, green buildings, and sustainable transport. Cities can improve solid waste collection and disposal, enforce green building standards, and develop alternative modes of transport, including e-mobility. To invest in climate-resilient and productive cities, local governments can improve revenue generation, explore commercial financing options, and build institutional capacity to implement bankable projects. Sri Lanka would also benefit from a comprehensive digital framework for SMART cities to address fragmented data systems and enhance climate risk planning and response capabilities. Expanding clean domestic energy Securing a clean, reliable, and affordable energy supply is a critical economic priority. Sri Lanka has set ambitious goals to transition to renewable energy, aiming for 70 percent of its electricity to come from renewables by 2030. Achieving this requires a step-up of private investment for energy generation, grid modernization, energy efficiency, and transport electrification. The government can attract more private capital by fully implementing the new Electricity Act, improving the Ceylon Electricity Board’s financial position, refining tariff policies, and de-risking investments. Investing in solar and onshore wind energy adoption is the most promising short-term strategy, while offshore wind and smart grid investments represent medium- to long-term opportunities. Electrifying the transport sector and advancing energy efficiency will reduce fossil fuel dependency and improve air quality. The National Policy on e-Mobility aims to transition nearly 90 percent of the vehicle fleet to electric by 2050. If implemented, this could halve transport emissions by 2040 and significantly reduce fossil fuel imports. Similarly, scaling up energy efficiency in buildings and industry could save substantial energy and reduce emissions cost-effectively. Regulatory reform, institutional capacity building, and greater access to concessional finance will help unlock these opportunities. The energy transition must be equitable. While electricity tariff reforms could provide significant cost recovery, they may disproportionately affect low-income households. Future reforms can be introduced gradually and supported by better- targeted social protection programs to prevent exacerbating poverty and ensure public support for energy reforms. Financing and policies to achieve sustained, resilient growth Between 2025 and 2053, US$220 billion (4.3 percent of GDP annually) can be directed towards “no regrets” investments that build climate resilience and boost economic activity and welfare. Of this, about 0.1 percent of GDP annually would be for targeted adaptation investments. Meeting this overall financing need will require mobilization of public, private and international climate finance. In the short term, the government can strategically attract foreign direct investment and leverage international sources to catalyze investments in climate resilience and energy investments. The government should expand efforts to increase fiscal revenue and pave the way for a greater role for the public and domestic financial sector in the longer term. This could include rationalizing tax incentives, implementing a minimum corporate income tax, and reforming tax administration to enhance effectiveness. Carbon pricing can be considered in the medium term to incentivize and raise additional financing for the long-term transition to a Net Zero economy, but it must be carefully phased in to manage distributional effects. xi Country Climate and Development Report Recent reforms, including improved legal frameworks for the financial sector, strengthened state banks, and initiatives to expand digital financial services, offer a foundation for building a more robust financial sector. Currently, the financial sector is small, state-dominated, and under-diversified, limiting the availability of long-term finance. Given the role of state-owned financial institutions, there are significant opportunities to align their mandates with climate goals and develop new mechanisms for mobilizing private capital. Innovative financial tools and regulatory reforms offer great promise to unlock private capital. To date, mobilization of climate finance in capital markets has been limited; sustainable lending for energy-efficient equipment, rooftop solar power, and wind and solar farms represents just 0.3 percent of GDP. Public-private partnerships, green loans, guarantees, and targeted grants can attract private finance for investments in solutions like CSA, renewable energy, livable cities, resilient transport and landscape management. A key next step is to develop financial sector technical expertise to evaluate these types of projects and design appropriate instruments. International climate finance can play a catalytic role. To access greater international finance, including carbon markets and results-based climate finance, the government could designate a climate finance institutional focal point to improve climate-related data and reporting and enhance coordination among ministries. It can also use this report as a basis to collaborate with the private sector and development partners to develop a pipeline of bankable projects. This report analyzes potential future pathways, policies, and investments that will help Sri Lanka achieve a climate- resilient, sustainable future (Table ES1). If these recommendations are successfully implemented, they can help Sri Lanka achieve economic growth and job creation while delivering a host of other benefits, including cleaner air, more livable cities, reduced dependence on imported fuels, a more diverse energy mix, stronger ecosystems, and resilient rural livelihoods. Table ES1. Key Recommendations High-Level Objective 1: Maintain macro-fiscal-financial stability and implement key structural reforms (1.1) Boost competitiveness and facilitate trade and investment for a stronger baseline recovery by improving the investment environment, reducing trade barriers, addressing challenges in the financial sector, and advancing state- owned enterprise reforms. (1.2) Enhance tax policy and administration to increase revenues for resilience investments by rationalizing tax incentives, increasing corporate taxes, taxing high net-worth individuals, addressing tax administration challenges, and considering a gradual introduction of carbon pricing mechanisms. (1.3) Prioritize resilience investments and protect poor and marginalized households by developing a comprehensive Resilience and Adaptation Investment Plan, ensuring rural access to critical services, and enhancing the adaptability of social protection systems to respond to shocks. High-Level Objective 2: Build resilient livelihoods (2.1) Adopt integrated landscape management approaches across the Water-Agriculture-Forest-Infrastructure-Tourism nexus. (2.2) Harness water resources for development and mitigate impacts of water-related risks through integrated water resources management. (2.3) Promote, incentivize, and upscale CSA, support insurance, reform land use and public spending to support local communities with research and extension, post-harvest operations and value chain development. (2.4) Develop a fisheries management plan and improve enforcement mechanisms, strengthen value addition, promote economic diversification, and enhance sustainability. (2.5) Enhance resilient transport connectivity by performing a network criticality analysis to identify areas susceptible to landslides and other forms of erosion. (2.6) Accelerate access to resilient water supply and sanitation, focusing on lagging areas. Mobilize private sector participation to fill financing gaps. xii Country Climate and Development Report High-Level Objective 3: Enhance urban livability and prosperity (3.1) Use an evidence-based approach to identify flooding and climate risk hotspots and revise urban development plans. (3.2) Design and implement measures to mitigate and adapt to projected climate risk in cities, especially flooding and extreme heat. (3.3) Accelerate investment in low-carbon urban solutions via integrated urban mobility planning, updated building codes, a solid waste management (SWM) master plan, air quality monitoring and data, and investing in urban-rural infrastructure. High-Level Objective 4: Expand clean domestic energy (4.1.) Fully implement the new Electricity Act to ensure commercial sustainability while implementing procurement reforms that enhance transparency and private sector participation. (4.2) Strengthen transmission and distribution infrastructure to manage variable renewable energy, update the grid code and use integrated planning software. (4.3.) Implement an integrated procurement reform agenda to strengthen transparency and accountability in renewable energy projects. (4.4.) Enhance resilience and modernize hydropower assets. (4.5) Scale up clean transportation by developing a national e-mobility policy and platform, prioritizing buses and two- and three-wheelers as well as charging network infrastructure. (4.6) Improve targeting of compensation mechanisms to protect vulnerable households from energy price fluctuations without relying on inefficient universal subsidies. High-Level Objective 5: Mobilize private and climate finance (5.1) Establish a climate finance task force and strategy to ensure coordination between stakeholders and to define public sector support, the role of the private sector, and access to international finance. (5.2) Align financial sector strategies with climate goals and related risks by developing a pipeline of bankable projects, promoting private-public cooperation on climate finance instruments, including thematic bonds and risk-sharing mechanisms and incorporating climate considerations into state-owned financial institution strategies. (5.3) Strengthen institutional capacity and governance to attract international climate finance. Urgent near-term actions xiii Country Climate and Development Report xiv Country Climate and Development Report 1. Development and Climate Priorities 1.1 Sri Lanka emerges from a crisis, with a focus on growth and resilience The 2022-23 economic crisis was the result of longstanding structural weaknesses, exacerbated by exogenous shocks and policy missteps. A shift to protectionist policies in 2002 progressively repressed the tradable sector, slowed the pace of structural transformation and restricted productivity growth (Figures 1 and 2). In the aftermath of the civil war, investments in large infrastructure projects drove gross domestic product (GDP) growth to over 6 percent per annum in 2010-15. However, these investments were primarily financed through non-concessional debt and could not be sustained. These developments — coupled with poor governance, a weak investment climate, spells of accommodative monetary policy, and an administered exchange rate — led to a gradual accumulation of macroeconomic imbalances, high fiscal deficits and large financing needs. Significant tax cuts in 2019 resulted in rapid growth in debt beyond 100 percent of GDP. By 2020, Sri Lanka lost access to international financial markets following credit rating downgrades. In 2022, amid depleted reserves, the Government of Sri Lanka (GoSL) was forced to announce the suspension of external debt servicing, pending debt restructuring. Figure 1. Structure of the Economy Figure 2. Average Real GDP Growth (Percent Total GDP) 100.0 7.0 90.0 6.4 6.0 80.0 70.0 5.0 57.8 58.9 59.0 60.0 4.0 50.0 3.4 3.0 40.0 11.5 14.5 11.2 30.0 2.0 20.0 20.9 17.6 20.6 1.0 10.0 9.7 8.9 9.2 0.0 0.0 2010 2015 2022 2011-15 2016-19 2020-23 -1.0 -2.0 Agriculture Construction/Other Ind. -2.5 Manufacturing Services -3.0 Source: National Accounts, Department of Census & Statistics (DCS), 2024. The economy has stabilized following policy reforms and successful debt restructuring, but poverty remains high. After the country went into a macroeconomic crisis in 2022, GoSL implemented several reforms under an International Monetary Fund (IMF) program supported by the World Bank, including cost-reflective utility pricing, a new tax policy, and administrative measures. GoSL also initiated structural reforms related to debt, fiscal management, the financial sector, trade, investment, and state-owned enterprises (SOEs). Significant progress has been made in debt restructuring, with the package of policies yielding positive results.1 Following a year-on-year contraction of GDP by 7.3 and 2.3 percent in 2022 and 2023, respectively, the economy stabilized in 2024.2 Inflation has moderated to single digits since mid-2023, and the rupee has strengthened. Usable official reserves increased to US$5.1 billion in November 2024, compared to US$500 million in December 2022. GoSL achieved primary balance surpluses in 2023 and 2024. However, due to tax and price increases and loss of jobs, household budgets have remained stretched since the start of the crisis. Food insecurity remains high, and human capital outcomes are regressing. Despite the introduction of improved social protection programs, poverty more than doubled from 11 percent in 2019 to 26 percent in 2023.3 Sustained implementation of reforms is essential to support a stronger recovery.4 Modest economic growth is expected to return over the medium term. Poverty reached 27.5 percent (US$4.20 poverty line, 2021 Purchasing Power Parity) in 2023 and is projected to decline gradually as growth recovers but remains above 20 percent until 2027. Debt is likely to gradually decline towards 95 percent of GDP, in line with the IMF program targets. The gross financing need will remain high (approximately 20.8 percent of GDP on average between 2024 and 2027) and is expected to fall below 1 , k domestic debt restructuring operation was finalized in 2023, official creditors reached an agreement in mid-2024, and most of the past international bond issuances were successfully exchanged in December 2024. 2 World Bank, Sri Lanka Development Update, October 2024. 3 At US$3.65 per capita, 2017 PPP. 4 World Bank, Sri Lanka Development Update, October 2024. 1 Country Climate and Development Report the IMF target (an average of 13 percent of GDP in 2027–32) thereafter. The sustainability of the recovery will hinge on policy consistency and the success of structural reforms that support macro-fiscal-financial stability; increase the competitiveness of the economy; and reduce the economy’s inward orientation. To shield vulnerable populations, it will be essential to maintain service delivery standards in education and health and further improve the effectiveness of the social protection system. Sri Lanka’s sustained economic growth and poverty reduction are inextricably linked to building resilience against accelerating climate change impacts. The consequences of climate change are already affecting agriculture, services, tourism, and energy production, as well as people’s livelihoods. Beyond sustaining economic stabilization and recovery, GoSL’s reform agenda will improve climate resilience. 1.2 Sri Lanka is highly vulnerable to climate change, with direct impacts on its development Sri Lanka faces significant climate vulnerability due to its diverse topography, varied climate zones, and seasonal weather patterns. Sri Lanka primarily experiences three climate types: tropical rainforest in the south, tropical monsoon in central regions, and tropical savanna in the north. Average temperatures are very high throughout the country with monthly averages ranging between 26 and 28 degrees Celsius (°C). Most rainfall occurs during two distinct monsoon seasons: the northeast monsoon (October-January) and the southwest monsoon (May-September), with monthly precipitation ranging from 65 millimeters (mm) in July to 329 mm in November. Sri Lanka will very likely experience higher temperatures and more variable precipitation patterns due to climate change. This report analyzes two contrasting climate futures representing the low and high ends of a range of potential climate impacts to assess the economy’s vulnerability.5 “Wet/Warm” represents a relatively benign future with modest temperature increases but significantly higher precipitation, on average, by 2050. In contrast, “Dry/Hot” depicts a more adverse future characterized by significantly hotter and drier conditions, on average, by 2050.6 These two climate futures foresee the following changes in average temperature and precipitation: • Under the Wet/Warm and Dry/Hot climate futures, average temperatures are expected to increase compared to the 1995-2020 average, reaching between 0.95 (Wet/Warm) and 1.14oC (Dry/Hot) higher by the 2040s; and • Under the Wet/Warm climate future, average precipitation is expected to increase by about 16 percent by the 2040s vs. the 1995-2020 average, while the Dry/Hot climate future shows a 1.8 percent increase following initial decreases in the 2020s and 2030s. Sri Lanka already faces substantial losses from extreme weather events Losses from extreme weather events will be further exacerbated by climate change. Between 1975 and 2022, the country experienced over 25,000 extreme weather events across 25 districts, with floods and strong winds being the most frequent. These disasters cost Sri Lanka approximately US$380 million annually (0.4 percent of GDP). Flooding has been particularly devastating, affecting more than 10 million people in the past three decades and causing historical average annual losses of US$240 million, followed by cyclones and high winds at US$80 million annually.7 The country is also vulnerable to storm surges and salinity intrusion from sea level rise (SLR), with coastal agriculture and drinking water sources outside Colombo’s salinity barrier experiencing degradation. 5 The projected temperature and precipitation changes from both climate futures were incorporated into a modeling exercise to estimate the biophysical impacts across eight key channels by 2050: heat and labor productivity, inland flooding, urban flooding for Colombo, rainfed crop production, irrigated crop production, water availability, hydropower production, and tourism demand. The analysis assessed how land use changes and nature-based solutions affect climate resilience, including how forest and mangrove conservation impact flooding, soil erosion, and water availability. These first-order impacts were aggregated at the national level using appropriate weights and then integrated into a mac- roeconomic model to evaluate potential climate change implications for the economy and potential adaptation responses (see Chapter 6). 6 To select these climate futures, we draw on 29 General Circulation Models (GCMs) from the Coupled Model Intercomparison Project 6 (CMIP6) suite of model outputs for combinations of Shared Socioeconomic Pathways (SSPs) and Representative Concentration Pathway (RCP) emission scenario runs. To limit the number of scenarios, we omit SSP1-1.9 as the most unlikely SSP. The Wet/Warm climate future averages across three scenarios that sit around the 10th percentile in mean temperature changes and 90th percentile in mean precipitation changes in the period 2051-2060 relative to the baseline (1995-2014) across SSP2-4.5, SSP3-7.0 and SSP5-8.5 GCMs. The Dry/Hot climate future averages across three scenarios that sit around the 90th percentile in mean temperature changes and 10th percentile in mean precipitation changes across SSP2-4.5, SSP3-7.0 and SSP5-8.5 GCMs. Due to modeling limitations, inland and urban flooding damages on built-up capital could not be estimated for the average Dry/Hot and Wet/Warm climate futures. Instead, these damages were modeled separately under the SSP1-1.9 and SSP5-8.5 scenarios, with the SSP1-1.9 results incorporated with the other Dry/Hot climate future impacts and the SSP5-8.5 results incor- porated with the Wet/Warm climate future impacts. 7 World Bank Group. 2016. Fiscal Disaster Risk Assessment and Risk Financing Options – Sri Lanka. GFDRR. URL: http://documents1.worldbank. org/curated/en/430141467229470955/pdf/106715-WP-P147454-OUO-9-SRI-LANKA-D4web.pdf. 2 Country Climate and Development Report Climate change is expected to increase the frequency of high-impact floods Climate change is estimated to intensify the frequency and severity of flooding, further endangering infrastructure. Approximately 10 percent of infrastructure is highly exposed to flooding. By the 2040s, projected damage will increase significantly under a high-emissions climate future.8 A flood event with a 25-year return period could cause 26 percent more damage compared to a 1995-2020 baseline. Urban flooding is expected to result in over US$160 million in annual damages under this scenario, though actual damage in any given year could be substantially higher.9 Escalating rainfall and flooding events have negative health impacts. Heavy precipitation leads to an increase in vector and water-borne diseases. In addition to direct physical injuries, floods compromise household sanitation, contaminate drinking water sources, and facilitate the spread of infections. The health costs are substantial: Sri Lanka spends over US$19 million per year on direct healthcare associated with floods and droughts – with 83 percent allocated to flood- related healthcare.10 In addition, extreme weather events damage medical facilities and impede access to care, further complicating service delivery during periods of high need.11,12 Climate change is expected to heighten heat stress and lower labor productivity Higher temperatures and prolonged exposure to extreme heat due to climate change significantly impact human health. Elevated temperatures can also exacerbate pre-existing respiratory, cerebral, and cardiovascular diseases. The elderly, children, and individuals with existing health conditions are particularly vulnerable. In 2021, heat-related deaths accounted for 0.38 percent of total deaths in Sri Lanka.13 A hotter climate future threatens crop production and yields The agriculture sector will experience lower productivity due to heat stress. Climate change is projected to cause significant year-to-year variability in crop yields. Agricultural labor productivity losses are projected to range from 6 percent under the Wet/Warm climate future to nearly 8 percent under the Dry/Hot climate future by 2050, compared to the 1995-2020 period. Heat stress-related declines in labor productivity are likely to be most severe in historically more affluent districts that experienced greater poverty increases during the economic crisis, while heat-stress risks also remain significant in the poorer northern districts. These climate impacts particularly affect Sri Lanka’s most vulnerable populations. Low-income households in the bottom 40 percent of the income distribution are three times more likely to earn income from agriculture compared to the richest 20 percent. Productivity declines will be high in rice-producing districts, highlighting the potential of climate change to amplify food insecurity (Figures 3 and 4) which could worsen malnutrition experienced during the recent economic crisis.14 8 Intergovernmental Panel on Climate Change Sixth Assessment report, Shared Socioeconomic Pathway (SSP) 3-7.0 mean climate scenario. 9 These figures are likely underestimates, as they exclude secondary impacts, such as business disruption losses. 10 De Alwis, D. and I. Noy. 2019. The cost of being under the weather: Droughts, floods and healthcare costs in Sri Lanka. Asian Development Review 36:2. https://www.adb.org/sites/default/files/publication/525971/adr-vol36no2-7-cost-under-weather-sri-lanka.pdf. 11 IFRC. 2024. LK Flood – 2023-09 – Monsson Floods and Dengue outbreak. https://go.ifrc.org/emergencies/6679/details. 12 Ministry of Health, Nutrition, and Indigenous Medicine of Sri Lanka. 2018, October 22. Hospitals in Floods and Landslides: Responders and Survivors. https://saarc-sdmc.org/sites/default/files/programmes_doc_upload/Sri-Lanka-Country-Presentation-Floods-and-landslides-22-10-2018.pdf. 13 Institute for Health Metrics and Evaluation. 2021. “Global Burden of Disease Study 2019 Results.” Seattle, WA: IHME, University of Washington. http://ghdx.healthdata.org/gbd-results-tool. 14 The share of children under five who are underweight increased from 12.2 to 17.0 percent between 2021 and 2024. Stunting among the same group increased from 7.4 to 10.5 percent over the same period. See https://fhb.health.gov.lk/wp-content/uploads/2024/10/National-Nutrition- Month-Summary-Report-2024.pdf. 3 Country Climate and Development Report Figure 3. Changes in Irrigated Crop Figure 4. Changes in Rainfed Crop Productivity and Value of Produced Crops, Productivity and Value of Produced Crops, by District (Dry/Hot climate future) by District (Dry/Hot climate future) Source: CCDR modelling results, 2025. Degradation of natural capital will increase Sri Lanka’s vulnerability to climate impacts Sri Lanka’s climate resilience is intrinsically tied to the health of its natural capital. The country shows a trend of deforestation, losing approximately 11,500 hectares (ha) of forests annually as communities turn to unsustainable logging for fuel or income. Coastal ecosystems, including fish stocks, mangroves, and coral reefs, have become increasingly vulnerable due to heightened exploitation during the economic crisis. Economic constraints have weakened environmental regulation enforcement, resulting in increased pollution and destructive fishing practices that continue to degrade these valuable ecosystems. Looking ahead, further deforestation is expected to lead to soil erosion and reduced crop productivity under different climate futures (see Chapters 3 and 6). An integrated landscape management approach can address these interconnected challenges. Sri Lanka’s diverse topography – ranging from coastal zones to central highlands – functions as multifunctional systems where ecological, social, and economic processes interact. Upstream deforestation in the Central Highlands intensifies downstream flooding in Colombo, while coastal mangrove degradation reduces storm surge protection for fishing communities. By managing these systems holistically, Sri Lanka can enhance ecosystem services, minimize sectoral conflicts, and create synergies between urban and rural development, ultimately building stronger climate resilience. 4 Country Climate and Development Report Climate change is expected to exacerbate gender inequalities and social tensions Persistent gender inequality is exacerbated by climate change. Sri Lanka ranks 122nd on the Global Gender Gap Index and is among the bottom 10 countries in women’s political representation.15 Climate change exacerbates these inequalities and deepens vulnerabilities. This is particularly true in the micro, small, and medium enterprise (MSME) sector in rural areas, where agriculture and other businesses are often informal, home-based, and low-skilled, limiting scalability and access to financing and government support. However, women possess valuable knowledge and capacity for building climate resilience. Climate change poses significant challenges to social cohesion more broadly, such as by intensifying competition for natural resources or exacerbating grievances if not managed appropriately. Land disputes between local communities in the north over the conservation of natural resources and forests have been a point of grievance in the past. These have been exacerbated by spatial inequalities, insufficiently inclusive stakeholder engagement, and inconsistent implementation of existing natural capital preservation efforts. To address these risks, the design and delivery of climate-related interventions in Sri Lanka should prioritize activities that strengthen social cohesion wherever possible, and embed inclusive governance, transparent decision-making, and meaningful community engagement—particularly ensuring that the voices of ethno-religious minorities are heard. These elements are essential to minimizing the potential for climate action to further exacerbate social tensions and regional disparities. Scaling up renewables in Sri Lanka’s energy mix can lower the cost of power, reduce economic and fiscal risks, and help address air pollution The country’s reliance on imported fossil fuels creates economic and health risks. Although carbon dioxide (CO2) emissions per capita have more than quadrupled in Sri Lanka over the past four decades, they remain considerably below the global average of 4.3 total carbon dioxide (tCO2) per capita. However, imported fossil fuels dominate Sri Lanka’s energy supply, with coal and petroleum products accounting for 54 percent of total energy supply in 2020, up from 44 percent in 2010.16 The road transport sector is particularly dependent, consuming approximately 63 percent of imported fuels. Since they account for about 20 percent of the country’s total imports, fossil fuel imports place considerable strain on foreign exchange reserves, contributing to trade imbalances and rendering Sri Lanka vulnerable to exogenous price shocks in global energy markets. As energy demand continues to rise, imported fuels lead to higher risk and affordability challenges. While hydropower provides about one-third of Sri Lanka’s electricity, most of the viable sites have been developed, and unpredictable rainfall patterns affect the reliability of existing dams. To diversify its electricity mix, Sri Lanka has expanded its thermal power capacity. However, fuel shortages and high energy prices during the 2022 economic crisis highlighted the link between imported fossil fuels, energy security, and affordability. Sri Lanka possesses significant untapped potential for domestic renewable energy generation, particularly in solar and wind. The country has set ambitious targets of attaining 70 percent of electricity generation from renewable energy by 2030 and carbon neutrality in the power sector by 2050.17 Achieving this goal would enhance Sri Lanka’s energy security and development by tapping into low-cost domestic resources, reducing long-term energy costs (and energy prices), and creating growth and job opportunities through private investment. Beyond economic vulnerabilities, the use of fossil fuel and biomass for energy contributes to public health challenges. The country is experiencing a deterioration in air quality, with air pollution contributing 11 percent to total deaths in 2021, two-thirds of which are driven by indoor air pollution.18 Transport and residential cooking account for two-thirds of the total particulate matter (PM) pollution.19 A shift to electric stoves or solar-based cooking, as well as augmented use of renewable energy and electric mobility will help address these risks and reduce the related economic costs, whilst also opening new job and investment opportunities. 15 World Economic Forum. 2024. “Global Gender Gap Report 2024.” World Economic Forum, Geneva. https://www3.weforum.org/docs/WEF_ GGGR_2024.pdf. 16 International Energy Agency. 2024. “World Energy Statistics and Balances.” IEA, Paris. https://www.iea.org/data-and-statistics/data-product/ world-energy-statistics-and-balances. 17 Government of Sri Lanka, Ministry of Environment. 2021, September, “Updated Nationally Determined Contributions”. 18 Nandasena, S. et al. 2012, “Air pollution and public health in developing countries: Is Sri Lanka different?” Journal of the Collage of Community Physicians Sri Lanka 17:1. https://jccpsl.sljol.info/articles/4932/files/submission/proof/4932-1-17525-1-10-20121126.pdf. 19 World Bank. 2023. Striving for Clean Air: Air Pollution and Public Health in South Asia. South Asia Development Matters. Washington, DC: World Bank. 5 Country Climate and Development Report This report analyzes Sri Lanka’s development in the context of climate change impacts, technological change, and the government’s priorities. It identifies the major risks and opportunities that climate change presents for the country’s growth and poverty reduction while charting a path forward for key aspects of the economy. It proposes a framework to approach climate and development and recommends priority actions and investments. Chapter 1 summarizes Sri Lanka’s development trajectory, needs, and vulnerability to climate risks. Chapter 2 presents Sri Lanka’s climate- related commitments, policies, and institutions. Chapter 3 looks in depth at the imperative to shore up resilience and prosperity in rural communities, including via landscapes, water, and agriculture. Chapter 4 delves into the accelerating climate impacts in cities across the country, and identifies key resilient, low-carbon investments and policies. Chapter 5 lays out the opportunity for Sri Lanka to achieve greater energy security and lower emissions by expanding renewable energy, increasing resilience and tapping into energy efficiency. Chapter 6 models the impacts of climate change on the economy. Chapter 7 evaluates the ways and means to finance the key priorities identified by this report, and Chapter 8 concludes with a prioritization framework for policy changes and investments. 6 Country Climate and Development Report 2. Country Climate Commitments, Policies, and Capacities Sri Lanka has made strong commitments to address climate change. This includes a national framework that integrates its Paris Agreement pledges, sectoral strategies for emissions reduction and adaptation, and a Climate Prosperity Plan (CPP) that aims to transition the country towards an environmentally sustainable and climate-resilient economy, building on the existing Nationally Determined Contributions (NDCs) and National Adaptation Plan (Table 1). Table 1. Key Climate Policy Commitments Date Policy Commitments 2016 Paris Agreement Committed to contribute to global efforts to limit temperature rise and enhance Ratification resilience through its NDCs 2018 National Climate Provided a framework for systematic response and institutional approach to climate (revised in Change Policy change challenges 2023) 2021 2022-30 National Outlined strategies to build resilience and adapt to climate change impacts in sectors Adaptation Plan such as agriculture, water resources, coastal zone management, and human health 2022 CPP National strategy to align and integrate the country’s climate change efforts/prior commitments with its broader economic development goals 2023 Updated NDCs Committed to achieve 14.5 percent greenhouse gas (GHG) emissions reductions, increase forest cover to 32 percent, and achieve 70 percent renewable energy in electricity generation by 2030 relative to the business-as-usual scenario 2023 Carbon Net Zero 2050 Long-term low emission development strategy setting transition to net zero pathways Road Map and Strategic in six sectors Plan Source: World Bank staff analysis. In addition, there are important sectoral laws and policies that have an important impact on Sri Lanka’s development pathway, including by transitioning to electric vehicles, enhancing water resource management, and ensuring the commercial and financial sustainability of the energy sector (Table 2). While the country has made progress in advancing its commitments in the water and agriculture sectors, it is facing challenges implementing energy and transport commitments. Table 2. Relevant Sectoral Policies Date Policy Key Commitments and Focus Areas Reforms Ceylon Electricity Board (CEB) structure to ensure financial 2023 Electricity Act sustainability and enable private sector participation in clean energy Aims to convert 90 percent of the vehicle fleet to electric by 2050, with 2023 National Policy on e-Mobility key adoption targets starting in 2025 Introduces integrated planning and regulation of water resources, 2023 Water Resources Policy including dam safety and climate resilience Focuses on climate-resilient agriculture, sustainable land use, and smart 2023 National Agriculture Policy (Revised) farming practices Disaster Risk Reduction Strategy Prioritizes early warning systems (EWS), local risk reduction planning, and 2023 (Sendai-aligned) infrastructure resilience to climate-related disasters Source: World Bank staff analysis. 7 Country Climate and Development Report Sri Lanka’s ability to fully implement its climate commitments depends on overcoming resource constraints, improving governance, and receiving external support. While key institutions and policies are in place, the government faces significant implementation challenges due to limited technical and financial resources resulting from the financial crisis, weak coordination among agencies, data gaps, and underdeveloped monitoring systems. There is inadequate implementation of national climate policies by provincial and local governments. Engagement of local bodies is critical to translate Sri Lanka’s national commitments into investment projects and programs at the local level, where most resilience investments are needed. While some provinces have developed adaptation plans, they do not define explicit roles and responsibilities for local governments. Most local governments have limited technical capacity and resources, are fiscally constrained, and depend on intergovernmental fiscal transfers. Climate change budgeting is impeded by poor planning and capacity. The National Development Plan has not been updated since 2019. GoSL lacks a framework to prioritize public investments in a context of scarcity. The National Planning Department has prepared a multi-year Public Investment Programme but lacks the authority and capacity to objectively select projects. The medium-term fiscal framework, which sets concrete financial envelopes for multi-year investment planning, is not properly enforced. As a result, mainstreaming climate priorities into public investment remains a major challenge. Sri Lanka implemented climate budget tagging for the first time in 2024 by making budget allocations to specific Sustainable Development Goals.20 SOEs play a significant role in the economy but have done little to align with Sri Lanka’s climate commitments. SOEs have a presence in all sectors that are crucial for Sri Lanka’s green transition, including energy, transport, water, and financial services. Key SOEs include the Ceylon Petroleum Corporation, CEB, Sri Lanka Transport Board, Sri Lanka Ports Authority, Bank of Ceylon, and People’s Bank. The National Adaption Plan states that CEB, Sri Lanka Transport Board, and Sri Lanka Ports Authority are expected to embed climate change adaptation priorities into their development plans, budgets, and operations. Similarly, Ceylon Petroleum Corporation is expected to contribute to reducing energy and transport emissions, and CEB is responsible for boosting renewable energy penetration. However, there has been little progress by these entities in translating commitments into policies and investments. SOEs could be central actors in delivering a climate-smart transition. SOEs could be important actors in advancing Sri Lanka’s green agenda, especially as a source of capital from state-owned banks, and leading investments in sustainable technologies and the energy transition. SOE reform provides an opportunity to address economic inefficiencies and reorient SOEs to play a stronger and more deliberate role in Sri Lanka’s green transition. Several constraints prevent the private sector from capitalizing on climate-smart market opportunities. As discussed in Chapter 7, a stable and supportive business environment is crucial to encourage investments in new climate sectors, especially those requiring regulatory approvals and licensing. Businesses face inconsistent policies and a complex business environment as successive governments introduce new policies or programs that conflict with legacy policies or result in overlapping implementing agencies. The private sector is further constrained by high import barriers, limited presence of foreign firms, narrow options for capital and low adoption of new technologies. 20 Climate Change Secretariat, Ministry of Environment (2024), First Biennial Transparency Report; available at https://unfccc.int/sites/default/files/resource/First%20Biennial%20Transparancy%20Report%20-%20Sri%20Lanka%20-%202024.pdf. 8 Country Climate and Development Report 3. Rural Resilience and Prosperity Management of the rural space as an integrated system can generate economic and resilience benefits. Four out of five Sri Lankans reside in rural areas, with livelihoods closely tied to natural capital. This natural capital – water, soil, air, and biodiversity – acts as an essential buffer against crises for communities and is a driver of growth. However, climate change and the ongoing degradation of these assets pose an increasing risk to development gains. Better management and use of resources, coupled with sustainable development of value chains and local enterprises in agriculture, fisheries, and forestry, can boost growth, expand jobs, and help advance prosperity in the face of climate change. 3.1 The importance of integrated landscape management Sri Lanka’s landscapes are becoming more intensively used, more fragmented, and more degraded. Sri Lanka faces mounting pressures on its land and natural resources due to population growth as well as unsustainable land use and management. Sri Lanka ranks 142 of 180 countries in ecosystem vitality, indicating poor performance in environmental policies and practices, measured across various factors like climate change, air and water quality, and biodiversity.21  Landscape management can build resilience across the economy. Landscape management is an approach for allocating natural resources among stakeholders across large areas. It allows stakeholders to pursue mutual objectives and balance trade-offs among competing resource uses, including among people, sectors, and geographic areas. In this way, landscape management helps optimize climate-resilient ecosystem services such as food and water provision, and reduce risks such as flooding and drought, biodiversity loss, and land degradation. Integrated landscape interventions can restore biodiversity, create opportunities for recreation, improve human health, water and food security, and support community wellbeing and livelihoods. They protect, manage, restore, or create natural or nature- based features and, in many cases, have proven to be cost-effective because of their cross-sectoral benefits.22 They also deliver private sector growth and jobs, which form the building blocks of resilient livelihoods. Sri Lanka is one of 35 global biodiversity hotspots.23 Sri Lanka’s biodiversity includes both flora and fauna spanning terrestrial, aquatic and marine ecosystems. These natural ecosystems provide important services that support agricultural, fisheries, hydropower, forest and tourism livelihoods. Sri Lanka’s rural economy and natural resources are inextricably linked, and the health and productivity of natural assets is critical to ensuring prosperous rural economies. While Sri Lanka’s total wealth more than doubled over the last two decades, natural capital diminished by 3.7 percent. This was driven by a dramatic decrease in the per capita value of fisheries by 90 percent, and the degradation of cropland and pastureland.24 Climate change exacerbates stress on these systems. Sri Lanka’s forests provide resources for communities, supporting agricultural productivity through water and soil regulation, food security, and nutrition. Twelve percent of Sri Lanka’s area is at high risk of soil erosion.25 Although the deforestation rate significantly slowed during 2013-23 by over 70 percent compared to 1956-84,26,27 deforestation continues at an average rate of 11,500 ha/year, shrinking forest cover to 30 percent in 2017.28,29 The carbon stock value of Sri Lanka’s 1.9 million ha of forests is over US$225 million;30 forests provide 8 percent of the country’s carbon sequestration.31 21 The Yale Environmental Performance Index ecosystem vitality score conveys how well countries are preserving, protecting, and enhancing ecosystems and the services they provide. Yale Environmental Performance Index (2024), https://epi.yale.edu/measure/2024/ECO. 22 World Bank. 2021. “A Catalogue of Nature-based Solutions for Urban Resilience.” Washington, D.C. World Bank Group. 23 Climate Change Secretariat. 2016. National Adaptation Plan for Climate Change in Sri Lanka. 24 World Bank. 2021. “The Changing Wealth of Nations 2021: Managing Assets for the Future”. 25 Jayasekara, M. J. P. T. M., H. K. Kadupitiya, and U. W. A. Vitharana. 2018. “Mapping of Soil Erosion Hazard Zones of Sri Lanka. ” Tropical Agricultural Research 29, no. 2: 135–146. https://doi.org/10.4038/tar.v29i2.8284. 26 Global Forest Watch. 2024. Sri Lanka Profile, https://www.globalforestwatch.org/dashboards/country/LKA/?category=forest-change&location=WyJjb3VudHJ5IiwiTEtBIl0%3D. 27 Third National Communication, Government of Sri Lanka, 2022. 28 Sri Lanka’s Forest Reference Level submission to the UNFCCC, Sri Lanka UN-REDD Programme, 2017. 29 Ediriweera, Sisira, et al. 2024. “Old-Growth Mixed Dipterocarp Forests Show Variable Losses and Gains in Aboveground Biomass and Standing Carbon over Forty Years.” Forest Ecosystems 11, no. 1: 100163. https://doi.org/10.1016/j.fecs.2023.100163. 30 The stock value is derived by multiplying the total carbon stored (3,038 Gg CO2e) by the shadow price, US$75, as provided in the World Bank’s Guidance note on the shadow price of carbon in economic analysis, https://documents1.worldbank.org/curated/en/099553203142424068/pdf/IDU1c94753bb1819e14c781831215580060675b1.pdf. 31 Third National Communication, Government of Sri Lanka, 2022. 9 Country Climate and Development Report There are important links between sustainable development and natural resource management. Investments in any one resource can have cascading impacts on others. Similarly, climate impacts on one resource can result in knock-on effects in other sectors that depend on it. Policies designed to manage trade-offs and mutual opportunities between natural resource assets can help hydropower, irrigation, and water supply to use resources sustainably and efficiently. Across the country, water, forest, and land resources continue to be used largely on a project-to-project basis. More research will help identify the links, trade-offs, and synergies from a more integrated approach. Sri Lanka has yet to develop the essential enabling environment, institutional framework, and analytic architecture to fully implement an integrated response to development. Effective management of the water-energy-food nexus’s growing demands will be crucial. Deployment of integrated landscape and watershed management approaches would reduce seasonal water shortages in agriculture, power generation, and urban systems while providing flood, drought, and erosion management services. These approaches require multisectoral cooperation, new perspectives to incentivize coordination between users, and new flows of financing. Recommendations to integrate water, agriculture, and forests for climate resilience • Strengthen the enabling environment for better coordination among ministries and across government. • Strengthen local development programs for natural resource and watershed management as well as climate risk reduction. • Build the analytical basis and decision-support systems for climate-informed management of rivers, watersheds, and landscapes. 3.2 Managing peaks and scarcity: an increasingly challenging water future Water, food, and energy form a nexus at the heart of Sri Lanka’s economic recovery and sustainable development. Sri Lanka’s vast water resources have driven economic and social transformation across agriculture, industry (including water-intensive garment and textiles) and, increasingly, tourism. Demand is increasing as the country grows, and climate change is profoundly altering the hydrological cycle, making water-dependent sectors and rural livelihoods more prone to shocks.32 Sri Lanka should plan to manage the growing uncertainty around annual water availability, more powerful rainfall events, and higher volumes of water. Sri Lanka’s rainfall predictions vary widely depending on the climate scenario modelled for this CCDR. Under a Wet/Warm future, significant wetting is expected by 2050, with spikes of over 50 percent in some basins (Figure 5). An increase of this magnitude will strain existing flood protection infrastructure, place pressure on dams, and require additional interventions to manage flood impacts. Under a Dry/Hot future, rainfall is expected to decrease across most of the country, with potential wetting in the southern half. Overall, however, annual rainfall is expected to increase, and it will be more intense and variable. Sri Lanka must boost its ability to manage extremes through improved dam safety and storage, and resilience of hydropower assets. 32 Richardson, J., W. Steffen, W. Lucht, J. Bendtsen, S.E. Cornell, et al. 2023. “Earth Beyond Six of Nine Planetary Boundaries.” Science Advances, 9, 37. 10 Country Climate and Development Report Figure 5. Average Annual Runoff relative to a “No Climate Change” Reference, 2041-50 Dry/hot mean Wet/warm mean % difference 54% 50% 40% 30% 20% 10% 0% −10% −15% Source: CCDR Modelling results, 2025. Sri Lanka needs to enhance its capacity to manage competing water demands. The country has ample freshwater, with per capita availability of 2,450 cubic meters (m3), well above 1,700 m3 considered the threshold for water stress. However, the spatial and temporal variability of water availability and utilization causes deficits and excesses33. The irrigation sector uses 85 percent of water, and 70 percent is used for paddy production. Currently, 6 percent of total water demand is unmet and concentrated in the northern and northwestern basins, potentially exacerbating existing high poverty levels and reducing the contribution of these areas to GDP (Figure 6). These localized water scarcity hotspots are expected to persist, even under a wetter climate future, and to worsen with additional demand for water as Sri Lanka grows.34 Figure 6. Average Annual Unmet Irrigation Water Demand by Climate Scenario, 2041-50 No climate Dry/hot mean Wet/warm mean change reference % 20% 15% 10% 5% 0% Source: CCDR modelling results, 2025. Integrated water resources planning is required to manage future demand and water scarcity. This CCDR modelled the impact of expanding irrigation as a key climate adaptation measure. Where water is available, irrigation enhances the productivity and profitability of the agricultural sector. However, where irrigation expands in basins that face water 33 This CCDR used a Water Evaluation and Planning System (WEAP) model to evaluate water flows to different water users, considering competing uses, climate change effects, and available storage infrastructure. The model simulates water management scenarios, considering factors such as supply, demand, and climate change impacts to assess possible future vulnerabilities, optimize water allocation, and help the Government of Sri Lanka develop adaptive strategies for water security. 34 Modeled as a 2.5 percent expansion by 2050. 11 Country Climate and Development Report shortages, without adequate planning, there are higher potential negative impacts on crop productivity than in a “do nothing” case. Additional water storage can help mitigate unmet demand but requires longer-term interventions to manage supply and demand. Inter-basin water transfers can support basin security but are expensive and require long-term planning horizons. The analysis carried out for this CCDR found that transferring water from surplus areas in other southern basins, such as the Mahaweli River, could ensure water security for Malwathu Oya, Kala Oya, and Deduru Oya basins that had the greatest modelled water deficits (Figure 7).35 However, these interventions can be costly and require long-term planning, financing, and coordination across users, underscoring the need for integrated water resources management to balance costs and benefits. Figure 7. Irrigated Rice Impact by Basin and Development Scenario, Dry/Hot Mean, 2041-50 No climate Dry/hot mean Wet/warm mean Wet/warm mean change reference 23% 20% 15% 10% 5% 0% −5% −10% Source: CCDR modelling results, 2025. An immediate priority is protection of watershed catchments as a cost-effective way to utilize existing water storage. New approaches to enhance water storage should include leveraging and maximizing natural storage and green infrastructure; evaluating opportunities for reoperating, rehabilitating, and retrofitting existing storage, including de- siltation; investing in new storage; and considering storage alternatives such as demand management, alternative supply measures, and zoning regulations.36 Nonfunctional tank-cascade systems can be upgraded to improve irrigation efficiency and demand management. Sri Lanka has relatively low levels of water productivity and water use efficiency, and limited incentives for farmers to improve. Further expansion of irrigation needs to be carefully planned to prevent waterlogging and salinization, incorporate drainage, and ensure ongoing maintenance. Securing the resilience of existing water resource reservoirs and large dams is a priority for Sri Lanka. Sri Lanka’s water resource management and irrigation have a rich history of traditional knowledge, which forms a strong base for future interventions. Sri Lanka’s irrigation activities date back 2,500 years and provide a foundation for a sustainable approach to integrated landscape management.37 Its water flow management approach includes small-scale village tanks and simple channel systems to cascaded tank-village systems in the dry zone. This traditional method of water management should be integrated into future river basin planning at the cascade level rather than focusing on individual water reservoirs or interventions. Restoration and improvement of the traditional system should include strengthening of local institutions, knowledge sharing, and training. 35 This included accounting for additional irrigation and storage needs such that unmet demands would be reduced to zero and irrigation benefits fully realized. 36 Burke, E.R., J.M. Tront, K.N. Lyon, W. Rex, M.I. Castera Errea, M.C. Varughese, J.T. Newton, A.N. Becker, and A.L. Vale. “What the Future Has in Store: A New Paradigm for Water Storage.” Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/099454002022397507 37 Gunasena, C. and R. Nianthi. 2024. “Traditional Water Management Systems in Sri Lanka: A Legacy of Sustainability and Climate Resilience for Disaster Risk Reduction and Management.” In: Mitra, S. and R. Shaw (eds) Disaster Risk Reduction and Rural Resilience. Disaster Risk Reduc- tion. Springer, Singapore. https://doi.org/10.1007/978-981-97-6671-0_7. 12 Country Climate and Development Report A new approach is needed to balance trade-offs and manage a variable water cycle in an integrated way at the community, river basin, and national level. This approach to water resource management should include practical tools—from decision-making under uncertainty to integrated allocation and planning techniques, incorporating better use of data and technology—that can streamline processes and facilitate collaboration. However, a stronger policy and regulatory environment is required, including the promulgation of a new National Water Law that clarifies water management mandates, encourages streamlined collaboration across the Irrigation Department, Mahaweli Authority of Sri Lanka, Water Resources Board, and CEB and others, and addresses sector sustainability. Formulation of a National Strategic Water Plan would help to provide a roadmap and investment framework. The establishment of an apex coordination body may help enforce integrated water resources planning, yielding benefits for mandates that require multi-institutional responses, such as dam safety. Efforts to strengthen institutions that manage the current irrigation systems include a focus on adequate operations and maintenance, and demand-side management where water pricing may provide a powerful incentive. Recommendations to implement integrated water resource management • Pass a new Water Resources Act, with a focus on integrated planning, regulation and coordination including clarification of mandates and establishment of an apex decision-making and coordination body. • Develop and implement a National Strategic Water Plan to provide a roadmap and investment framework. • Implement an integrated river basin approach. • Expand and modernize the monitoring network and improve drought and flood forecasting, EWS, and data sharing. • Mainstream climate risk in water resources planning and project design by updating project selection criteria. • Invest in efficiency improvements in water usage, particularly in water-scarce basins, and explore water pricing to encourage better demand-side management. • Invest in additional irrigation, ensuring adequate availability through interventions to augment natural, built, and hybrid water storage. • Invest in flood mitigation infrastructure in flood-prone areas. 3.3 Ensuring resilience and food security through climate-smart agriculture A resilient agricultural sector can protect the livelihoods of Sri Lanka’s rural poor. Agriculture employs about a quarter of the country’s labor force but contributes only 7.5 percent to the country’s GDP. Three-quarters of the rural population engages in agricultural production or earns an income from agriculture-related value chain activities.38,39 Agri-food exports contributed 22 percent of total export earnings in 2024, the second-highest contribution after apparel trade. Agriculture has also served as a buffer for job losses in the service and industry sectors during and right after the COVID-19 pandemic. Climate-induced productivity declines could disproportionately impact poorer households’ incomes. Climate change affects the agri-food system directly by altering crop production and indirectly through reduced labor productivity and shifts in agricultural landscapes. Significant production losses have occurred in recent years due to extreme events.40 Combined losses in rice production in 2023 and 2024 were estimated at over US$150 million (LKR 45 billion), with damage to over 23,000 ha of paddy in 2023 alone. Severe droughts resulted in combined losses of over US$166 million (LKR 50 billion) in coconut production in 2017 and 2018. Under a Dry/Hot scenario, rainfed agricultural productivity is likely to decrease significantly for rice, tea, and vegetables, which contribute more than 60 percent of income from 38 Central Bank of Sri Lanka. 2024. “Annual Economic Review 2024.” Central Bank of Sri Lanka, Colombo. https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/annual-economic-review/annual-economic-review-2024. Anusha, P. and S. Vijesandiran. 2022. “An empirical analysis of the effect of agricultural sector determinants on economic growth in 39 Sri Lanka.” Business and Economic Research, 12(2), 155. 40 World Bank. 2024. “Building Climate Resilience in Agrifood Value Chains in Sri Lanka: Impacts and Vulnerability and Climate Smart Solutions”, an analysis done under the Agriculture Sector Review. 13 Country Climate and Development Report agriculture for households in the bottom quintile.41 Investments in mechanization of the agriculture sector can enhance resilience against labor heat stress; for example, increasing investments from 1.5 to 15 percent could reduce labor productivity losses by 26 to 30 percent by 2050.42 Investments in irrigation should be pursued as a risk mitigation measure against a drier, hotter future. Irrigated rice productivity is projected to experience relatively minor adverse shocks in a Dry/Hot future while cinnamon could decline 30 percent by 2050. Overall, impacts modelled in this CCDR are expected to be severe for vegetables, with a range of 14 to 12 losses in 2041-50 under different scenarios. Productivity declines in major producing districts will impact exports and foreign exchange earnings. Climate change affects activities at all stages of the agri-food value chain. While farmers are the most vulnerable actors, other parts of the value chain, including dairy chilling, transport, and processing operations, also face significant risks.43 Consumers also face increased prices and scarcity resulting from climate-related supply shocks. Strengthened rural resilience and prosperity requires widespread adoption of climate-smart agriculture (CSA) practices, innovative risk mitigation measures, and integrated management of agricultural landscapes. Support to smallholder farmers in adopting CSA technology and practices is critical for building rural resilience. Sri Lanka is already mainstreaming CSA through increased use of climate-resilient crops and livestock breeds, promoting efficient irrigation technologies such as drip and sprinkler systems to optimize water use, agroecology techniques such as intercropping, integration of vegetative cover and natural farming practices, and efforts to reduce post-harvest losses.44,45 The adoption of CSA measures should extend beyond the farm gate to climate-proofing critical operations across value chains. However, upfront investment costs, technology risks, and lack of access to information constrain the adoption of CSA. Strengthening advisory services and innovative financing can facilitate access to technology and reduce upfront investment costs for farmers. The newly created National Credit Guarantee Institution addresses collateral risks for small and medium enterprise (SME) lending; supplementing this with financial sector capacity-building around CSA business models and opportunities will help increase adoption. Innovative risk management measures can overcome rising losses and damage due to extreme weather events. Existing insurance products and risk mitigation measures are inadequate in addressing the growing risk of climate- induced disasters faced by smallholder farmers and other value chain actors. Innovative climate insurance products can help overcome disaster losses and damage. Efficient climate information services, including EWS and community- based disaster preparedness programs, can further reduce the risk for agri-food system actors. Integrated land and water resource management is key. Restoration of degraded agricultural landscapes, watersheds, and wetlands can help regulate water availability for irrigation, enhance soil productivity and health, and reduce the risk of floods. Strengthening and upscaling community-based landscape governance mechanisms, such as cascade management committees, can facilitate the adoption of integrated land and water management, climate-resilient farming practices and crop diversification, while creating networks and partnerships to share best practices and lessons learned. Current restrictions on land tenure and ownership limit the opportunity for CSA solutions. Existing land policies impose restrictions on tenure and ownership of agricultural land, hindering productivity growth, diversification, and private investment in agribusiness ventures. Additionally, overlapping responsibilities among land administration agencies impede effective land management.  To address these challenges, GoSL should reform laws on use and ownership of agricultural land, enhance land management policies, and improve coordination among state institutions. These steps will promote rural livelihood diversification and investments. 41 Authors’ calculation for CCDR. In a wetter scenario, climate change may increase the productivity of some crops, including rice, although this does not account for losses caused by heavy precipitation events and flooding. 42 By 2041-50, climate change is expected to reduce labor productivity in agriculture by -6.2 to -7.6 percent relative to the 1995-2020 average level. However, productivity losses are projected to be reduced to approximately -4.3 and -5.6 percent if mechanization is increased from 1.5 to 15 percent. 43 World Bank. 2024. “Building Climate Resilience in Agrifood Value Chains in Sri Lanka: Impacts and Vulnerability and Climate Smart Solutions”, an analysis done under the Agriculture Sector Review. 44 Gunaratne, Mahinda Senevi, and R. B. Radin Firdaus. 2021. “Climate Change and Food Security in Sri Lanka: Towards Food Sovereignty.” Humanities and Social Sciences Communications 8, no. 1: 246. https://doi.org/10.1057/s41599-021-00917-4. 45 World Bank. 2023. Ecosystem conservation and management project – Implementation Completion and Results Report. 14 Country Climate and Development Report Repurposing public expenditure will help to mainstream CSA solutions. Public spending on agriculture is currently concentrated on infrastructure (40 percent) and input subsidies (34 percent).46 Allocations are insufficient for areas such as research (5 percent), extension and technology transfer (6 percent), and marketing (1 percent).47 Repurposing fertilizer subsidies can free resources for promoting and adopting CSA, which would contribute to improved fertilizer use efficiency. Public-private partnerships (PPPs) can also play a role by fostering collaboration between the government and private sector to mobilize financing for climate-smart strategies. There is US$4.3 billion of private investment potential in providing CSA solutions that enhance production, boost climate resilience, and reduce emissions.48 Climate-smart agriculture recommendations Implement CSA: • Promote and upscale CSA solutions with incentive schemes. • Establish a community-based integrated landscape management system with clearly defined institutional responsibilities and procedures for enhanced community participation in decision-making, including women and marginalized populations. • Coordinate landscape-level planning and strengthen research-extension linkages via participatory research and digital solutions. • Develop climate insurance, strengthen EWS and the availability of climate data, and establish community- based disaster preparedness programs. • Introduce policy reforms to relax land use and ownership restrictions on agricultural land and improve state land management, facilitating the adoption of CSA solutions and diversification into high-value agriculture. Reform public spending: • Reassess public expenditures to mobilize more resources toward resilience-building measures across all stages of value chains. • Invest in research and extension, postharvest operations, and value chain development that can support climate-smart solutions. • Mobilize financing for CSA solutions through strategic PPPs with private sector partners and build the capacity of the banking sector to invest. 3.4 Leveraging nonfarm livelihoods for rural development Seventy-two percent of rural workers are employed in nonfarm service sectors. While building a stronger service industry has potential, barriers currently prevent use of resources and assets. There are gaps in connective infrastructure, last-mile connectivity, facilities for value-addition, access to finance and markets, skills, and labor force participation. Moreover, few regulatory incentives exist. Ensuring alternate economic opportunities for rural Sri Lankans will help build resilience in rural economies. World Bank. (forthcoming). “Modernizing Sri Lanka’s Agri-food System Through Strategic Repurposing of Spending and Public Policies”, 46 an analysis done under the Agriculture Sector Review. 47 Ibid. 48 International Finance Corporation (IFC) & Unique Land Use GmbH. 2023. “Sri Lanka Climate Smart Agriculture Project.” Final Project Report. (see Chapter 7 for a more detailed assessment of the private finance opportunities in CSA). 15 Country Climate and Development Report Box 1. Digital infrastructure and literacy in rural areas Rural areas have limited digital infrastructure and literacy. Through Sri Lanka’s National Strategy on Artificial Intelligence (AI), the government is committed to enhancing AI adoption to strengthen digital payments and rural dissemination while improving agricultural productivity.49 This boosts business growth by helping smallholders overcome challenges of accessing digital marketplaces and payment platforms. Efforts such as the Inclusive Digital Agriculture Transformation initiative aim to improve data integration and provide dashboards. Recommended actions: • Explore the usage of AI and data analytics for climate risk assessment, value chain optimization, and real- time agricultural decision-making (that is, precision farming and real-time water management which can boost productivity and climate resilience). • Strengthen rural digital connectivity and address the issues of fragmented data-sharing framework/ policies. • Conduct targeted digital literacy and capacity building for the rural workforce to effectively adopt EWS and other digital solutions. Investment in enabling infrastructure will accelerate economic growth and skills development while supporting MSMEs. Resilient enabling infrastructure will also support inclusive regional development, helping rural businesses overcome limited local demand and access to export markets. Targeted investments should be made in connectivity and transportation as well as other essential infrastructure, unlocking the high potential of agriculture and agribusiness, fisheries, tourism, and other sectors to create jobs. Lifting regulatory barriers, improving labor, land, tax and trade policies, and addressing structural constraints will support the growth of rural enterprises. Improvement in the regulatory environment for private sector development can be supported through streamlining business registration and licensing processes for MSMEs and introduction of innovative financing mechanisms for rural enterprises. The launch of the new secured transaction registry and National Credit Guarantee Institution could enhance credit access for MSMEs, in addition, establishing special economic zones in rural areas with infrastructure support to attract foreign direct investment (FDI) and investing in foundational skills of youth and women can help build resilience of these jobs. Digital opportunities also offer promise (Box 1). Recommendations to leverage non-farm livelihoods • Foster business development skills, including providing credit support for firms targeting value addition, with a focus on women and youth. • Improve regulatory barriers to streamline business registration and licensing. • Support private sector involvement in rural economies through the operationalization of the secured transaction registry and national credit guarantee institution. • Establish special economic zones with infrastructure support to attract FDI. 3.5 Sustainable fisheries are critical for food security Sri Lanka’s fisheries support the livelihoods of approximately 2.7 million people, 12 percent of the population.50 Coastal exports such as lobsters, sea cucumbers, crabs, and mollusks account for 17 percent of fisheries sector export earnings. Coastal ecosystems also support a growing nature-based tourism industry—snorkeling, whale watching, 49 For more information on Sri Lanka’s National AI strategy, see https://mode.gov.lk/. 50 World Bank. 2024. “Investing in Sustainable Coastal Fisheries Management for Increased Productivity, Jobs, and Resilience.” World Bank, Washington, DC. 16 Country Climate and Development Report mangrove tours, and sport fishing—that generated 4.3 percent of GDP in 2023.51 These sectors offer significant opportunities for income diversification and local economic multipliers. Yet, the long-term viability of both fisheries and marine tourism is jeopardized by unsustainable fishing, pollution, and weak governance of marine protected areas. The sustainability of fisheries is essential for national nutrition. Fish provides more than 50 percent of animal-source protein in Sri Lankan diets and plays a central role in nutrition across all income groups. However, with 75 percent of fish stocks overfished,52 climate-driven declines threaten to deepen an already critical nutritional challenge, where 35 percent of women of reproductive age are anemic, and 18 percent of infants are born underweight.53 Climate change is set to intensify these pressures. Rising sea temperatures, more frequent coastal flooding, and the degradation of coral reefs and mangroves will reduce fish populations. Under a high-emissions scenario, Sri Lanka’s Exclusive Economic Zone could experience a 16–44 percent drop in maximum catch potential by 2050.54 If export value losses were proportional to these maximum catch potential reductions, Sri Lanka could lose up to US$118 million annually under the worst-case scenario—nearly half of current fisheries export value. Climate risks are unevenly distributed. Kalpitiya in Puttalam District is identified as highly vulnerable, with moderate vulnerabilities across western and southern coastal divisions. SLR and flooding pose high to moderate risks for fishing communities on all coasts. Coastal erosion is also accelerating, especially along the western shoreline, where storm surges and land loss threaten beach-based fishing operations, infrastructure, and housing. As fishers are forced to travel farther offshore in search of declining stocks, they face escalating fuel costs, greater safety risks, and increased displacement. Enhancing the resilience of coastal fishing communities requires a multifaceted approach. Improved stock assessment data are essential to avoid overfishing, while better understanding of climate impacts on key habitats can guide long-term planning.55,56 Structural solutions should be informed by integrated land-use assessments that consider sand movement, coastal dynamics, and climate-resilient design, especially nature-based solutions (NbS). Ecosystem conservation and restoration can also support the growth of ecotourism. Upgradation of supply chains – including fleet efficiency and cold storage – would help reduce postharvest losses. Finally, effective policy implementation, particularly co-management of fisheries involving GoSL, fishing communities, and other stakeholders, will be critical for long-term sustainability. Recommendations to enhance resilience of fisheries • Develop a fisheries management plan for priority resources that accounts for climate change’s impact and fisheries co-management, including using data and technology for enhanced monitoring. • Implement strong control and enforcement measures to reduce overfishing and ensure the sustainability of fish stocks. • Improve infrastructure, such as landing sites and cold storage, to reduce waste and improve post-harvest handling. • Enhance value addition by strengthening processing capabilities to promote value-added products and provide financial and technical support to small-scale processors. • ·Promote economic diversification within fisheries. 51 Ibid. 52 Food and Agriculture Organization (FAO). 2023. Fisheries and Aquaculture statistics, derived from FishStatJ https://www.fao.org/fishery/en/ statistics/software/fishstatj. 53 Jayatissa, R., et al. 2022. «Sri Lanka National Nutrition and Micronutrient Survey 2022.» Cited in World Bank, “Investing in Sustainable Coastal Fisheries Management for Increased Productivity, Jobs, and Resilience,” 18. World Bank, Washington, DC. 54 World Bank. 2024. Full Report: Investing in Sustainable Coastal Fisheries Management for Increased Productivity, Jobs, and Resilience. 55 Arulananthan, K. 2016. “Climate Change Impact on Coastal Fisheries and Aquaculture in Sri Lanka” in Giri, S. S. ed., Climate Change Impact on Coastal Fisheries and Aquaculture in South Asia. Dhaka, Bangladesh: SAARC Agriculture Centre, Dhaka, Bangladesh, 170p. https://www.sac.org. bd/archives/publications/Climate%20Change%20Impact%20on%20Coastal%20Fisheries.pdf. 56 Ministry of Mahaweli Development and Environment (MoMDE). 2016. National Adaptation Plan for Climate Change Impacts in Sri Lanka 2016 17 Country Climate and Development Report 3.6 Ensuring connectivity through resilient transport networks The increased vulnerability of the road network to climate and disaster risks can adversely impact rural communities’ connectivity to critical social and economic opportunities. Road transport is the dominant transport mode in Sri Lanka, carrying 95 percent of passenger and 98 percent of freight traffic. It plays a critical role in connecting rural communities to economic and social opportunities in urban areas. While GoSL has made notable progress in expanding the road network, it is highly exposed to floods. Due to outdated construction methods and inadequate design, the secondary and tertiary network in mountainous regions is more vulnerable than the national road network. Investment in resilient transport networks will help advance economic growth in rural economies. A substantial part of the road network shows some level of damage even under a relatively frequent flooding event.57 Severe damage or complete collapse is expected for a significant number of bridges and roadways even during a 1-in-20-year flood event. Flood-induced damage includes indirect losses, such as service disruptions, as well as the direct loss associated with the damage to assets. The expected combined annual loss to the transport network is US$66 million. To help prioritize interventions, GoSL should focus on critical transport links identified through a network criticality analysis, prioritizing high-poverty areas, underserved regions and populations, ensuring that all new infrastructure utilizes climate-resilient designs. Recommendations to invest in transport resilience • Enhance resilient transport connectivity in high-poverty areas, underserved regions and populations. • Undertake a network criticality analysis to identify critical transport links most at risk. 3.7 Water supply and sanitation services for rural resilience Access to safely managed water and sanitation delivers improved living standards, reduces poverty and malnutrition, and boosts workforce productivity. These services also support industries and tourism. Despite significantly increased access over the past decade, 40 percent of Sri Lankans still lack access to safely managed water services. Only 15 percent of communities have access in the northern province, with extremely low coverage in tea estate communities. Safely managed sanitation is also a growing concern, with access for only 11 percent of the population and less than 3 percent connected to wastewater treatment, mainly in urban areas. Inadequate access to safely managed water and sanitation disproportionately affects women and children. Sri Lanka has a notably low female workforce participation-- 34 percent of the economically active population – which is even lower in the rural areas. Poor-quality groundwater directly affects the lives of 4.7 million people (22 percent of the population). Currently, there is no nationwide assessment of groundwater quality. Surface water pollution is also a significant issue. This is further exacerbated in urban rivers, where the practice of discharging untreated domestic and industrial waste contributes significantly to deteriorating water quality. A major concern is the presence of fecal coliform, particularly in the lower and certain upper reaches of the Kelani Basin, where population density is high. Contributing factors include poor sanitation practices, the release of untreated or partially treated sewage, and inadequate urban infrastructure for wastewater treatment. A US$7 billion investment is needed to close access gaps to reach 80 percent coverage and manage water pollution by 2030. The National Water Supply and Drainage Board (NWSDB) currently provides water to 50 percent of Sri Lankans in areas with higher population density. Community- and local-government managed schemes provide an additional 14 percent coverage. While the financial position of NWSDB is improving, it is not yet creditworthy, and its legacy debt poses a significant challenge. Clarifying its mandate in rural areas can help NWSDB meet its internal cost recovery targets while ensuring lagging regions are included in future planning. There have been efforts to improve NWSDB’s – 2025. https://www4.unfccc.int/sites/NAPC/Documents%20NAP/National%20Reports/National%20Adaptation%20Plan%20of%20Sri%20 Lanka.pdf. 57 A transport network planning and analysis decision-support tool was developed to analyze Sri Lanka’s Road network. The analysis undertook a network criticality analysis, hazard mapping and vulnerability assessment, and infrastructure damage assessment to assess possible interven- tions to support Sri Lanka’s socioeconomic functions, identify links whose disruption would significantly affect traffic flow and increase travel costs, and identify those critical for accessibility to essential amenities. 18 Country Climate and Development Report operational performance, including a steady improvement in water sales and a doubling of the tariff between 2020 and 2023. However, tariffs do not provide full cost recovery, and additional public funds are needed to expand coverage, especially in rural areas. It is expected that only by 2030 will the utility be able to access commercial financing, in part due to its large legacy debt of US$1.2 billion. Additional efforts to enhance NWSDB’s operational efficiency and creditworthiness would help shift this timeframe closer. • Recommendations for resilient water supply and sanitation • Address the growing pollution in ground and surface water: Improve and expand wastewater treatment, especially where communities rely on groundwater for potable water, and better manage agricultural and industrial effluent. • Accelerate progress in achieving 100 percent safely managed water supply and sanitation coverage: • Augment NWSDB’s efficiency and operational performance to attract commercial financing and unlock finance. • Utilize public investments to invest in lagging regions in the north and vulnerable communities, such as estate workers. 19 Country Climate and Development Report 4. Investing in Livable Cities Sri Lankan cities have been negatively impacted by climate change and economic shocks. Two-thirds of national GDP come from cities.58,59 However, the last three years have witnessed a downward trend in economic activity and a tripling of urban poverty due to the pandemic and the economic crisis.60,61 Cities also face heightened climate risks from floods and extreme heat.62 Cities will play a key role in driving the country’s economic recovery by increasing resilience and advancing cleaner development. Sri Lanka can leverage its growing urbanization by boosting the productivity of people and enterprises in cities. This growth will require significant infrastructure, providing an opportunity to advance resilient infrastructure that can manage flooding, extreme heat, and landslides, and SLR. Cities and rural areas are symbiotically connected through water, food, and ecosystem services. Colombo’s flood resilience depends on the health of the Kelani River Basin, which supplies 80 percent of the city’s drinking water. The Dry Zone’s irrigation systems regulate water flows for urban hydropower generation. Conversely, urban demand for agricultural products drives rural land use decisions. However, unplanned urbanization threatens these linkages: encroachment on wetlands reduces natural flood buffers while pollution from cities contaminates rivers that are critical for rural irrigation. Strengthening these connections requires landscape-level zoning and incentives for NbS. 4.1. Sri Lanka can leverage urbanization to create livable and more productive cities Most urban growth in Sri Lanka is unplanned and has resulted in transport congestion, environmental degradation, health risks, and air and water pollution. Built-up areas in provincial capitals grew at an average rate of 6.4 percent per year from 1995 to 2017 and accounted for one-third of Sri Lanka’s population (Figure 8).63 Colombo is the largest urban area with the highest contribution to national GDP. Low-density sprawl is evident in most other cities.64 Unplanned urban sprawl can lead to greater informal settlements in areas at risk of flooding. While Sri Lankan cities measure relatively well in access to improved water, sanitation and electricity, significant challenges remain in wastewater treatment, drainage, solid waste management, transport, affordable housing and access to public open spaces. These constraints undermine livability65 and restrict economic growth. 58 The Western Region Metropolitan and eight other provincial capital cities in Sri Lanka account for two-third of the national GDP, with the majority attributed to Colombo and the western region. The Western region, especially Colombo, which hosts most of the country’s population, the largest port, industries, and assets, contributes 40 percent of GDP. Almost one-third of non-agricultural entities are based in the western provinces, with large establishments and formal industries concentrated in Colombo and its adjoining districts. The Port of Colombo handles over 95 percent of the total cargo by volume. 59 Un-Habitat. 2018. State of Sri Lankan cities. 60 Based on the night lights data analysis of nine provincial capital cities. 61 World Bank. 2023. Sri Lanka Development Update (2023): 32–34. 62 According to GOSL’s National Physical Planning Policy and the Plan 2017-2050, by 2016, nearly half of the population was more than 40 percent urbanized and concentrated in about one-10th of the total land area. By 2030, 80 percent of population will be more than 60 percent urbanized and spread throughout the island. As per recent geospatial analysis using earth observation data done for this CCDR, the absolute population living in peri-urban areas or areas with urban characteristics is estimated at almost three times the city population. As per UN-Habitat state of Sri Lankan cities, almost 7.39 million live in urban areas that includes peri-urban areas as opposed to 1.47 million within city boundaries. 63 Government of Sri Lanka, National Physical Planning Policy and the Plan (2017-2050). 64 As per the 2012 census, less than 30 percent of households have sewerage connections to their dwellings, which include Greater Colombo: around 42 percent of households in Colombo city practice onsite waste disposal (State of Sri Lanka cities 2018). 65 Livability is defined as quality of life. Despite definitions of livability varying according to the context in which it is used, the notions of safety and stability, quality of life, amenities, public transport, infrastructure emerged in most definitions. Some of these indicators are tangible such as amenities and infrastructure while safety, quality of life are intangible. Nevertheless, in literature, livability is a subset of concepts of sustainability but is defined in the point of view of the individual (Source: 2019. Tennakoon M. Understanding livability: related concepts and definitions). 20 Country Climate and Development Report Figure 8. Urban Growth Within and Outside Municipal Boundary in Key Cities from 1975 to 2014 Source: World Bank Analysis. Cities in less-developed regions have inadequate access to basic services and are highly vulnerable to climate change risk. Jaffna and Trincomalee are highly vulnerable to climate and disaster risk and have high poverty.66 Jaffna has the lowest proportion of people connected to piped water (44 percent) among nine provincial capitals. Similarly, only 1 percent and 9 percent of residents, respectively, in Jaffna and Trincomalee have access to sewerage. Residents of remote rural areas in the Northern, Eastern and Central areas suffer from limited access to cities, jobs and services due to low-quality roads, which are impassable in times of floods, and low-capacity logistics services.67,68 Sri Lankan cities can invest in greener solutions and enhance livability. Many of the country’s climate commitments will be realized in cities. Local governments can enhance urban livability through several proven solutions, such as investing in resilient infrastructure, establishing urban forests and public spaces, retrofitting existing buildings and designing new energy-efficient and resilient buildings and housing, upgrading informal settlements, utilizing NbS, using renewable energy, and promoting clean transport, and e-mobility.69 If managed well, urbanization can fuel productivity, stimulate innovation, and spur job creation. For example, in the late 1970s, the concentration of the garment industry in the metro Colombo region played a vital role in helping to drive export-led growth. Key opportunities include revitalizing downtown Colombo and Kandy, better managing growth on metropolitan peripheries, and enhancing the connectivity of Batticaloa and Jaffna. The building approval process lacks width and scope and is poorly enforced, contributing to greater physical exposure and vulnerability to disasters. Sri Lanka does not have a national building code to regulate construction.70 In 2015, the National Building Research Organization (NBRO) developed planning and zoning regulations to address vulnerability to landslides hazard, with particular focus on nonengineered housing. The implementation of urban reforms requires investment in the technical capabilities of local government’s building stock and permit issuance platforms, staff’s technical capabilities to respond to climate impacts, regulate new energy-efficient resilient buildings, improve EWS, and enhance planning and response in the context of floods and heatwaves. GoSL needs to improve climate-resilient urban planning and mobilize financing. As mentioned in Chapter 2, institutional 66 National Accounts, Department of Census & Statistics (DCS), 2024. 67 GoSL and UN-Habitat. 2018. State of Sri Lankan cities report. 68 For example, only 20-25 percent of rural roads in Northern Province were in good condition after the civil war. Source: A. O’Donnell, M.G. Razaak, M. Kostner, and J. Perumpillai-Essex. 2018. Shadows of Conflict in Northern and Eastern Sri Lank Socioeconomic Challenges and a Way Forward. International Development in Focus. Washington, DC: World Bank. doi:10.1596/978-1-4648-1344-3 License: Creative Commons Attribution CC BY 3.0 IGO. 69 Ministry of Environment. 2021. Amendment to NDC. Updated NDC – Sri Lanka. 70 In 2019, the Cabinet approved a multi-agency technical committee for the development of a National Building Code for Sri Lanka, including the UDA, the Construction Industry Development Authority (CIDA), the NBRO and the Department of Building. No new Code has been approved yet. 21 Country Climate and Development Report and jurisdictional fragmentation creates a barrier for integrated and climate resilient city development. Most local governments have limited technical capacity and resources. A lack of disaggregated local data also prevents evidence- based planning for livable cities. Cities are fiscally constrained and depend on intergovernmental fiscal transfers for infrastructure investments. As a result, the 2023 Public Expenditure Review Committee recommended that funding for local government authorities be stopped. Municipal and urban councils’ funding will gradually reduce within five years; this is expected to severely impact municipalities’ ability to fund capital investments.71 Cities can introduce reforms in municipal tax administration (collection efficiency of property tax is currently 60 percent) to improve municipal revenues.72 At present, the ratio of property tax to GDP is 0.06 percent.73 Cities are not leveraging own source revenue (OSR), have not explored commercial financing options, and most do not have a credit rating. As discussed in Chapter 7, financing instruments like green bonds and climate-focused performance grants could mobilize private finance. PPPs can encourage private sector investment in climate-smart infrastructure, such as green buildings and public transport. Additionally, local authorities need to develop their institutional capacity to plan capital investments, identify and implement bankable projects, and leverage funding sources such as property taxes and land value capture for low carbon, climate-resilient projects. To address cities’ fragmented data and systems, low digital capabilities, and underutilization of digital tools for revenue generation, there is a need for a comprehensive digital framework for SMART cities. A comprehensive digital framework is crucial for sustainable urban development in Sri Lanka. Expansion of broadband and the eLand Registry74 can enhance land management and transparency. Digital platforms can boost municipal revenue, while initiatives like GoSL’s Digital Industry Parks help to drive innovation, job creation, and collaboration. Recommendations to use an evidence-based approach to identify climate risk hotspots and revise urban development plans • Collect and validate city level datasets on urbanization trends, climate risk and climate-change impact to conduct vulnerability assessments and identify climate risk hotspots.    • Develop city-level climate action plans. • Revise urban zoning, development plans and land use planning to promote climate smart urban form, incentivize densification of safer areas and avoid carbon lock-in risk • Conduct integrated spatial planning for underdeveloped regions in consideration with urban growth, economy and climate. • Expand broadband and digital infrastructure to enable smart city technologies. • Create transparent public data management systems. • Strengthen local government capacity through technical training in revenue generation, and support improved municipal finance. • Improve building codes for resilience, build transparency and accountability among agencies responsible for building and land permitting processes, streamline building approval processes, and digitalize building and land records. • Improve access to sanitation and sewerage management, especially in the north and east regions. 71 For municipal councils, 20 percent of staff salaries should come from OSR in 2024, and, by year 5 (2029), 100 percent of staff salary should come from OSR. The remaining local governments will be curtailed with reduced funding from the government case by case. Source: Ministry of Finance, Economic Stabilization and National Policies, 2023. Recommendations of the PERC. 72 At present, for fiscal year 2023, OSR is at 0.23 percent of GDP, excluding government transfers. 73 Numbers pertain to FY 2023. 74 See https://icta.lk/projects/digital-government/e-land-registry-system-elr-for-land-registries. 22 Country Climate and Development Report 4.2. Managing climate risks will be paramount for productivity and livability75 Sri Lankan cities have seen a sharp escalation over the last several decades in flooding, urban heat, and other climate impacts; unplanned urban expansion will exacerbate these risks in the future (Box 2).76 Flooding will continue to be a major and recurrent risk. Galle, Matara and Kurunegala are projected to receive 45-50 mm of precipitation on their wettest days77 by 2040-59, 20 percent higher than current levels. Higher temperatures and the urban heat island (UHI) effect will create inhospitable conditions. 75 This section is based on risk analysis for flood, drought, urban heat, and climate risk projections. It includes nine provincial capitals (Anuradhapura, Kurunegala, Kandy, Greater Colombo, Ratnapura, Trincomalee, Galle, Badulla and Jaffna) and three cities (Matara, Puttalam and Batticaloa). (Source: City Resilience Program, 2024. Urban Climate Risk Analysis). 76 Walsh 2021. 77 Defined as days with precipitation above the 95th percentile. The climate projection results in this analysis are drawn from the World Bank’s Country Climate Knowledge Portal (https://climateknowledgeportal.worldbank.org/#country-map), which computes based on CMIP6. CMIP6 differs from its predecessor, CMIP5, in that it presents scenarios as SSPs, instead of the RCPs used in CMIP5. GoSL is currently in the process of updating its climate projection sources to CMIP6. Note that while the SSP5-8.5 scenario is useful for understanding the potential risks and impacts of high emissions, it is not selected in this analysis because it is an extreme scenario considered unlikely to happen. 23 Country Climate and Development Report Box 2. Hazards and climate risks in 12 Sri Lanka cities Pluvial (Rainwater) Flooding & Built-up Area Exposure Fluvial and pluvial flood hazards pose significant threats to most cities, with Greater Colombo being particularly vulnerable due to its extensive built-up areas and rapid urban expansion. Row 1: Anuradhapura, Badulla, Batticaloa, Galle In 1985-2015, built-up areas in the 12 cities grew by 105 percent, while built-up areas exposed to fluvial and pluvial flood hazards grew by 180 percent and 112 percent, respectively. Row 2: Greater Colomo, Jaffna, Kandy, Kurunegala Row 3: Matara, Puttalam, Rathnapura, Trincomalee Coastal Flooding and Economic Exposure Coastal flooding is a concern for cities in the west, with Jaffna, Greater Colombo, and Puttalam facing potential impacts on critical areas. Continued outward expansion will push some built-up areas into flood zones. Extreme precipitation is projected to intensify across Coastal flood zones overlaid on the 12 cities, potentially DGP compounding coastal and Top left clockwise: other flood risks. Greater Colombo, Jaffna, Puttalam, Batticaloa Urban Heat Urban heat is a growing concern, with summer land surface temperatures exceeding 50°C in some areas. Continued urban expansion is projected to exacerbate heat island effects, leading to increased health risks and reduced productivity. Green infrastructure and heat adaptation plans are essential to combat heat. Source: City Resilience Program (2024), Urban Climate Risk Analysis. 24 Country Climate and Development Report Flooding poses the greatest risk to livability.78 Greater Colombo is at the highest risk due to its concentration of people, assets, and economic activities. Haphazard land use, unplanned urban growth, reclamation of low-lying land, and increase in impervious surfaces reduces the ability of the land to absorb water, leading to higher runoff and greater vulnerability to flood events. Rapid urbanization has seen a huge expansion of exposed built-up areas: Greater Colombo and Trincomalee’s built-up exposure has tripled in three decades. In May 2016, flooding in Colombo affected more than 340,000 people and caused US$310 million in economic damage.79 Similarly, in cities like Galle, inadequate stormwater drainage infrastructure further exacerbates flooding,80 which calls for an integrated approach to urban planning that optimizes flood risk reduction and connectedness with the rural landscape to manage flow and urban expansion. Continued urban expansion onto the floodplains is placing an ever-increasing number of people at risk. Around 25 river basins are susceptible to flooding, particularly in the Kelani, Kalu, Niwala, Attanagalu Oya and Gin River basins. In Greater Colombo, a 1-in-10-year flood scenario is likely to impact newly built-up areas to the east of the city, directly affecting infrastructure and placing educational and healthcare facilities as well as residents at risk. A similar scenario is likely to play out in Galle. Urban areas in the southern and western provinces, especially during the rainy season, are most at risk. Most cities are also expected to experience some disruption of community infrastructure because of fluvial flooding. Pluvial floods impact high GDP regions within most cities by disrupting access to infrastructure. Fluvial seasonal and flash flooding are common in Sri Lanka, posing a threat mainly to Greater Colombo, Ratnapura, and Galle. Across a 12- city analysis, built-up areas grew 105 percent from 1985 to 2015. Exposed areas in Greater Colombo expanded from 20 square kilometers (km2) to 65 km2. A 1-in-100-year flood in the Greater Colombo area could potentially impact up to 10 percent of Sri Lanka’s GDP. Between 1985 and 2015, the area exposed to pluvial flooding in Greater Colombo grew from 20 to 65 km2. Coastal flooding is also projected to cause significant damage, particularly in the Western province.81 A 1-in-10-year coastal flood event is likely to impact critical areas of existing settlements in cities such as Jaffna, Greater Colombo, and Puttalam, directly impacting infrastructure and placing residents and services at risk. Like with other flood risks, coastal flood areas coincide with high GDP locations. The country’s susceptibility to coastal flooding is further exacerbated by factors like erosion and the lack of protective features such as sand dunes, beaches, and mangroves. In a 100-year period, SLR could affect over 10 percent of urban infrastructure in coastal cities.82 Shoreline erosion could lead to property damage, degradation of habitats, and loss of land. Coastal areas in Puttalam, Mannar, Hambantota and Galle districts will face the highest threat.83 Some cities (notably Jaffna) have already seen rapid erosion. Due to climatic and geographic features, Kelani, Kalu, Nilwala, and Gin River basins are prone to flooding. Deforestation and mining along with inadequate drainage infrastructure exacerbate the problem. SLR will also impede storm water drainage and lead to salinity intrusion in drinking water schemes in coastal cities.84 Between 2019-22, heat stress approached dangerous levels in low-elevation parts of the country, with cities experiencing enhanced impacts due to the UHI effect.85 Expansion of impervious land, intensification of land use, degradation of wetlands, reduction in green areas, and increase in air pollution all contribute to the UHI effect. By 2040-59, all nine provincial capitals are expected to experience a rise in mean temperature (0.6-1.0oC). Drier cities would potentially reach maximum daily temperatures of up to 34oC.86 Cities will also endure longer warm spells in the coming decades.87 78 Urban flooding can be caused by a wide range of sources, including coastal (such as tidal, storm surge, or wave overtopping); fluvial (floodwater from a watercourse); and pluvial (floodwater that has not been able to get into a watercourse). (Source: Scott F. et. al. 2023. Urban Flood Risk Handbook: Assessing Risk and Identifying Interventions. World Bank). 79 Climate Risk Assessment Report, West Province; Findings from a COVRI Assessment: STIMSON Center; August 2022. 80 Discussion with the local municipalities (April 2024). 81 Coastal flooding was modeled by combining the effects of SLR, storm surge, and other extreme tidal conditions. 82 GoSL. 2018. Status of Sri Lankan Cities: Report published by the Ministry of Provincial Councils, Local Government and Sports, GoSL with technical assistance from UN-Habitat. 83 Disaster Profiles of Sri Lanka; UNDP Book; Chapter 7; Disaster Management Center; GoSL. 84 Ministry of Environment. 2021. Amendment to NDC. Updated NDC – Sri Lanka. 85 https://ui.adsabs.harvard.edu/abs/2022AGUFMGH26A..03A/abstract. 86 City Resilience Program, 2024. Urban Climate Risk Analysis. 87 This is indicated by the Warm Spell Duration Index, which measures the length of heat waves in days. Continued urban land expansion will result in increased temperatures by 2050. 25 Country Climate and Development Report Rapid and unplanned urbanization resulted in a 30 percent increase in land surface temperatures between 2010-15. Higher surface temperatures correlate with built-up areas and lower temperature values are associated with blue and green infrastructure.88 More than 200 km2 of built-up areas in Greater Colombo experiences temperatures equal to or exceeding 35oC, a figure significantly higher than that of other cities analyzed. Frequent incidences of extreme heat pose a risk to productivity and human health, making cities less livable.89 In addition to impacting people, rising temperatures drive up energy demand for cooling, strain the power grid, and contribute to increased emissions.90 The poor are the most affected, as a lack of resources and infrastructure limits their access to affordable cooling solutions. This amplifies existing social inequalities and gender vulnerabilities. Potential heat adaptation costs could amount to an estimated US$263 million by 2050 in four Sri Lankan cities with the highest heat stress. The four cities include Colombo, Jaffna, Point Pedro, and Wennappuwa, with Colombo bearing the bulk of the cost due to its large population. Low-income families living in unplanned settlements lack the resources and knowledge to invest in effective ventilation systems. Adaptation measures such as urban greening, cool roofs, and emergency response and preparedness can protect residents from the harmful health effects of extreme heat including heat exhaustion, heat stroke, cardiovascular and kidney diseases, and even death. These measures should be reinforced by institutional reforms to support climate-smart planning, efficient coordination among sectors, including health and the built environment, as well as effective allocation of resources. While drier conditions are concentrated in rural areas, some cities have also experienced drought. Some drought- related water shortages are already evident in cities located in the higher watersheds, such as Nuwara Eliya and Badulla.91 The use of integrated urban water management approaches for watersheds can improve water availability and reliability in drier months. Although landslides are primarily concentrated in rural areas, some cities (Ratnapura, Kandy and Galle) have also been affected. As urban areas grow beyond city boundaries, many cities face landslide risk. Deforestation, urban expansion, and unplanned settlements have led to the loss of natural vegetation cover. Weakened soil and rock layers are more susceptible to rainfall-triggered landslides, mostly in the southwestern part of the country. Particularly during monsoon seasons, landslides drag debris onto houses and roads, disrupt transportation and cause large-scale displacement. Wetlands are extremely important ecosystems but are declining at a rapid rate. If the 1.2 percent annual declining trend continues, one-third of wetland areas will be lost by 2038.92 This will have important environmental impacts, including loss of resilience to flooding. Colombo city is built around an interconnected system of natural and man-made wetlands, and the greater metropolitan area has many marshes, lakes, and paddy fields. Forty percent of the city’s flood water is held by an intricate network of wetlands; during intensive rainfall events, the wetlands can store several tens of million cubic meters of water.93 However, unauthorized land filling, construction, waste disposal, pollution and clearing of natural vegetation are leading to encroachment. A decline in wetlands has adversely resulted, for instance, in an escalation in water and air pollution as well as vector-borne diseases, reduction in green surface and agricultural lands, and amplification of the UHI effect.94 Successful management of wetland systems offers a host of benefits. Due to evaporative cooling, wetlands reduce air temperatures, more than half of urban Colombo benefits from this natural air conditioning. Wetlands are also a buffer against the negative impacts of airborne pollutants on air quality. Over 250 plant and almost 280 animal species inhabit Colombo’s wetlands, offering the potential for recreation, tourism, urban agriculture, and other income 88 A combination of green (vegetation) and blue (water retention structures) interventions that use the best of both types to manage flood risk and provide ecological benefits. Source: CRP, 2023. Urban Flood Risk Handbook: Assessing Risk and Identifying Interventions. 89 Mayantha Madurasinghe, Damitha Samarakoon, R. Magotra, and N. Jha, “Vulnerability Assessment of Households to Socio-Economic Impacts of Heat Stress in Colombo” (Asia-Pacific Network for Global Change Research, 2023), https://www.apn-gcr.org/publication/vulnerability-as- sessment-of-households-in-colombo-sri-lanka-to-heat-stress/. 90 The increase in demand associated with rising temperatures can be captured under an indicator called Cooling Degree Days, which represents the total burden of cooling required to maintain temperatures at the optimal level for human comfort. Source: Sri Lanka Country Climate Profile (World Bank, 2021). 91 Ministry of Environment. 2021. Amendment to NDC. Updated NDC – Sri Lanka. 92 GoSL. 2016. Technical Report 3: Physical Features and Hydrologic and Hydraulic Issues; Metro Colombo wetland management strategy. Met- ro Colombo Urban Development Project (MCUDP) No. MCUDP/PHRD/03. Colombo, Sri Lanka. Comprehensive risk-benefit assessment and multi-disciplinary technical assessments of the Metro Colombo Urban Development Project (MCUDP). 93 Ibid. 94 Hettiarachchi, M., T.H. Morrison, D. Wickramsinghe, R. Mapa, A. De Alwis, and C.A. McAlpine. The eco-social transformation of urban wetlands: A case study of Colombo, Sri Lanka. 26 Country Climate and Development Report generation activities.95 Wetland systems also improve livelihoods for surrounding communities in Colombo, with over 60 percent of local households directly benefitting from products derived from the wetlands; these areas also contribute to the city’s food security.96 However, if Colombo loses its wetlands, the city risks losing 1 percent of its GDP, on average, every year due to flood damage alone; floodwater levels would increase by 1.8 meters above current levels during severe rainfall events.97 GoSL can build on existing efforts to boost conservation of wetland resources as NbS for flood mitigation and reap other socioeconomic benefits. The Wetland Conservation Project (1991-98) has made strong progress, including the creation of the National Atlas of Wetlands, National Wetland Steering Committee, and draft policies to ensure sustainable management and conservation of wetlands. To date, several laws, policies, strategies, and action plans exist.98 However, the continued decline in wetlands calls for urgent action. This includes revisiting regulations to integrate wetland areas formally into urban landscape designs as green infrastructure and declaring wetlands as “no development zones” to regulate encroachment. Increased investment in restoring, preserving, and developing wetlands will also be critical, along with developing a network of wetland parks within Colombo that provides the public with managed access and opportunities for learning and recreation.99 Among other economic sectors, the tourism industry can be further affected by increased climate risks. Soil erosion and loss of biodiversity and green cover due to haphazard urban development could reduce the appeal of urban areas for tourists. Coastal cities and regions facing SLR, storm surges, and saltwater intrusion may suffer from declining tourist interest. Accelerated by SLR, coastal erosion has damaged beachfront hotels and roads in key areas like Negombo and Bentota. Due to rising sea temperatures, extensive coral bleaching has been reported in marine biodiversity hotspots like Hikkaduwa and Pigeon Island. These reefs are major attractions for snorkeling and diving, and their degradation has diminished the appeal of these destinations. Prolonged droughts, particularly in the Cultural Triangle (Sigiriya, Polonnaruwa, and Anuradhapura), have led to water shortages, affecting the appeal of these historic sites. Monsoon-related flooding has become more intense and unpredictable, affecting popular tourist cities such as Colombo and Galle. Heavy rainfall events, particularly during the southwest monsoon, have triggered landslides in the central highlands known for tea plantation (for example, Nuwara Eliya, Ella, and Kandy city), periodically disrupting transport and posing safety concerns. Recommendations to adopt integrated city-level climate risk management • Build multi-purpose reservoirs upstream and lowland river defense including bunds, flood walls,  NbS, wetland restoration and mangrove protection, and climate-sensitive urban design solutions. • Implement climate risk mitigation measures to manage floods and urban heat at city-levels, including EWS, improved building codes, and climate action plans. • Integrate spatial planning for lagging regions in consideration with urban growth, economy and climate.  • Expand broadband and digital infrastructure to enable smart city technologies.  • Create transparent public data management systems. • Integrate wetland areas formally into urban landscape designs as green infrastructure and declare wetlands as “no development zones” to regulate encroachment. 95 Plant species include nine endemic, nine nationally threatened and 11 nationally near threatened species. Animal species include 32 endemic species. GoSL. 2016. Metro Colombo wetland management strategy. Metro Colombo Urban Development Project (MCUDP). 96 Stories of Impact: -Urban Wetlands - A New Model for Urban Resilience in Colombo; A briefing note of the GFDRR-World Bank, undated. 97 Comprehensive risk-benefit assessment and multi-disciplinary technical assessments of the Metro Colombo Urban Development Project (MCUDP). 98 Five policies, six strategies and action plans, seven ordinances and acts, and three regulatory documents support wetland governance, the most recent being the Metro Colombo Wetland Management Strategy. 99 Successful examples include Baddegana wetland park under World Bank-funded Metro Colombo Urban Development Project and Diyasaru wetland park developed by GoSL. 27 Country Climate and Development Report 4.3. Sri Lankan cities have strong potential to invest in climate-smart solutions Emissions and air pollution are concentrated in urban centers, offering many opportunities to drive clean solutions, technology innovation and improved livability. Urban development trends in Sri Lanka are resulting in a more carbon- intensive economy.100 Urban-related activities account for 78 percent of total GHG emissions.101 There are several emission reduction opportunities that offer many benefits, including reduced energy cost, low-cost clean energy supply, and increased energy efficiency. These include mitigation of methane emissions from solid waste, growth of energy efficiency and green buildings, and planning for integrated, multi-modal, and clean transport solutions. Sri Lankan cities have a growing solid waste disposal problem, which contributes to higher methane emissions. Of the total 9,000102 metric tons of municipal solid waste generated per day, the Western Province accounts for 40 percent of the volume.103 About 55 percent of waste is collected in the Western Province and 25 percent in other provinces. Only 2 percent of the waste collected by local authorities is recycled; the informal sector plays a much bigger role in waste recycling. On average, 65 percent of solid waste generated in Sri Lanka is biodegradable organic mass with substantial moisture content, resulting in high methane generation. While there has been some progress with Colombo Municipal Council (CMC) advancing on recycling and PPPs for incineration plants, other municipal and urban councils will also need a sustainable waste solution for collection, treatment, recycling and disposal, moving to circularity and zero waste. PPPs can advance innovations in waste management, including methane capture and use. Green buildings have been gaining momentum but face some constraints. Several entities have developed green building certification standards, including the Green Building Council, Urban Development Authority, and sustainability council, as well as international efforts such as LEED (Leadership in Energy and Environmental Design) and IFC’s EDGE (Excellence in Design for Greater Efficiencies).104 However, there is a lack of standardized processes for certification. While basic regulations and building codes are in place, the absence of energy codes, lack of energy efficiency standards for appliances, and weak compliance mechanisms create disincentives for developers and consumers to invest. There is also limited awareness of green buildings among consumers. Skill developments could be enhanced, including certifying professional auditors for green buildings. Finally, there are financial constraints, including higher upfront costs; property developers have struggled to get financing due to the financial crisis. To promote green buildings, Sri Lanka needs a robust authorizing environment that includes building codes, standards, and compliance; capacity building with training for professionals and community awareness; and financial solutions. Green buildings represent an estimated investment opportunity of nearly US$600. These investments would offer significant electricity savings, a reduction in emissions, and other livability advantages. To realize this opportunity, GoSL can consider financial incentives such as lower interest rates, along with nonfinancial incentives, including higher floor/area ratio for buildings, property tax rebates and fast tracking of construction permits. Technology and design innovations offer promise, including implementation of natural ventilation and passive design strategies such as shading, insulation of walls and roofs, green roofs, window films and double-glazed windows. Increased use of private transport, inefficiencies in the public transport system and limited development in railways and nonmotorized transport are leading to growing road congestion, unsafe conditions, and higher emissions in urban areas.105 Vehicle ownership has increased more than three times since 2000 to 5.6 million vehicles.106 The operating fleet is dominated by private vehicles, which are growing at approximately 10 percent per annum. The bus industry suffers from unreliable, low-quality service, lack of adequate infrastructure, passenger-based revenue models, and a near absence of regulations to control service quality. Rail has seen little investment in modernization and expansion of the network and services. Most city centers have high-density pedestrian flows, with some links exceeding 5,000 pedestrians per hour, but lack proper sidewalks, crosswalks, and signalized intersections, creating an unsafe environment for pedestrians. Cycle lanes are absent in most cities. Unsustainable motorization poses a heavy economic impact: the cost of congestion in the Western Province is estimated at US$95 million per year for every 1 100 Livable cities scenario modeling report draft for CCDR inputs by CAPSUS, URL team. 101 The sources of urban emissions considered here include six key sectors: industrial processes, waste, buildings, electricity/heat, manufacturing/construction, and transportation. 102 Equivalent to about 0.41 kg/capita/day. 103 Ministry of Environment. 2021. Amendment to NDC. Updated NDC – Sri Lanka. 104 https://edge.gbci.org/. 105 Ministry of Sustainable Development, Wildlife and Regional Development. 2018. Sri Lanka Voluntary National Review on the Status of Imple- menting Sustainable Development Goals. 106 Ibid. 28 Country Climate and Development Report km/hour decrease in road network speed.107 This is further exacerbated by urban sprawl, which leads to longer trip distances to access jobs and other services. Developing a sustainable transport system based on the principles of avoid-shift-improve and better land- use-transport integration can substantially contribute to improving city livability. Integrated, multimodal transport planning and a low-carbon, inclusive transport strategy are required. Better integration of transport and land-use planning can help promote densification around key transport nodes, ensuring compact city growth, which will help reduce the need for travel.108 To shift private transport to public modes, Sri Lanka needs to invest in improved bus transport efficiency with better operational models, enhanced route planning and scheduling, efficient bus fleets, digitalization, and revenue models linked to performance (Box 3). The rail network needs better infrastructure, operational efficiencies and enhanced integration with improved first-last mile connectivity. Stricter traffic regulations and targeted incentives can help to change commuter behavior. Finally, electrification of both private and public vehicles is important (see Chapter 5), while improving the fuel efficiency of the existing vehicle fleet. Box 3. SMART transport SMART transport systems with multimodal services, electric fleets, and digital payments can cut emissions and improve mobility. Despite existing digitalized transportation systems, such as railway ticketing and digital payment systems, data sharing and interoperability are limited and intelligent transport systems such as eMotoring are compromised by weak regulatory frameworks. GoSL’s digital development plans do include SMART transport, but they could be broadened to promote inclusive economic development. GoSL can strengthen digitalized rail and motor transportation systems and create a supportive regulatory framework for effective implementation. There are also opportunities to drive a citizen-focused digital transformation in the transport sector by advancing integrated, data-driven digitalization, and using emerging technologies, such as AI and Internet of Things (IoT)-powered smart systems to optimize efficiency, accessibility, and user experience. Air pollution is becoming a serious problem for most cities. Due to increased transport emissions, all major cities are experiencing high levels of pollution, with average PM2.5 exceeding 5 microgram/m3, a threshold associated with a 6–13 percent increase in long-term mortality. Vehicle emissions are the biggest contributor to air pollution, while industry accounts for 15-20 percent of emissions. Improved monitoring of air quality and mitigation of emissions from the transport and industrial sectors will be critical for cleaner air and enhanced livability in cities. Integration of emerging technologies, such as AI-powered risk assessments, real-time monitoring, and data-sharing frameworks, into urban planning can enhance climate resilience; centralized platforms for climate, geospatial and urban data can improve risk mapping and planning.109 Furthermore, disaster resilience and recovery capabilities of the Lanka Government Cloud need strengthening; its capabilities are weak compared to those of data centers operated by private operators. It is imperative that these capabilities be strengthened to ensure critical data and services are not lost in times of natural disasters. It is also important to prioritize digital/telecom connectivity as an ‘essential service’ during emergencies. This was not the case during the peak of the economic crisis in 2022, when fuel shortages led to the shutdown of telecom infrastructure and disruptions of citizens’ digital communication and services. 107 With the current network speed in the Western Province estimated at 20 km/hour, the cost of congestion if the desired speed is 25 km/hour, a reasonably comparable value to other Asian cities, would be US$475 million per year. In addition, the CMR Transport Masterplan estimated the economic cost of all land transport operations within the Western Province for 2013 at US$2.68 billion and the do-nothing estimate for 2020 at US$3.38 billion, making traffic congestion around 10-15 percent of the cost of mobility. 108 Mendis, W. 2023. Strategic perspectives of integrating land use and transport development in Sri Lanka review. 109 Ben Dhaou, S., T. Isagah, C. Distor, and I.C. Ruas. 2024. Global Assessment of Responsible Artificial Intelligence in Cities: Research and rec- ommendations to leverage AI for people centered smart cities. Nairobi, Kenya. United Nations Human Settlements Programme (UN-Habitat). 29 Country Climate and Development Report Recommendations to accelerate low-carbon urban solutions • Develop an integrated urban mobility and city planning strategy to reduce the need to travel, shift to more environmentally friendly transport modes, and improve the efficiency of transportation and vehicle technology. • Develop a SWM master plan for CMC and the Greater Colombo Area for operational and financial efficiency of the SWM value chain, along with a country-wide sector assessment. • Invest in reliable data, research, and capacity building for GHG/air quality monitoring and improved coordination between responsible government and nongovernmental agencies. • Establish an enabling environment for green buildings through building energy efficiency codes, green building certification, and development of an energy efficient construction industry. • Undertake a comprehensive program to modernize and electrify the bus sector to promote modal shift to public transport and deploy electric buses, starting with the public bus fleet under Sri Lanka Transport Board management. • Invest in infrastructure to improve productivity and improve connections between urban and rural markets. 30 Country Climate and Development Report 5. Expanding Clean and Reliable Domestic Energy Achieving a reliable and affordable domestic energy supply is a pressing economic necessity. The country is dependent on hydropower but is facing increasingly unpredictable rainfall patterns that affect generation. Given that most viable hydropower sites have already been developed, GoSL has expanded thermal power capacity, leading to an even split between fossil-based and renewable power generation. This has created new vulnerabilities, as the country must import nearly all the fuel. The power sector requires approximately US$1 billion in annual fuel imports, while the transport sector is responsible for an additional US$3 billion worth of oil imports. Accounting for 20 percent of the country’s total imports, these fossil fuel imports place considerable strain on foreign exchange reserves, contribute to trade imbalances and render Sri Lanka vulnerable to exogenous price shocks in global energy markets. The recent fuel shortages and high energy prices highlight the links between imported fossil fuels, energy security, and affordability. Sri Lanka possesses significant untapped potential for domestic renewable energy generation, particularly in solar and wind. The country has set ambitious goals: generating 70 percent of its electricity from renewable energy by 2030 and achieving carbon neutrality in the power sector by 2050.110 The expansion of renewable energy offers substantial economic and resilience benefits: renewable energy investments would enhance Sri Lanka’s energy security, reduce long-term energy costs, and attract new private investment. A complete transition to renewable energy would significantly reduce energy prices compared to continued fossil fuel dependence, boosting the economy by approximately 1.2 percent of GDP by 2050 (see Chapter 6). While lower energy prices ultimately benefit low-income households, short- term transition costs require careful management. Additional developmental benefits include less congested cities that are more attractive for investment and tourism, improved public health through reduced air pollution, and lower long-term imports. Securing sufficient capital is the greatest constraint to renewable energy expansion. In the short term, Sri Lanka can pursue several strategies to build up its domestic energy resources, including encouraging competitive development of onshore wind and solar energy, strengthening grid infrastructure, creating enabling private financing mechanisms, promoting battery storage options, and adjusting energy pricing, while protecting vulnerable households. GoSL can also pursue strategies to alter its energy demand. Electrification of the transport sector (the largest energy user) is crucial for reducing oil imports but requires an aggressive ramp up in renewable energy capacity. 5.1. Sri Lanka is expected to experience rapid growth in energy demand The CCDR presents two policy pathways to examine how Sri Lanka’s energy supply and demand could evolve by 2053.111 The Intended Policy Scenario (IPS) pathway is based on the suite of policies associated with Sri Lanka’s climate commitments. Under this scenario, energy demand is projected to increase by 60 percent by 2053, with emissions growing by 50 percent. In contrast, the Net Zero Scenario (NZS) accelerates decarbonization to Net Zero by mid-century through advanced technologies that eliminate dependence on imported fossil fuels. While both scenarios exceed the aspiration of a business-as-usual case and assume similar GDP growth rates, they differ in their level of policy ambition, leading to distinct choices and energy mixes (Table 3). 110 Government of Sri Lanka, Ministry of Environment. 2021, September. “Updated Nationally Determined Contributions.” 111 More detail about these pathways can be found in the CCDR background paper titled “Energy Transition for Sri Lanka”. 31 Country Climate and Development Report Table 3. Policy Pathways for Sri Lanka’s Energy Supply and Demand Intended Policy Scenario Net Zero Scenario Description of scenario Based on existing and announced policies likely An ambitious policy pathway with emissions peaking to be financed and implemented in line with Sri by 2035 and carbon neutrality achieved in the power Lanka’s climate commitments, with net zero sector by 2053 through significant adoption of targets not yet met by 2050. renewable energy and advanced technologies. Modelling assumptions Methodology Both pathways employ the same integrated energy optimization approach combining five models. For demand, an energy transition model projects sectoral energy demand from a 2020 base year, working in tandem with an “avoid-shift-improve” transport framework for decarbonizing transportation. For supply, a power generation optimization model maps changes in electricity generation capacity and dispatch, complemented by a transmission and distribution model that addresses necessary reforms and investments for reducing distribution losses and integrating variable renewable energy. An investment model then calculates the incremental costs of achieving these energy transition targets, accounting for savings from reduced fossil fuel imports and encompassing investments in generation capacity, transmission infrastructure, efficiency measures, and industrial decarbonization. Shared modelling 1. Same economic, industry and demographic growth assumptions assumptions 2. Implicitly accounts for transition costs Results by 2053 Renewable energy deployed 14 GW 30 GW RE share of electricity 70% 100% generation Energy demand growth 60% 12% CO2 emissions 30.4 million metric tons 2.5 million metric tCO2e (offset by afforestation) Industry energy efficiency 30% reduction in TWh/USD 40% reduction in TWh/USD (excluding cement) Residential energy efficient 85% 100% appliance adoption Electric vehicle adoption rate Bus: 35% Bus: 80% (passenger transport) 4-wheelers: 30% 4-wheelers: 80% 3-wheelers: 50% 3-wheelers: 100% 2-wheelers: 35% 2-wheelers: 100% Taxi: 30% Taxi: 100% Transport mode distribution Road: 97% Road: 85% Rail: 3% Rail: 15 percent Investment needs (% of GDP) 3.9% 1.7% (incremental) 5.5% (total) Private investments (% of GDP) 2.5% 1.2% (incremental) 3.7% (total) Note: tCO2e= tons of carbon dioxide equivalent; Twh=terawatt/hour. Source: World Bank Analysis. 32 Country Climate and Development Report The ambitious transition under NZS would require incremental investments of US$104 billion (equivalent to an average 1.7 percent of baseline GDP) by 2053. Under this pathway, transport would account for 80 percent of investments, while electricity generation, transmission and distribution would require 17 percent. The private sector is assumed to provide roughly two-thirds of these investments, with the public sector covering the remainder. Private investment would primarily flow toward renewable energy capacity through independent power producers, electric vehicle adoption, building and industry upgrades, and about 85 percent of clean cooking solutions. The public sector would focus on electricity transmission and distribution infrastructure, transport infrastructure, and afforestation initiatives. These NZS investments would build upon the development investments already planned under the IPS, which total US$207 billion (equivalent to an average 3.9 percent of baseline GDP) by 2053 (see Figure 9). IPS investments follow a similar pattern, with the private sector financing nearly two-thirds and the public sector contributing just over one-third. Figure 9. Investment Needs under the IPS and NZS Pathways (% of Baseline of GDP) 8.0% 6.0% 4.0% 2.0% 0.0% 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 IPS NZS Source: CCDR modelling results, 2025. Both policy pathways assume that liquefied natural gas (LNG) imports will be used to displace some oil use, as GoSL has indicated the priority role of gas. At the same time, there are risks associated with LNG, including high upfront capital costs for new infrastructure; greater exposure to volatile global prices; foreign exchange depletion; and strained public finances. While illustrative, both policy pathways highlight the rapid growth in energy demand, particularly in the transport and industrial sectors. They also demonstrate how renewable energy expansion within the power sector, electrification of the transport sector, and enhanced energy efficiency in the industrial sector and commercial buildings can meet these challenges. 5.2. Scaling up renewable energy to ensure energy security and affordability The expansion of renewable energy generation has the potential to transform the power sector in Sri Lanka. Investments in domestically available renewable energy would enhance energy security, reduce long-term energy costs and fossil fuel imports (see Chapter 6) and provide new private sector growth opportunities. Electricity generation in the power sector amounts to approximately 16,000 gigawatt hours (GWh) from an installed capacity of about 4.7 GW, which comprises thermal power (59 percent), hydropower (22 percent), and other renewable energy sources (19 percent).112 This also includes close to 1.2 GW of installed rooftop solar capacity. Looking ahead, the Ministry of Power and Energy’s Long-Term Generation Expansion Plan (LTGEP) 2025-44 projects electricity demand to grow by 4.8 percent annually, requiring 7.7 GW of additional capacity by 2035.113 Renewables will play a central role in meeting this demand, with plans to reach 2.7 GW by 2029 and add another 2.6 GW by 2035 – representing about 70 percent of all new capacity. To support this renewable expansion, LTGEP includes 755 megawatts (MW) of battery storage and 600 MW of pumped storage over the next decade, while also targeting annual additions of 150 MW in rooftop solar capacity between 2025 and 2044. 112 Ceylon Electricity Board, Statistical Digest 2022 (Colombo: Ceylon Electricity Board, 2022), accessed May 1, 2024. 113 Base Case Scenario (Scenario 3) of the Long-Term Generation Expansion Plan 2025-44. Ceylon Electricity Board, Long Term Generation Expansion Plan 2025-44 (Sri Lanka Ceylon Electricity Board, 2023). 33 Country Climate and Development Report Onshore wind and solar energy hold the greatest promise in the short term. Hydropower – with an installed capacity of 1.8 GW in 2023 – has limited expansion potential. GoSL plans to increase solar and wind-based energy supply by 10-fold from just over 1.2 GW in 2023 to over 10 GW by 2042 under the LTGEP.114 This aligns with the IPS pathway’s expected 12-fold growth in solar capacity and eight-fold onshore wind capacity by 2050. Solar and wind represent the most cost-effective options.115 Building from a low base, solar power has increased nearly nine-fold over the past decade (see Figure 10).116 However, meeting net zero targets by 2050 would require an even more dramatic expansion to 30 GW through extensive solar and wind deployment to replace retired fossil fuel plants. Sri Lanka has large offshore wind potential, with estimated potential exceeding 50 GW. Over its lifetime, a single 0.5 GW offshore wind farm could generate US$570 million in gross value added through local investment and employment, provided sufficient investment capital can be secured.117 Figure 10. Solar and Onshore Wind Capacity Additions (2014-23) 1,400 1,200 1,000 800 MW 600 400 200 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Onshore wind (MW) Solar (MW) Source: International Renewable Energy Agency (2024). CEB will need to undertake significant investments in system planning to ensure that variable renewable energy resources can provide a stable generation source. The short- to medium-term investment plan should include transmission investments and a pipeline for battery storage infrastructure. It is recommended that CEB use software to develop an integrated system plan, which looks at the economic costs and benefits and impact of grid resilience for renewable energy integration (Box 4). Moreover, adequate net metering policies will help GoSL to establish a market for power from commercial and industrial consumers. Box 4. Smart grids Integrating renewable energy sources into Sri Lanka’s grid network presents an opportunity to modernize the electrical infrastructure through “smart grid” technology while addressing intermittency concerns. While pilot projects for smart meters exist, large-scale adoption remains limited due to high costs, regulatory gaps, and outdated systems. The electricity sector continues to rely on conventional infrastructure, underutilizing IoT- based energy monitoring and AI-driven power distribution solutions, despite their potential to enhance efficiency and reduce outages. Sri Lanka could expand smart grid infrastructure through PPPs and digital platforms. This would enable IoT- driven energy systems with AI-based demand forecasting, predictive maintenance, and real-time monitoring to optimize energy consumption and grid stability. Implementing smart metering would further enhance efficiency while addressing challenges from intermittent renewable energy sources. 114 Ceylon Electricity Board, Long Term Generation Expansion Plan 2025-44 (Sri Lanka Ceylon Electricity Board, 2023). 115 This assumes Sri Lanka remains committed to not building new coal plants; Ceylon Electricity Board, Statistical Digest 2022. 116 International Renewable Energy Agency (IRENA), Renewable Capacity Statistics 2024 (Abu Dhabi: IRENA, March 2024). 117 World Bank Group, Offshore Wind Roadmap for Sri Lanka, (Washington, DC: World Bank, 2023). 34 Country Climate and Development Report Renewable energy expansion requires substantial investments, particularly from the private sector. Onshore wind development alone could cost US$9 billion (assuming CAPEX costs of US$2.5 million per MW), while achieving power sector carbon neutrality by 2050 would require US$17-25 billion. Additional investments in transmission capacity and energy storage will also be necessary to integrate these renewable sources into the grid. Historically, the private sector (individual power producers) has financed nearly all renewable energy capacity in the country. However, CEB, as the off-taker, faces significant financial sustainability challenges stemming from high fuel costs, potential revenue shortfalls from fluctuating tariffs, and accumulated debts. These issues, combined with Sri Lanka’s low credit rating and perceptions of uncertainty at both a macro and sectoral level, create bankability challenges for developers entering the market. This results in higher financing costs and limited interest from international investors without additional support. Affordable tariffs and other sectoral reforms are essential for scaling up renewable energy investment. Several policy reforms are required to attract private finance, which could cover the bulk of these investments. These include competitive procurement processes and sound tariff policies, strategic planning for transmission infrastructure and storage capacity, and regulations incentivizing energy efficiency in industry and buildings. In the short term, Sri Lanka should continue leveraging development finance institutions through credit enhancements such as guarantees to attract private investment and for technical assistance to support market development, but sustained success requires comprehensive reforms. Upgrading transmission and distribution infrastructure will require significant investments and reliance on public funding, which is already limited and would place a large fiscal burden on the government. Over the past two years, Sri Lanka has taken steps to enhance CEB’s operational efficiency, financial stability and service delivery through cost-recovery energy tariffs with quarterly adjustments and a new Electricity Act. While implementation has not yet begun, the Act provides for the unbundling of CEB’s functions into separate generation, transmission, distribution and system operation entities. It also mandates competitive procurement for private investments and establishes a pathway towards a wholesale power market. Maintaining cost-recovery electricity pricing remains essential for the financial sustainability of the power sector and CEB’s capacity to support the scaling of renewable energy. Competitive and transparent procurement is essential for securing cost-effective and sustainable renewable energy investments. Procurement practices that bypass standard procedures – such as unsolicited proposals or opaque bilateral deals – pose significant risks. These approaches often lead to elevated costs, limited value for money, and diminished investor confidence, particularly in a context where FDI plays a central role. A rules-based, open tendering framework not only promotes fairness and accountability but also helps attract credible private sector partners and reduce financing costs. Offshore wind presents strong medium- to long-term opportunities. Sri Lanka can take immediate low-cost steps to lay the groundwork for commissioning its first offshore wind farm in the next decade. These include conducting further feasibility studies (particularly important given that offshore wind capital costs are three or four times higher than onshore), implementing a strong regulatory foundation, utilizing financial de-risking measures to attract private investors, integrating with global supply chains and upgrading port infrastructure.118 Sri Lanka could also explore different business models to best utilize their offshore wind resources, be it for direct export, for domestic purposes, or a combination of both. Green hydrogen holds promise for the longer term. As an emerging technology, green hydrogen faces several barriers to adoption, including technological uncertainty, limited market demand and high costs of production, storage and transportation. The business case will need to be assessed as green hydrogen technology and markets mature. 118 Ibid. 35 Country Climate and Development Report Recommendations to increase the use of renewable energy • Fully implement the new Electricity Act to ensure commercial and financial sustainability of the sector and enable private sector participation. • Strengthen transmission and distribution infrastructure to manage variable renewable energy, update the grid code and use integrated planning software. • Implement an integrated procurement reform agenda to strengthen transparency and accountability in renewable energy projects, such as establishing and enforcing robust regulatory frameworks, adopting digital procurement platforms, conducting regular independent audits, and promoting public participation and oversight. 5.3. Strengthening hydropower resilience Climate change represents opportunities and vulnerabilities for Sri Lanka’s hydropower sector. While overall hydropower production might slightly increase by 1-5 percent in the 2040s due to changes in precipitation patterns, the future is far from straightforward. As discussed above, the country will likely experience significant variability in water availability. Under a Dry/Hot climate future, hydropower production could drop significantly during the summer period. This was dramatically illustrated in 2019, when a drought reduced hydropower generation to just 15 percent of total electricity production, causing widespread power cuts. The biggest challenge is balancing water needs. Hydropower and agriculture compete for limited water resources. If investments focus only on irrigation and neglect hydropower infrastructure, electricity generation could decrease by 2-7 percent, depending on the climate future. Sediment accumulation poses a long-term threat to hydropower infrastructure and production capacity. Aging hydropower assets have already reportedly lost up to 50 percent of their generation capacity due to high sedimentation levels. Analysis for this CCDR shows that significant forest cover loss and cropland expansion could accelerate sedimentation from erosion in upstream catchments in the next few decades. Erosion could be partially mitigated by reforestation, reversing vegetation degradation, and implementing sustainable farming practices. As discussed above, healthy ecosystems and well-managed watersheds are essential for Sri Lanka’s clean energy transition. As the country expands its renewable energy capacity, it must balance infrastructure development with ecosystem conservation to ensure long-term sustainability.  As climate change intensifies competition between water-dependent sectors, a multi-faceted approach will be essential to balance energy production with overall water security. This strategy should include comprehensive climate risk mapping for key energy infrastructure, rehabilitation of existing hydropower assets, and implementation of improved drainage and rainwater management systems to protect vital energy installations against extreme weather events and enhance water capture. Recommendations to enhance resilience and modernize hydropower assets • Undertake a comprehensive multi-hazard risk assessment of hydropower plants and other transmission and distribution infrastructure. • Establish transparent water rights regulations that balance the competing needs of hydropower generation and irrigation, especially during drought periods. • Assess the feasibility and effectiveness of scaling up reforestation and sustainable farming practices in upstream catchment areas to reduce erosion and sedimentation. • Implement improved drainage systems and rainwater management solutions around energy infrastructure to reduce erosion, mitigate flood risks, and enhance water capture for operational use. 36 Country Climate and Development Report 5.4. Electrifying the transport sector to reduce dependence on imported fossil fuels Decarbonization of the transport sector will be critical for reducing fossil fuel dependence and improving air quality. The transport sector is currently on an unsustainable expansion path. Sri Lanka has a fleet of 5.6 million licensed vehicles that consume over 4 million liters of petroleum annually; imports cost the country US$3.4 billion in 2021. Vehicle ownership is on a sharp growth trend: the fleet has grown at over 9 percent per year due to tax concessions and unreliable public transport; emissions from passenger road transport have doubled since 2020.119 This escalation has been accompanied by increases in traffic congestion, air pollution, and respiratory illnesses. Without changes, the motor vehicle fleet is predicted to increase by over 130 percent, with fuel consumption and GHG emissions increasing by 100 percent by 2050.120 A phased approach can reform, modernize and electrify public and private transport. Only about 10,000 electric vehicles (EVs) have been registered over the past decade.121 To promote EVs, the Ministry of Transport, Highways, Ports and Civil Aviation has formulated a National Policy on E-Mobility, which is awaiting approval.122 The policy aims to reduce motorization rates and fossil fuel consumption by promoting a shift to modern electric bus and rail transportation, while electrifying private vehicles. The policy sets ambitious targets, aiming to phase out the internal combustion engine fleet by mandating that all new vehicle registrations be electric by 2040. The transition will start with motorcycles and three- wheelers in 2025, followed by buses and trucks in 2030, and cars in 2035. Under this plan, an estimated 250,000 new EVs will be added annually until 2040, after which all vehicle registrations will be electric, reaching a total of 9 million EVs, representing almost 90 percent of the active vehicle fleet by 2050. This includes over 50,000 electric buses. The phased approach is designed to allow time for a gradual transition to EVs and to develop the capacity of the domestic EV industry, while phasing out internal combustion engine vehicles. If the plan is successfully implemented, it would result in large economic and development benefits. Total transport emissions would reduce by almost half of current levels by 2040 and to a quarter by 2050. Fossil fuel use could decrease from 8,200 million liters to 1,900 million liters by 2050. Electrification of the vehicle fleet also has direct benefits in terms of improved air quality, diminishing emissions of the most harmful PM by 10-fold per passenger km traveled.123 The implementation of the policy will cost an estimated US$1.75 billion in the medium term, primarily for the reconstruction of bus terminals and stops. In the short term, Sri Lanka should prioritize key e-mobility initiatives. This includes approval of the formulated National Policy for E-Mobility; implementing an e-bus program including deployment of an e-bus fleet and development of a robust charging infrastructure network with private capital mobilization; creating innovative financing to accelerate electrification of two- and three-wheelers; developing standardized guidelines for charging stations; and creating an E-Mobility Secretariat to strengthen institutional capacity. Recommendations to accelerate clean transportation • Enact the formulated National Policy for E-Mobility. • Undertake a comprehensive program to modernize and electrify the bus fleet to promote modal shift to public transport. • Deploy e-buses and charging infrastructure network through PPPs between government authorities and the private sector. • Accelerate electrification of two- and three-wheelers and phase out of internal combustion engine vehicles by exploring innovative financing and fleet management schemes. 119 Background note on “Decarbonizing Transport”. 120 Ibid. 121 Ministry of Transport and Highways, Department of Motor Traffic, Vehicle by Fuel Type, 2017-2022. 122 Ministry of Transport, National Policy on E-Mobility (NPEM), February 2024 (awaiting approval). 123 Briceno-Garmendia, C, Q. Wenxin and V. Foster. 2023. “The Economics of Electric Vehicles for Passenger Transportation. Sustainable Infrastructure Series.” Washington, DC: World Bank. doi:10.1596/978-1-4648-1948-3. 37 Country Climate and Development Report 5.5. Enhancing energy efficiency to manage rising energy demand Energy efficiency is a key complement to expanding cleaner energy supply. Under the IPS policy pathway, energy demand is expected to grow by 60 percent by 2050, whereas improvements in energy efficiency could limit this growth to just 12 percent under the NZS pathway. Energy efficiency improvements could have the greatest impact on public, commercial, and industrial facilities, which currently consume about 60 percent of total electricity. Space cooling and refrigeration, in particular, account for 20 percent of construction costs and 50 to 60 percent of energy costs in typical commercial buildings. Moreover, electricity demand for commercial buildings is expected to quadruple by 2034 due to rising temperatures, income growth, and urbanization.124 Energy efficiency solutions offer substantial economic and environmental benefits while moderating the need for grid infrastructure investment. Energy efficiency investments in the public, commercial and industrial sectors of US$490 million until 2035 could save around 1,200 GWh cumulatively by 2035, delivering US$2.2 in economic benefits per dollar invested.125 Lowering overall energy demand and peak loads would help integrate solar and wind power while minimizing impacts on grid reliability and reducing storage requirements. Achieving these outcomes requires scaling up through market-based business models, dedicated financing mechanisms, and effective institutional coordination for measurement, verification, and enforcement. There are significant barriers to enhancing energy efficiency. Existing frameworks are inadequate in their energy efficiency requirements. As discussed in Chapter 3, there are a limited number of accredited energy management firms and individuals with adequate green buildings expertise. Furthermore, compliance is largely voluntary, and energy consumption measurement and reporting systems are at a nascent stage. Investments in energy efficiency also require high upfront costs, against the backdrop of high borrowing and transaction costs. Lastly, consumers, developers, and commercial lenders have a weak understanding of operational, contractual and implementation models. Recommendations to enhance energy efficiency • Harmonize green building certifications and elaborate guidelines for energy audits. • Strengthen local capability for testing appliances, equipment and construction materials and establish a framework of recognizing foreign testing laboratories. 5.6. Managing energy affordability to protect poor and vulnerable households Sustainable energy affordability is essential to avoid poverty escalation. In the long term, renewable energy investments will reduce energy prices and benefit low-income households, but prices may increase in the short term (see Chapter 6). Cost-reflective electricity tariffs played a crucial role in Sri Lanka’s economic recovery by addressing CEB’s persistent operational losses, attracting private investment in generation capacity—particularly for renewable energy— and improving public finance efficiency by removing inequitable subsidies. However, these reforms had significant consumer impacts. Poorer households that relied more on below-market electricity prices were particularly vulnerable to sudden price hikes. The July 2023 adjustments aimed to lower costs for low-income households, yet rates remained three times higher than pre-crisis levels. Rapid tariff reforms and rising energy costs significantly contributed to poverty increases in 2022 and 2023, with social protection measures providing only partial relief due to the scale of the crisis (a 10 percentage-point rise in poverty) and challenges in targeting and adequacy of cash transfers. Energy affordability will support economic recovery as it contributes to an increase in real household incomes and business productivity. While early signs of economic recovery have reduced poverty rates, real incomes and economic opportunities remain below pre-crisis levels, with declining employment and increasing emigration. Energy and utility prices are still nearly 60 percent higher than in 2021, and unmitigated price hikes could further strain vulnerable households. High energy costs also impact business productivity and limit job creation. 124 World Bank Group, “Sri Lanka: A Roadmap to Energy-Efficient Buildings,” (Washington, DC: World Bank, 2023), https://openknowledge.world- bank.org/handle/10986/40695. 125 Ibid. 38 Country Climate and Development Report Key lessons from the fiscal adjustment process highlight the importance of a well-managed energy pricing structure, with tariff revisions guided by ex-ante distributional assessments to ensure continued access and affordability for households and businesses. Moving forward, it will be essential to develop a clear, transparent tariff policy that includes all stakeholders. Strengthening social protection mechanisms will also be critical to safeguard vulnerable households from future energy price shocks. Recommendations to manage energy affordability • Improve the targeting of compensation mechanisms so that changes in energy costs affecting vulnerable households can be compensated without resorting to inefficient universal subsidies. 39 Country Climate and Development Report 6. Assessing Sri Lanka’s Path to Enhanced and Resilient Development Climate change is anticipated to have a sizeable impact on Sri Lanka’s economy, with projected GDP losses from the impact channels considered in this CCDR ranging from -3.3 to -3.5 percent by mid-century. Under all scenarios, the primary driver of GDP losses is labor heat stress, accounting for 60 to 70 percent of total projected losses by 2053. Under a Dry/Hot future, agricultural productivity may contribute to 15 percent of GDP losses. A Wet/Warm future is expected to amplify flooding damage, contributing to 40 percent of GDP losses by 2053. The impact of climate change is projected to negatively affect household incomes under all scenarios, leading to an increase in the poverty rate between 1.7-1.8 percent by 2053. Sri Lanka should prioritize investments in resilient development to manage the impact of climate-related shocks; this will also boost economic activity and welfare. There are several “no regrets” investments—including expanded clean power, modern transport, energy efficiency, enhanced irrigation, and better water and sanitation services—in the country’s NDCs and CPP. Further targeted adaptation investments, including thermal comfort solutions and CSA, have the potential to mitigate 20 to 25 percent of direct climate-related GDP losses by 2053, amounting to 0.7 to 0.8 percent of GDP. These investments also provide a host of other benefits, including reduced energy costs, improved air quality and urban livability, and higher agricultural productivity. Resilient development investments are a key step toward placing Sri Lanka on the trajectory to achieve its goal of a full Net Zero transition. Mobilizing additional public and private resources at the desired pace and scale for Net Zero may be beyond the country’s current financial capacity, until structural constraints are addressed. Advancing the “no regret” investments outlined above, together with continued reforms to enhance the country’s long-term growth prospects and promote greater private investment, will help pave the way for Sri Lanka’s ambitious energy transition goals. 6.1 Illustrative pathways to efficient and resilient development 6.1.1 Baseline development pathway Sri Lanka’s climate commitments set a goal for transitioning the country towards a climate-resilient, economically strong pathway. As outlined in Chapter 2, the NDCs and CPP align climate action with sustainable economic development by investing in expanded clean power generation, modernized transport systems, increased energy efficiency, enhanced irrigation, as well as improved water and sanitation services. This CCDR therefore adopts these policy pathways as its baseline scenario.126 This pathway foresees an acceleration of GDP growth to approximately 4 percent per year between 2029 and 2037, gradually moderating to around 3.3 percent annually by 2053.127 These investments can be accommodated by Sri Lanka’s economy. They would amount to 4.2 percent of GDP on average during 2025-53 across the private (2.5 percent of GDP) and public (1.7 percent of GDP) sectors. Improved tax revenue performance, coupled with a declining interest bill and prudent public spending, is expected to enhance debt sustainability and create fiscal space for public investment. Ongoing tax policy and administration reforms are projected to yield sustained increases in revenue, which is projected to reach at least 16.4 percent of GDP by 2053.128 Concurrently, interest rates on public debt are anticipated to decrease significantly as growth and revenue recover, reducing the government interest bill from 8.4 to approximately 5 percent of GDP over 2023-53. These developments would enable GoSL to maintain total spending at approximately 20 percent of GDP while creating fiscal space to raise public investment 126 As discussed in Chapter 5, these are the policy pathways most likely to be financed but require further policy and regulatory actions to be im- plemented successfully. 127 These projections reflect the anticipated long-term growth trajectory of the Sri Lankan economy under conservative assumptions. The expected economic performance is underpinned by a range of factors, including: i) a convergence to the median annual productivity growth rate amongst low and lower-middle income countries over 2000-19 (i.e., gradually shifting Sri Lanka from 0.4 percent a year in 2024 to 0.8 percent by 2053); ii) an increase in female labor force participation from 36 percent in 2024 to 40 percent by 2053; and iii) an increase in FDI inflows to the South Asian average over 2010-19 (that is, from 1.1 percent of GDP in 2024 to 1.4 percent by 2053). These factors are expected to improve due to ongoing government reforms intended to overhaul the existing tariff regime, lift legal restrictions to female labor participation, and reduce legal and institutional barriers to FDI. Higher FDI inflows are expected to more than offset a gradual reduction in foreign indebtedness (that is, from 77 to 50 percent of GDP over 2022-53), which, in conjunction with stable domestic savings, would raise total investment slightly above pre- crisis levels (36 percent of GDP by 2053). 128 Recent tax policy and administration measures are expected to increase total revenue to at least 14 percent of GDP by 2027. From 2028 onwards, revenue is expected to increase at par with the average growth observed amongst low and lower-middle income countries over the past 30 years (that is, 0.11 percent of GDP per year according to Gallien, M., A. Lees and G. Mascagni 2024). 40 Country Climate and Development Report from 2.3 to approximately 6 percent of GDP during 2023-53.129 Overall, the trajectory of the main fiscal accounts is expected to significantly reduce the public debt burden to at least 80 percent of GDP by mid-century. The country will realize a host of additional benefits from these investments. The water and sanitation interventions would contribute to community resilience by guaranteeing access to safely managed water and sanitation for about 80 percent of the population by 2053.130 The energy investments would reduce fossil fuel imports from more than 5 percent of GDP in 2022 to 0.7 percent in 2053, while reducing energy costs by 23 percent over the same period.131 6.1.2 Enhanced development pathways and investment needs In addition to the baseline development pathway, this CCDR explores two alternate pathways: one with enhanced adaptation measures, and another that achieves the country’s Net Zero emissions target. The enhanced adaptation interventions represent a subset of the measures discussed in Chapters 3 and 4 and would require an additional annual public investment of 0.2 percent of GDP in 2025, reducing to 0.04 percent by 2053.132 They include: • Expanding the irrigated area in Northern basins to contain crop productivity losses, which would require an investment of 0.01 to 0.18 percent of baseline GDP per annum, approximately 70 percent of the targeted adaptation investments; • Increasing the availability of cooling/thermal comfort systems and enhancing agricultural mechanization to mitigate labor heat stress, which would require an additional investment of 0.01 percent of baseline GDP per annum;133 and • Containing flood damage and coastal erosion through improved floodproofing standards and natural capital interventions, which would add another investment of 0.01 percent of GDP per annum.134 The Net Zero pathway requires an additional 0.4 percent of GDP in 2025, rising up to 3 percent annually in 2053.135 This includes investments in enhanced energy efficiency and a complete transition to renewable energy in power generation (see Chapter 5).136 These investments are assumed to be concentrated in the 2025-53 period and would fall sharply thereafter to a level required to maintain the new assets.137 Two-thirds of the Net Zero investments are assumed to be made by the private sector, including the replacement of the existing fleet of private vehicles with 129 Approximately 1.5 percentage points above the average public investment prior to the crisis of 4.5 percent of GDP over 2012-22. 130 Specifically, these investments would increase access to safely managed water from 56 to 84 percent over 2020-53, and to safely managed sanitation from 11 to 75 percent over the same period. 131 This is over the 2024-53 period and in real terms. The average price of energy reflects the price of every primary energy source weighted by the corresponding share of the supply mix (for both power generation, transport and other purposes) in constant 2015 USD. Real GDP is expected to grow approximately three times by 2053, while final energy demand would only increase by 60 percent. Improvements in the energy mix and efficiency are driven by the growth in the share of power generation from renewable sources to 70 percent by 2053, and numerous other investments to improve efficiency in industry and transport. 132 These interventions were selected based on their relevance to Sri Lanka’s economy and the availability of cost-benefit data. The magnitude of the targeted adaptation investments is small due to modelling and data constraints. They seek to illustrate interventions that build resilience to the expected climate shocks and have significantly positive net economic benefits. A more exhaustive study is required to evaluate the costs and benefits of the full array of interventions proposed in this CCDR. Given the limited targeted adaptation investments factored in the macro model, Chapter 7 also benchmarks adaptation needs using cost estimates from Sri Lanka’s Climate Prosperity Plan (2022), averaging 1.1 percent of GDP annually over 2025–53. 133 Expanding irrigation in Northern basins by approximately 18,000 hectares is projected to reduce crop production losses by 6 percent na- tion-wide under a Dry/Hot climate by 2050. Furthermore, increasing access of indoor workers to cooling systems from 6 to 25 percent and the mechanization of agriculture from 1.5 to 15 percent is projected to reduce labor productivity losses by 21 to 27 percent by 2050. However, the expansion of agriculture mechanization could not be reflected in the aggregate costs of adaptation due to data limitations. 134 Improved floodproofing for new inland structures and exposed buildings in Colombo could reduce built-up capital damages by 40 to 70 percent by 2050. Additionally, conservation and restoration of forest and cropland, and of mangroves would contain annual expected capital damages from inland and coastal flooding by up to 0.01 and 7.3 percent by 2050, respectively. Forest and cropland conservation and restoration would also limit soil erosion damage to crop productivity from -0.03/-0.16 to +0.02/-0.09 percent under Dry/Hot and Wet/Warm futures, respectively. These interventions would also prevent emissions of up to 190,000 tCO2e per year by 2050, a reduction of 0.6 percent of baseline emissions by mid-century. 135 Full decarbonization and associated investments are only concluded by 2053 to allow for a smoother transition from fossil fuels to green energy sources. The scenario including net zero only reflects the incremental investment vis-vis the IPS scenario, which is required to ensure the supply of energy and transport becomes more efficient and carbon neutral by 2053. 136 The pathway to decarbonize the Sri Lankan economy and the underlying investments and policy actions were estimated through an external energy optimization model, which was subsequently soft linked with MFMod CC. See Chapter 5 for further details. 137 Stranded asset costs are limited, because the energy optimization model (see Chapter 5) factors in the useful life of existing power plants, vehicles and other assets before these are replaced by more energy efficient and greener alternatives. As a result, transitional costs related to stranded assets are not considered further in the modelling. 41 Country Climate and Development Report greener alternatives.138 Incremental public spending on the Net Zero pathway would reach 1 percent of baseline GDP by 2053. This would cover investments in electricity transmission and distribution, public transport infrastructure, and subsidies for various purposes (for example, purchase of clean cooking stoves).139 Carbon pricing can incentivize private sector participation and help fund public investments in a net zero pathway; however, it entails potential transitional and distributional risks that merit closer scrutiny. In response to the economic crisis, GoSL removed longstanding energy subsidies on fuel and electricity. In 2023, it also removed implicit subsidies, in the form of uncompensated losses incurred by public utility companies, through the introduction of cost-reflective pricing of electricity and retail petroleum products.140 This was followed by the introduction of excise duties on fuel in June 2023, and the removal of value-added tax exemptions on fuel and liquefied petroleum gas (LPG) in January 2024.141 The swift removal of electricity subsidies had a regressive impact, which was only partially offset by efforts to improve the adequacy and targeting of welfare transfers.142 In this context, any additional energy-related taxation must be carefully assessed and timed to avoid placing a further burden on specific segments of society. This CCDR assesses the economic, distributional, and revenue impacts of carbon taxes deployed in tandem with Net Zero investments. Carbon taxes were calibrated to align price signals with the assumed decarbonization trajectory and maximize potential tax revenue.143 The impact of a gradual introduction of a carbon tax over a 15-year period reaching US$39/tCO2e for coal and US$194/tCO2e for oil and gas by 2040 was assessed in the Net Zero scenario.144 According to GoSL’s commitments, no additional coal-based power generation capacity will be developed beyond 2024, and existing plants will be decommissioned by 2050. Taking these commitments and supporting regulations into account, a modest carbon tax on coal should suffice to encourage its gradual phase out. Oil-related emissions would be subject to significantly higher taxation to encourage households to adopt cleaner transportation options. Carbon taxes would be slowly phased in over 2025-40 to avoid sudden shocks to inflation and allow the economy to gradually adjust.145 6.2 Projected impact of climate change on Sri Lanka’s economy This CCDR analyzed a set of scenarios to explore the economic and distributional impact of different climate futures combined with varying policy responses. The scenarios assessed key climate change impacts on built-up infrastructure, labor productivity, agricultural output, hydropower production, and tourism demand. The analysis evaluated the economic implications under two specific climate futures: a Dry/Hot future, characterized by a significant temperature increase of 1.14°C by 2041-50 compared to the 1995-2020 average, coupled with a modest rise in precipitation of 1.8 percent; and a Wet/Warm future, which combines a modest temperature increase of 0.95°C for the same period with a substantial 16.1 percent increase in rainfall (Table 4).146 138 The private-public breakdown envisaged in the energy optimization model presented in Chapter 5 is based on a judgement of the viability of private sector participation across different subsectors. Private investment would primarily flow toward renewable energy capacity through independent power producers, electric vehicle adoption, building and industry upgrades, and about 85 percent of clean cooking solutions. Meanwhile, the public sector would focus on shared infrastructure or public goods, including electricity transmission and distribution, trans- port infrastructure, and afforestation initiatives. The purchase of electric vehicles and clean cooking solutions by households – approximately 46 percent of the investment needs – is integrated into the macroeconomic model as incremental private consumption given the nature of these expenditures. 139 Given the ambitious level of assumed private sector participation, the scale of incremental public investment should be interpreted as a lower bound estimate. 140 Implicit subsidies on electricity amounted to 0.6 percent of GDP on average over 2010-19 as noted in IMF Country Report No. 23/116 (March 2023). 141 Excise duties are currently at LKR 19/20 per liter of diesel/petrol imported, respectively. VAT now applies to fuel and LPG at the standard rate of 18 percent. 142 2023 Fiscal Incidence Analysis, Poverty GP, SAR. Despite the inefficiencies underlying the provision of electricity subsidies, these tend to represent a larger share of consumption amongst poorer households. On the other hand, the introduction of excise duties and removal of VAT exemptions on fuel was likely progressive as richer households are more likely to own a vehicle and/or consume more fuel. 143 Since energy supply is exogenous to the macro model, it is assumed that, in conjunction with government investment, subsidies and regula- tions, the modest level of carbon taxation included in the simulations would suffice to support the decarbonization pathway. 144 These levels of carbon taxation are broadly consistent with the recommendations from international expert panels including the High-Level Commission on Carbon Prices (i.e., US$61–122 by 2030 in 2023 terms), and the Intergovernmental Panel on Climate Change (i.e., US$115 by 2030 in 2023 terms). Despite the potential for additional revenue mobilization, the modelling assumes that incremental public invest- ments are fully financed through debt issuance or a combination of debt and carbon taxation to illustrate the potential financing challenges and scale of potential public debt accumulation. 145 The carbon taxes modelled as part of this CCDR would yield an increasing amount of revenue until the mid-2030s peaking at 0.5 of GDP. The revenue generated by this instrument would fall sharply thereafter as renewable energy sources gain market share arriving at 0 percent of GDP by 2053. 146 The macroeconomic modeling is based on the climate change extension of MFMod (MFMod CC by Burns, Jooste & Schwerhoff, 2021). The modelling exercise quantifies the direct and indirect impact of climate change damages by introducing exogenous shocks - estimated through external biophysical models - to the baseline macroeconomic scenario (explained in Section 6.1.1), which assumes no additional climate change impacts beyond the historical record as of 2023. For further details regarding the selection of climate scenarios, see Chapter 1. To 42 Country Climate and Development Report Table 4. Climate Policy Scenarios Enhanced Development Baseline Development Pathway Pathways Dry/Hot Dry/Hot Climate Dry/Hot + Targeted Adaptation (Adp) (Baseline policy response) Wet/Warm Wet/Warm Wet/Warm + Targeted Wet/Warm + Targeted Climate (Baseline policy response) Adaptation (Adp) Adaptation (Adp) + Net Zero Source: World Bank analysis In the absence of a structured policy response, the climate change impact channels considered in this CCDR are projected to reduce GDP between 3.3 and 3.5 percent by 2053. GDP losses increase steadily over time as changes in temperature and rainfall become more pronounced (Figure 11).147 Labor heat stress accounts for 60 to 70 percent of total losses in 2053 (Figure 12). Damage to agricultural yields will have a sizeable impact on GDP under a Dry/Hot climate (15 percent of total losses in 2053) but would be negligible under Wet/Warm conditions. GDP losses related to flooding damage are anticipated to be considerably larger under a Wet/Warm future (40 percent of total losses in 2053). This result is driven by the significant increase in the volume and volatility of precipitation.148 Lower probability, higher impact extreme weather events could significantly escalate climate-related damages. For example, by the 2040s, a 100-year inland flood could cause 45 times more incremental damage to built-up capital under a high-emissions (SSP5-8.5) Wet/Warm scenario than the annual expected damage reflected in the macroeconomic model.149 Such an event would considerably amplify the scale of GDP losses discussed in this chapter. maintain a manageable number of scenarios, the incremental net zero investments were only modelled in the Wet/Warm scenario. 147 Current climate research suggests that economic damage is projected to increase at an even faster rate over the latter half of the century. See: IPCC, 2023: Climate Change 2023: Synthesis Report. Contribution of Working Groups I, II and III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change, IPCC, Geneva, Switzerland, pp. 1-34, doi: 10.59327/IPCC/AR6-9789291691647.001. 148 Flooding damage was modelled as direct losses to capital stocks as a function of each climate scenarios. Secondary effects such as increased maintenance costs induced by climate change and business interruption losses were not accounted for due to data limitations. 149 Under SSP5-8.5 (i.e., high emissions Wet/Warm Scenario), the incremental impact - compared with the 1995-2020 baseline - of a 100-year inland flood on the value of built-up capital for the 2035-64 period (i.e., -7.2 percent reduction in capital) is projected to be 45 times larger than the average annual expected damage of inland flooding over 2041-50 (i.e., -0.16 percent reduction). 43 Country Climate and Development Report Figure 11. Climate Change Damages as Figure 12. Climate Damages by Channel/ % of GDP, by Climate and Policy Scenario Scenario, % of GDP by 2053 2023 2025 2029 2033 2035 2039 2043 2045 2049 2053 2027 2031 2037 2051 2047 2041 Dry/Hot Dry/Hot Wet / Wet / + Adp Warm Warm+ Adp 0.0 0.0 -0.5 -1.0 1.5 -1.0 2.0 (1.3) 2.1 Net Zero -1.5 2.5 -2.0 ADP -2.0 0.9 (2.4) 0.5 ADP -2.5 0.1 -3.0 (2.8) 1.1 0.3 0.5 (3.3) -3.0 (3.5) 0.4 0.2 -4.0 -3.5 Dry/Hot Wet/Warm Labor Heat Urban Flooding Tourism Dry/Hot + Adp Wet/Warm + Adp Crops Coastal Flooding Wet/Warm + Adp + Net Zero Inland Flooding Hydro Figure 13. Climate-induced Household Figure 14. Marginal Impact of Targeted Income Losses by Quintile 2023-53 (Dry/ Adaptation on Household Income by Quintile Hot & Wet/Warm Scenarios vs Baseline by 2053 (Dry/Hot + Adp vs Dry/Hot; Wet/ Development Pathway) Warm + Adp vs Wet/Warm) % change in avg. real HH pc income 0 2 % change in avg. real HH pc income (relative to baseline) -1 (vs no adaptation) -2 1.1 1.1 1.0 1.0 1.0 1.0 -3 1 0.9 0.9 0.8 0.7 -4 -3.9 -3.9 -4.1 -4.1 -4.2 -5 -4.5 -5.0 -5.4 -5.2 -6 -5.6 0 1 2 3 4 5 1 2 3 4 5 Per capita Consumption quintiles Per capita Consumption quintiles Dry/Hot Wet/Warm Dry/Hot Wet/Warm Source: World Bank staff calculations, based on the MFMod for climate change and macro-to-micro simulations. Notes: Adp = Targeted Adaptation Investments; Net Zero = Net Zero Investments; Red/Light Blue Arrows are the Targeted Adaptation Impacts; Dark Blue Arrow is the Net Zero Impact; HH pc is households per capita. 44 Country Climate and Development Report Targeted adaptation investments will help avert a loss of economic activity corresponding to 0.7-0.8 percent of GDP by 2053. Increasing resilience against labor heat stress should be the primary focus, as it would prevent climate-related damage amounting to 0.4 to 0.5 percent of GDP (Figure 12). Enhancing the resilience of infrastructure to flooding will also yield substantial benefits, preventing losses equivalent to 0.2-0.4 percent of GDP. The expansion of irrigation in northern river basins would reduce crop productivity-related losses by 0.05 percent of GDP under a Dry/Hot future. Due to their dependence on agricultural jobs, lower-income households will face greater climate-related welfare losses in a Dry/Hot climate. By 2053, household income for the bottom quintile is projected to decrease by 5.6 percent and 3.9 percent under a Dry/Hot and Wet/Warm climate future, respectively (Figure 13).150 These welfare losses are expected to increase poverty by between 1.7-1.8 percentage points by 2053.151 The benefits from the selected adaptation measures are expected to be evenly distributed across income levels under a Wet/Warm climate future, and slightly regressive under a Dry/Hot climate future (Figure 14). As a result, fully neutralizing the impact of climate on the poor would require additional social protection measures.152 Figure 15. Targeted Adaptation Investments Figure 16. Targeted Adaptation Investments vs Avoided GDP Loss*, Dry/Hot Scenarios vs Avoided GDP Loss*, Wet/Warm Scenarios (% GDP, 6% Discount Rate) (% GDP, 6% Discount Rate) 0.6 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.0 0.0 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 Avoided GDP Losses Adp Invest. Avoided GDP Losses Adp Invest. Adp Invest. +100% Adp Invest. +200% Adp Invest. +100% Adp Invest. +200% Source: World Bank staff calculations, based on the MFMod for climate change. Notes: Adp Invest. are the Targeted Adaptation Investments. 6 percent discount rate follows the guidance for all World Bank CCDRs. *Avoided GDP losses reported in Figures 15 and 16 correspond to the marginal impact of targeted adaptation investments measured as difference in GDP between scenarios with and without targeted adaptation investments (Dry/Hot + Targeted Adaptation vs Dry/Hot, and Wet/Warm + Targeted Adaptation vs Wet/Warm, respectively). The value is reported as a share of GDP under the baseline development pathway. 150 Forty percent of workers in the bottom 20 percent of the income distribution work in agriculture versus less than 15 percent in the top quintile. In the short to medium term (i.e., by 2029 and 2039), climate change is expected to affect poorer households more acutely with income losses at the bottom (top) of the distribution of 3.5 (1.4) and 5.7 (3.1) percent under a Dry/Hot scenario and 2.2 (1.0) and 2.6 (2.0) percent under a Wet/Warm scenario, for 2029 and 2039, respectively. 151 Baseline projections indicate that poverty levels will rise by 0.13 percentage points until 2029. Thereafter, poverty is projected to decline by 0.39 percentage points by 2039 and by 2.13 percentage points by 2053. 152 Note that additional efforts to minimize damage to crop productivity may be necessary to contain impacts on the poorest agriculture-dependent households. Additional social protection measures, including social registry coverage improvements and improved cash transfer targeting criteria, will need to be deployed to address impacts on the most vulnerable and ensure better responsiveness. 45 Country Climate and Development Report Targeted adaptation investments can generate substantial net economic benefits over the medium to long term. Avoided GDP losses are projected to closely track investment amounts until 2030 under both Dry/Hot and Wet/Warm scenarios, and then significantly increase (Figures 15 and 16). These investments would still be justified if the costs of the proposed interventions prove to be considerably higher (for example, 100-200 percent) given the favorable trend in associated benefits.153 The net economic benefits from targeted adaptation investments are expected to increase beyond 2053, as these measures will continue to yield meaningful benefits with very negligible costs going forward. The Net Zero scenario is projected to increase GDP by up to 1.2 percent of baseline GDP by 2053 offsetting a considerable portion of economic losses related to climate change (Figure 17). Until 2045, GDP gains associated with the Net Zero pathway would be primarily driven by the positive effect of incremental net zero investments on demand.154 During 2045-53, the shift to renewable energy sources would lead to a reduction of 57 percent in average energy costs compared to the baseline development pathway, and a modest improvement in labor productivity.155 In conjunction with the demand-side effects, these two additional effects would further increase GDP and, as a result, limit climate-related GDP losses to -1.3 percent of GDP by 2053 under this scenario (Figure 17). The combined package of Net Zero investments and carbon pricing is expected to primarily benefit poorer households in the medium to long run (Figure 17). By 2029, carbon taxation is expected to impose a small transitional cost on the per capita income of the richest 40 percent of households.156 By the mid-2030s, the income effect of this policy package is expected to become positive across the distribution, with greater benefits accruing to poorer households. By 2053, these interventions are anticipated to reduce climate-induced household income losses by more than 85 percent for the bottom 40 percent of the population. This effect is driven by the savings generated from lower energy costs, which are expected to be relatively larger than those for wealthier households, and the associated boost to agricultural value added. Figure 17. Combined Marginal Impact of Net Zero Investments & Carbon Taxation on Household per Capita Income by Quintile a. by 2029 b. by 2039 c. by 2053 3 3 3 2.8 % change in avg. real HH pc income % change in avg. real HH pc income % change in avg. real HH pc income 2.5 (compared to Adp only) 2 (relative to Adp only) (relative to Adp only) 2 2 1.8 1.7 1 1.1 0.1 0.1 1 0.9 0.8 1 0.8 0.0 0.6 -0.01 -0.03 0.4 -1 0 0 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Per capita Consumption quintiles Per capita Consumption quintiles Per capita Consumption quintiles Source: World Bank staff calculations, based on the MFMod for climate change and macro-to-micro simulations using outputs from MFMod for climate change. Note: HH pc: Households per capita. 153 The required investment to increase the level of mechanization in the agriculture sector to mitigate labor heat stress was not estimated due to data constraints. At a 6 percent discount rate and current cost estimates, these interventions are projected to yield a return of 192 to 215 percent by 2053. If the required investment amounts were twice as large – to account for missing costs with agriculture mechanization – the economic return would still stand at 46 to 58 percent by 2053. 154 Net Zero incremental investments directly increase both aggregate investment and consumption since the purchase of electric vehicles and clean cooking solutions by households (i.e., 46 percent of investment needs) is classified as private consumption. 155 For the Scenario including Net Zero investments, the average energy price increases up to 32 percent vis-à-vis the baseline by 2038 driven by the incidence of carbon taxes on a high consumption of fossil fuels (i.e., 60 percent of the primary energy mix). Thereafter, energy prices are expected to decline consistently in relative terms becoming 57 percent lower than baseline levels by 2053. The scale of the final reduction in the energy prices vis-à-vis the baseline development pathway is achieved irrespective of the application of carbon taxation. The increase in labor productivity is driven by improvements in air quality (i.e., 10 percent reduction in PM2.5 emissions). 156 In the modelling exercise, carbon prices stand at US$12/tCO2e for coal and US$60/tCO2e for oil and gas in 2029. 46 Country Climate and Development Report Although Net Zero investments are expected to generate GDP and household income gains by 2053, it may take longer for the full GDP gains to exceed the required investment (Figures 18 and 19). Incremental investments in the Net Zero scenario are assumed to be fully frontloaded in 2024-53, while the corresponding long-term benefits – driven by reduced energy costs – only materialize from 2045 onwards. Moreover, the capital expenditures required by the Net Zero scenario carry a high import content reducing the associated multiplier effect on the economy. Therefore, GDP gains associated with the Net Zero scenario are smaller than the required investment amount during the forecast horizon (2025-53). Beyond 2053, net zero investments would be concluded, while reduced energy costs would continue to yield GDP gains. Figure 18. Net Zero Investment vs GDP Figure 19. Net Zero Investment vs GDP Gains* (% GDP) Gains*, Discounted at 6% (% GDP) 3.0 1.0 2.9 0.8 2.5 0.8 2.0 0.5 0.6 1.5 1.2 0.4 1.0 0.2 0.2 0.5 0.7 0.1 0.1 0.1 (0.1) (0.0) (0.5) (0.2) 2024 2044 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2046 2048 2050 2052 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 Total GDP Gains Total GDP Gain o/w GDP Gain - Reduced Energy Prices o/w GDP Gain - Reduced Energy Prices Total Investment Total Investment Source: World Bank staff calculations, based on the MFMod for climate change. *Total GDP gains correspond to the marginal impact of enhanced energy efficiency measured as the difference in GDP between the scenarios with and without Enhanced Net Zero investments (i.e., Wet/Warm + Targeted Adaptation + Net Zero vs Wet/Warm + Targeted Adaptation). The marginal impact of reduced energy costs was estimat- ed by isolating energy cost effects from the impact of incremental investment and carbon taxation on GDP through independent model runs. The value is reported as a share of GDP under the baseline development pathway. A 6 percent discount rate follows the guidance for all World Bank CCDRs. Moreover, it may be challenging for the country to accommodate the anticipated impact of Net Zero investments on the public debt stock and current account deficit. By 2053, the required public investment to achieve the Net Zero target would increase public debt by 14 percent of GDP under the assumed tax revenue performance (i.e., 16.4 percent of GDP) and level private finance mobilization (i.e., 2/3rds of incremental investments) (Figure 20).157 Carbon taxation or an alternative tax measure with an equivalent revenue impact could reduce the incremental debt burden by approximately 9 percent of GDP. However, mobilizing additional public revenue at the desired pace and scale may prove challenging, given the extensive tax reforms already implemented since 2022 and persistent structural inefficiencies in tax administration. For the external sector, Net Zero investments would generate additional savings of up to 0.7 percent of GDP in fossil fuel imports per year by 2053 (Figure 21).158 However, importing the capital goods required for the energy transition would more than offset these gains, leading to a transitional deterioration of the current account deficit by up to 1.0 percent of GDP during 2025-53.159 Therefore, investments to achieve net zero by 2053 may exceed the country’s financial capacity under the expected financing constraints. 157 A lower level of private sector participation than envisaged in the energy optimization model (that is, two-third of total costs) could significantly increase the accumulation of public debt resulting from the net zero investments. 158 The scale of savings in imported fossil fuels is relatively small because, under our baseline scenario, the energy intensity of the Sri Lanka economy is expected to decrease substantially, reducing fossil fuel imports from 4-5 percent of GDP per year to 0.7 percent of GDP by 2053. 159 The net effect on the current account is illustrated by mapping the sectoral investments identified in Chapter 5 with the pertinent industries listed in the latest supply and use table from Department of Census & Statistics. It was assumed that the import content of each sectoral investment aligns with the imported share of supply of the corresponding industry. 47 Country Climate and Development Report Figure 20. Incremental Public Debt as % of Baseline Figure 21. Current Account Balance as % Baseline GDP GDP across Climate & Policy Scenarios across Climate & Policy Scenarios 20 2023 2025 2029 2033 2035 2039 2043 2045 2049 2053 2027 2031 2037 2051 2047 2041 19.6 15 -0.5 Carbon Taxation 10.6 10 -1.5 6.0 Net Zero -2.5 5 (2.9) 4.7 -3.5 (3.1) - Net Zero (4.1) 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 -4.5 Wet/Warm + Adp +Net Zero (No Carbon tax) Wet/Warm Wet/Warm + Adp +Net Zero (With Carbon tax) Wet/Warm + Adp Wet/Warm + Adp Wet/Warm + Adp +Net Zero Wet/Warm Carbon taxation impact Net zero investment impact Source: World Bank Staff Calculations, based on MFMod for climate change. Note: Adp: adaptation investments. Net Zero: Enhanced Energy Efficiency investments. Investments in resilient development and targeted adaptation will lay the foundation for the long-term transition to a full Net Zero pathway. Resilience investments will yield considerable economic benefits (for example, lower energy intensity, imports and prices) and help increase the resilience of the economy and people to climate change. Furthermore, incremental investments on targeted adaptation are expected to directly avoid a substantial portion of potential climate shocks. The level of investment required for these two sets of interventions can be accommodated by the country (discussed further in Chapter 7) and are estimated to have significant net economic benefits. A reduction in the costs of green energy technologies beyond current projections or further improvements in the macro-fiscal- investment outlook may, nonetheless, increase the feasibility of targeting a Net Zero pathway by mid-century.160 160 By 2050, the energy optimization model assumes a reduction of 25, 20 and 50 percent in the capital cost per kW for solar, wind and offshore wind energy generation, respectively. Assumptions are aligned with projections from the International Renewable Energy Agency. 48 Country Climate and Development Report 7. Financing and Policies to Achieve Sustained, Resilient Growth Transitioning to a climate-resilient and energy efficient economy will require substantial investments; given the constrained financing environment, strong prioritization is essential. Sri Lanka faces structural challenges, ongoing fiscal reforms, and a vulnerable financial sector, limiting its capacity to mobilize financing for climate action in the near term. Limited fiscal space, borrowing capacity, and access to international capital markets hinder meaningful domestic resource mobilization. Additionally, the financial sector’s contribution is constrained by its small size and narrow diversification, especially while still recovering from the economic crisis. In the short term, Sri Lanka should strategically attract FDI and utilize international sources of climate finance to support investments in climate resilience and energy efficiency. This will pave the way for a greater role for the public and domestic financial sector in the longer term. 7.1 Financing needs The transition to a climate-resilient, energy efficient economy will require substantial public, private and international climate investments amounting to at least US$118 to 140 billion between now and 2053.161 As presented in Table 5, these include: • Resilient development investments (the Baseline development pathway discussed in Section 6.1.1) are estimated at US$82 billion, the equivalent of 4.2 percent of GDP until 2053 across the private and public sectors, on average. These investments include interventions to expand power generation and distribution, modernize transport systems, boost energy efficiency, and increase access to safely managed water and sanitation. • Achievement of Net Zero by mid-century is projected to increase aggregate investment needs by US$33 billion or 1.7 percent of GDP, on average. • Targeted incremental adaptation investments are presented as a range to account for the limitations of the modelling conducted for this report. The lower bound (0.1 percent of GDP, on average) corresponds to the investments reflected in the macroeconomic model in Chapter 6, while the upper bound (1.2 percent of GDP, on average) reflects the adaptation needs estimated for the government’s CPP.162 This would bring the resilient and incremental investments to an upper bound of approximately 7.1 percent of GDP per annum. 161 Present value discounted at 6 percent per annum in 2023 US$. 162 Targeted adaptation investments incorporated in the macroeconomic modelling described in Chapter 6 are less comprehensive and only amount to approximately US$10 billion, less than half of the CPP estimate. Adaptation investments mapped in CPP encompass various critical areas including floodproofing and retrofitting buildings, irrigation and drainage systems, and net shading. 49 Country Climate and Development Report Table 5. Investment Needs 2025-53 SL CCDR - Investment Needs, 2025-53 US$ bn (2023 US$ bn (2023 prices, Average prices) discounted 6%) Annual % GDP Resilient Development Investments 218 82 4.2 (Baseline Development Pathway) Public 85 34 1.7 Private 133 49 2.5 Investments (Incremental) 108 to 150 35 to 58 1.8 to 2.9 Net Zero Investments 104 33 1.7 Public 33 10 0.5 Private 71 23 1.2 Targeted Adaptation Investments (100% Public) 4 to 46 2 to 24 0.1 to 1.2 Total Investment Needs 326 to 368 118 to 140 6.0 to 7.1 Total Investment Needs - Public 121 to 164 46 to 68 2.3 to 3.5 Total Investment Needs - Private 205 72 3.6 Note: The division of public/private investment needs was determined as follows: i) breakdown of investments on power generation, energy efficiency, and transport reflected in the baseline pathway and enhanced measures are based on assumptions presented in Chapter 5; ii) investments on water/sanitation included in the baseline pathway are assumed to be public; and iii) all targeted adaptation investments are assumed to be public. 7.2 Public finance and financial sector development context Fiscal space for public investment is expected to remain constrained in the short term. Fiscal reforms resulted in a primary surplus of 1.6 percent of GDP in 2024. Simultaneously, the interest bill also declined due to a reduction in interest rates and debt restructuring.163 Nevertheless, the overall fiscal deficit will remain close to 5 percent of GDP over 2025-27 as interest payments will continue to absorb half of the revenues collected. As these constraints subside, public investment will increase gradually from a trough of 2.3 percent of GDP in 2023 but is expected to remain below 4 percent of GDP until at least 2027. Thereafter, capital spending is anticipated to rise further to 5-6 percent of GDP per year by 2050.164 The financial sector is small, bank-centric and poorly diversified, and its contribution to economic growth has been modest. Credit to the private sector has decreased in the last decade, reaching roughly 27 percent of GDP in 2023. In addition, credit has been concentrated in large corporates and SOEs, which have traditionally crowded out the private sector. The banking sector has a strong state presence, with state-owned banks holding roughly 40 percent of total assets. Overall, there is limited availability of long-term finance since capital markets are at moderate stages of development. Between 2013 and 2023, capital raised through the Colombo Stock Exchange averaged less than 1 percent of GDP per year. The availability and usage of other financial services, critical for household resilience, is limited. Despite adequate levels of financial inclusion, savings mechanisms are modest while insurance penetration and the usage of digital financial services remain low among farmers and entrepreneurs. Digital financial services, which can drive innovation and competition, have yet to fully develop. The crisis compounded effects on the financial sector. In the aftermath of the crisis, the sector observed steady increases in nonperforming loans (NPLs) and lower profitability, which have added pressure to capital bases. The state- owned banks were particularly exposed to problematic SOEs, which were subject to restructuring and impacted on capital positions. GoSL has taken steps to address structural issues, tackling critical gaps in the legal and regulatory 163 A domestic debt restructuring operation was finalized in 2023, official creditors reached an agreement in mid-2024, and most of the past international bond issuances were successfully exchanged in December 2024. Post-restructuring, debt is expected to decline to 106 percent of GDP in 2024, and 102 percent by 2027. 164 The baseline development pathway scenario assumes that the distribution of primary public spending across recurrent and capital lines remains stable throughout the forecast horizon (i.e., one-third capital, two-third recurrent). 50 Country Climate and Development Report framework, strengthening state-owned banks, and incentivizing the reduction of banks’ exposures to SOEs. However, the stock of NPLs remains high, constraining the sector’s ability to finance the economy. Other complementary efforts to address these issues – including introducing a new Insolvency Bill and a framework for corporate workouts, implementing the new Securities Exchange Act, and developing the ecosystem for digital payments – are also underway. Efforts to strengthen the digital financial infrastructure in line with the new Digital Strategy should enable new financial instruments. Sri Lanka’s increasing inward orientation is a key constraint to private sector development. There are several challenges, including an unpredictable and opaque policy environment; a highly restrictive trade regime that limits investment in export-oriented activities and diversification; infrastructure gaps in transport and energy; and an outdated and fragmented institutional and legal FDI framework. This has led to low FDI concentration in non-tradable sectors. Between 2011 and 2021, FDI inflows averaged 1.2 percent of GDP, which is below the averages for middle income countries (1.9 percent for lower income and 2.5 percent for upper middle-income countries) and far behind aspirational peer countries (average 4.8 percent). While the FDI is overall low, due to a lack of disclosure requirements, the extent of climate finance that is attracted through FDI is not known. The priority investments identified in this CCDR require a mix of public, private, and international climate finance. Investments are at different stages of market maturity and technical viability. Some solutions are already accessing financing on commercial terms, while others face enabling-environment challenges that lead to higher real or perceived risk for financiers—as well as higher cost of financing. While the public sector and international climate finance provide important funding for climate solutions, the private sector plays a critical role in closing financing gaps. Several barriers hinder the scaling up of private finance, including unclear business models, low returns, and inadequate policies (Table 6). 51 Country Climate and Development Report Table 6. Priority Climate Investments Potential instruments & Investment priorities Lead actor Financing challenges solutions Rural Resilience and Prosperity 1. Revenues from environmental commodities Insufficient financial resources: cities lack to create market incentives Local + Central Large-scale watershed credit ratings; lack of disaggregated local for communities and for government management programs data private enterprises to invest (urban-rural) Development and participate in watershed Capacity building for personnel involved partners management in climate-related decision-making 2. Grants: Leverage international climate funds Central 1. Policy/budgetary support: Irrigation, water government Financial instrument availability: bulky Reform irrigation water pricing storage, water resource management (including National level investments with large upfront costs 2. Guarantees inter-basin water ministry Limited incentives to invest in transfer), water supply 3. Grants Development maintenance and sanitation   partners Central government Resilient transport Provincial Insufficient financial resources: limited 1. Grants networks governments government budget. 2. Green loans Development partners Financial instrument availability: Continued uncertainty and high interest 1. Technical assistance: rates add to both lenders and borrowers’ Strengthen advisory services risk aversion. Further, most of the funding to improve: (i) farmer capacity from formal sources goes to tea, rubber, and financial literacy, including Government paddy, livestock/dairy farming, vegetable/ digital; and (ii) build the fruit cultivation, fisheries and coconut. capacity of financial institutions CSA Agribusiness There is a lack of tailored and innovative to design instruments Financial sector instruments 2. Innovative financing Farmer readiness. Poor proposals, limited models: e.g., CSA credit lines & financial literacy, and lack of formal diversifying risk guarantees business records make credit evaluation difficult; many farmers lack collateral or 3. Guarantees verifiable credit histories Forest conservation Distributional impacts: Economic 1. Grants to improve ecosystem hardships cause communities to resort to 2. Revenues from services (timber and Ministry of unsustainable logging for fuel or income environmental commodities: nontimber forest Environment Weak enforcement: Reduced Payments for ecosystem products, water enforcement of environmental regulations services availability, control of erosion and Insufficient financial resources: Lack of 2. Innovative financing models: sedimentation) public funding Thematic bonds 52 Country Climate and Development Report Potential instruments & Investment priorities Lead actor Financing challenges solutions Distributional impacts: Economic hardship causes communities to resort to unsustainable fishing 1. Innovative financing models: Wetland restoration Ministry of Weak enforcement: Reduced Blended finance (fishing, protection Environment enforcement of environmental regulations 2. Disaster risk management against flooding) Local communities leading to unsustainable habitat loss instruments Financial instrument availability: Investments with no guarantee of impact Distributional impacts: Economic Ministry of hardship causes communities to resort to unsustainable fishing practices 1. Grants for sustainable Marine habitat Fisheries fishing practices protection (fishing and Marine Weak enforcement: Reduced tourism) enforcement of environmental regulations 2. Disaster risk management conservation instruments organizations Financial instrument availability: Investments with no guarantee of impact Investing in Livable Cities Insufficient financial resources: Cities State government need concessional financing and grants Storm water as they lack credit ratings and have 1. Grants infrastructure, pumping Development inadequate cost recovery 2. Guarantees stations, and outfalls; partners NbS and EWS Capacity building: For personnel involved Local government in climate-related decision-making. Limited local data PPP Insufficient financial resources: Cities need concessional financing and grants Development 1. PPPs Solid waste as they lack credit ratings and have partners management inadequate cost recovery; limited ability 2. Grants National + local to attract private investment for waste government management projects Regulatory challenges: Lack of energy codes, energy efficiency standards, and professional auditors Green Building Coordination challenges: Lack of Council of Sri effective collaboration and coordination Lanka among various government agencies, departments 1. Property tax rebates for green buildings Financial instrument availability: Sri Lanka Municipal and urban councils’ funding 2. Enhanced risk management Green buildings Sustainable Energy will gradually reduce within five years; and land valuation Authority property developers struggle to get 3. Innovative financing models Local financing due to the financial crisis; NPLs based on green building criteria municipalities in the construction sector remain high   Private developers Capacity building: Local governments have limited technical capacity and   resources, and lack disaggregated local data Perception: Limited awareness of green buildings among consumers 53 Country Climate and Development Report Potential instruments & Investment priorities Lead actor Financing challenges solutions Clean Reliable Domestic Energy Financial instrument availability: High 1. Innovative financing models: Sri Lanka investment requirements Guarantees and loans to Sustainable Energy support private investment and Authority Private sector engagement: Reluctance of grid integration CEB the private sector to invest in low carbon and climate resilient projects due to: 2. Policy/budgetary support: International and (i) uncertainty in reforms and financial To address transmission Wind and solar power domestic private sustainability of sector and tariffs; (ii) financing, grid strengthening developers lack of clarity on renewable energy for variable renewable energy, procurement process and permitting; and reforms Development partners (iii) uncertainty around transmission 3. Equity: Build a pipeline of investments and backbone transmission projects to leverage private   to ensure offtake sector investment Central government Insufficient financial resources: Limited 1. Grants: Leverage Improvements in the Provincial financial capacity of private bus operators international climate funds bus sector, e-buses + governments to bear the capital cost of better-quality 2. Green loans charging infrastructure Electric utilities buses and e-buses. 3. PPPs Development partners 7.3 Public finance interventions Projected capital spending is likely to fall short of the investment needs until at least the early 2030s. Prior to the crisis, capital spending on energy, transport, environmental protection and water supply accounted for approximately 45 percent of annual public investment (2 percent of GDP per year). Capital spending in these areas is anticipated to gradually increase up to 2.7 percent of GDP by 2050. This trajectory would enable the government to cover the envisaged public share of resilient development investments and most of the public incremental investments on targeted adaptation and enhanced energy efficiency outlined in Table 6 from the mid-2030s onwards.165 However, it would leave a significant financing gap of 0.7-2.5 percent of GDP per annum until then. Sustaining even a modest increase in capital spending on climate-related needs will require, at a minimum, further tax reforms to increase the tax-to-GDP ratio to 15-16 percent of GDP by mid-century.166 As discussed in Chapter 6, GoSL could increase tax compliance by reducing the frequency of in-year policy changes and through the rationalization of existing tax incentives.167 In addition, fiscal revenue can be increased through the introduction of a minimum corporate income tax and targeted interventions to increase tax compliance of high-net worth individuals. However, the success of these tax policy reforms is contingent on improving the tax administration.168 Key priorities include a transition to risk-based audit approaches, speeding up the provision of tax refunds, simplifying and digitizing tax administration processes, and improving taxpayer engagement and communication. If effectively implemented, these measures could yield additional revenues of 1.5-2.0 percent of GDP by 2029 versus 2024 and lay the ground for sustained increases of tax revenue in the long run.169 165 Baseline projections of public investment on energy, transport, environmental protection and water supply/sanitation would be sufficient to cover, on average, 85 percent of the anticipated public investment needs across these sectors per year from the mid-2030s onwards. These calculations are based on the upper bound estimates for targeted adaptation retrieved from GoSL’s CPP plan (2022). 166 A level comparable to other lower-middle income countries which achieved, on average, a tax-to-GDP ratio of 15.7 percent in 2022. UNU-WIDER, Government Revenue Dataset. 167 Tax incentives reduced total tax collection by approximately 36 percent in 2022. 168 According to the 2019 TADAT report, tax compliance was below 50 percent for the main tax instruments. 169 Estimates derived from the Sri Lanka Public Finance Review (2025, forthcoming). The Baseline Development Pathway presented in Chapter 6 assumes that tax revenue increases up to 16.4 percent of GDP by 2053. Therefore, some of these measures are already reflected in baseline projections of tax revenue and fiscal space. 54 Country Climate and Development Report Repurposing public expenditures toward climate resilience goals and building institutional capacity could attract private investment. Public spending could be better oriented to the country’s climate resilience goals and energy efficiency needs, especially in the agriculture and energy sectors. In this regard, it will be critical to build the capacity of the Ministry of Finance (MOF) to: (i) incorporate climate considerations in planning and budgeting, financial management (procurement and public investment management), credit assessments, SOE management, among other dimensions; (ii) develop pipelines of projects and PPPs; and (iii) identify “demonstration” transactions and opportunities to use public funding with the explicit goal of private capital mobilization. Partnerships with multilateral development banks can also play an important role in attracting private finance by aggregating projects, mobilizing concessional finance, and offering credit enhancements and risk mitigation instruments such as partial risk guarantees. Advancing SOE reform can also help the government mobilize climate action. SOEs represent a powerful lever for governments to achieve their climate goals. In Sri Lanka, SOEs play a dominant role across the economy and have a presence in carbon-intensive sectors, such as energy, mining, construction materials, aviation, and transportation, making them vulnerable to climate transition. On the other hand, SOEs can be a powerful agent as investors in green technology and owners of infrastructure investments, which are essential to mitigation and adaptation. The government’s plans to advance SOE reforms provide a timely opportunity to ensure these are aligned with national climate goals. Different approaches can be considered, including the introduction of climate-related targets, improved governance, reform of subsidies, and implementation of sustainable financing mechanisms. Debt for development swaps and green bonds remain an option to raise additional public funding for climate-related needs once Sri Lanka regains access to sovereign debt markets. With the conclusion of the debt restructuring process, borrowing costs were reduced considerably over the short to medium term. With the establishment of the new Public Debt Management Office in 2024, the immediate priority should be to enhance its ability to manage traditional bond issuances domestically and internationally. The preparation of specific climate finance instruments can be considered over the medium term as it requires careful planning, complex multiparty negotiations and appropriate capacity to deliver and report on the associated commitments. Although these instruments may lack the scale to mobilize significant levels of financing,170 they can support Sri Lanka in making investments in resilient development while improving the cost and risk profile of its debt portfolio. As a result, these instruments need to be anchored in the country’s broader debt management strategy. Carbon pricing can raise additional financing for a potential transition to a net zero economy over the medium to long term but must be carefully phased in to manage distributional effects. As discussed in Chapter 6, carbon pricing mechanisms can be considered as part of a broader energy transition policy package to encourage the adoption of green technologies and increase fiscal space for the required investments.171 However, energy taxation can place a disproportional burden on poorer households as shown by the recent removal of implicit energy subsidies in Sri Lanka. Analysis conducted for this report suggests that deploying carbon taxation in conjunction with enhanced energy efficiency investments could contain its regressive effects. 7.4 Mobilizing private finance The financial sector faces a diverse set of challenges. Capital markets mobilization has been limited and sustainable lending – primarily for energy-efficient equipment, rooftop solar power and medium-scale wind and solar farms – represents roughly 0.3 percent of GDP.172 Financial institutions lack technical expertise to evaluate green projects and design appropriate instruments; implementation of the new sustainable finance requirements and green taxonomy has faced challenges.173 Thematic issuances in the capital markets are at a nascent stage, hindered by limited awareness and understanding of the new framework.174 There is a need to build capacity in the private and financial sector, 170 The largest debt-for-nature swap to date was carried out in Ecuador in 2023, with the retirement of US$1.6 billion in outstanding debt. IMF Regional Economic Outlook (October 2023) estimates an immediate debt reduction of US$ 972 million, the difference between the face value of repurchased bonds (US$ 1.6 bn) and the new blue bond (US$ 656 m). A deal of a similar size would reduce Sri Lanka’s external debt stock by approximately 1 percent of GDP (share of external debt stock and GDP calculated against baseline GDP forecasts for 2027 when the country is expected to regain market access), a modest impact when compared with the projected external debt stock of approximately 40 per cent of GDP in 2027. See IMF Country Report No. 24/161 (June 2024). 171 The Green Tax on imported petroleum products (i.e., NPR 1 per liter of petrol/diesel imported to the country) introduced in Nepal in 2024 provides practical example in the South Asia Region. Article 45 of the Sri Lanka Sustainable Energy Authority Act, No. 35 of 2007 provides the legal basis for the introduction of a similar duty on fossil fuel imports but has not been enforced by the authorities. 172 Central Bank of Sri Lanka. 2023. Financial Stability Review. Based on the 2022 Sri Lanka Green Finance Taxonomy. 173 CBSL has taken a lead role with the Roadmap for Sustainable Finance, the Banking Act Direction on Sustainable Finance Activities, as well as the Green Finance Taxonomy for priority sectors. 174 Colombo Stock Exchange introduced the framework for green bonds, issuing guidelines for their issuance, including accepted Green Bond Principles and requirements of a second-party opinion from an independent third party. 55 Country Climate and Development Report including an understanding and identification of climate-related opportunities and risks. GoSL can also support the development of a pipeline of bankable projects in key sectors (Table 7). The GoSL must strengthen the enabling environment and provide investors with consistent policies. Clear procedures, regulatory certainty, and improvements in institutional performance, especially procurement, will boost investor confidence. As noted in Chapter 6, the broader FDI and investment environment needs to be strengthened, including through a comprehensive Investment Policy and implementation of the Economic Transformation Act. Strengthening the country’s PPP framework will be equally critical to unlock private financing, including through the passage of the PPP Act currently under preparation, development of a transparent and robust PPP program, and substantial capacity building. Planned efforts to introduce a National Policy for Industrial Development and a comprehensive framework for SME development provide an opportunity to mainstream climate considerations across government programs. Broader efforts to develop the financial sector (capital markets, digital financial services, secured transactions) are also important. Developing capital markets and new climate risk-related financial instruments will help to mobilize private investment. Authorities should continue to strengthen and expand the frameworks for thematic bonds. Once macroeconomic conditions become more favorable, thematic issuances could gradually play a role along with broader capital market development. A review of the investment policies of insurance providers and pension schemes could also be beneficial in unlocking investment in new asset classes. Accelerating the development of the insurance sector will also contribute to climate resilience. Climate risk-related financial instruments like private insurance can provide safety nets and mitigate risks in climate exposed sectors (for example, agriculture). There are also gaps in safety nets against climate-induced disasters, with natural disaster insurance only sparsely used by industrial and commercial properties.175 There is a need to strengthen financial sustainability and corporate governance of the National Disaster Insurance Scheme. Financial sector authorities can play a key role, including through state-owned financial institutions (SOFIs). Sri Lanka has many SOFIs, including state-owned banks, the public pension schemes, National Insurance Trust Fund, National Credit Guarantee Institution, Agriculture and Agrarian Insurance Board, and community-based banks (Divinaguma). These institutions can develop innovative instruments, support project preparation, provide targeted financial assistance, and pilot blended finance mechanisms, including through capital pooling, guarantees and insurance, green credit lines, co-lending and credit enhancements (through subordinated position or first loss). It is important for the government to assess which authority or authorities are best placed to engage in blended finance transactions. Given the country’s exposure to climate change, the Central Bank of Sri Lanka (CBSL) should build the capacity of the sector to identify and manage climate-related risks. For example, financial institutions have significant credit exposure to climate-relevant sectors, such as energy, construction, agriculture, and transportation sectors. Authorities can prepare a climate risk assessment, starting with the identification of data needs and surveys for financial institutions. CBSL can then integrate climate-related considerations into supervision and ensure the sector’s readiness. 7.5 Sectoral opportunities There are significant opportunities in the agriculture sector. There is an estimated US$4.3 billion private investment potential in provision of solutions for enhancing agricultural production, increasing climate resilience, and reducing emissions for key commodities (Table 7). Financial instruments are not tailored to the sector’s reality, including seasonal and informal cash flows, longer and diverse cycles, and challenges associated with remoteness and infrastructure gaps in rural areas. Financial institutions are particularly risk-averse to agriculture financing in general, due to the lack of bankable projects, limited modernization, and potential losses from climate change and natural disasters. Meanwhile, there is limited lending outside the banking sector and low levels of digitalization in the sector. 175 Verite Research. 2018. Natural Disaster Insurance Coverage. Policy Note. 56 Country Climate and Development Report Table 7: CSA Investment Opportunities for the Private Sector Investment Investment Investment Opportunity Applicable Value Chains Potential Demand (US$ mn) (US$ mn) Renewable energy: (i) Solar-powered water pumps Tea, chili, cinnamon, dairy, poultry 1,529 444 (ii) Solar panel for processing Rice mills, tea factories 44 22 Irrigation infrastructure: borewells Chili, cinnamon, dairy, poultry 220 59 Irrigation technology: (i) Sprinklers Tea, chili, cinnamon 880 266 (ii) Drip irrigation Chili 269 92 Pest and disease management: insect-proof Chili 316 108 netting Resilient animal husbandry: livestock shelter and Dairy (shelters and ventilation manage- 991 373 ventilation ment), poultry (shelters) Total (US$ mn) 4,249 1,365 Source: International Finance Corporation (IFC) & Unique Land Use GmbH. 2023. Sri Lanka Climate Smart Agriculture Project. Final Project Report. Note: The exchange rate is US$1 = LKR 322.75 (April 18, 2023). Investment demand is assumed to be 25 percent of technical investment potential among small farms, 33 percent among medium-sized farms, and 50 percent among large farms. Catalyzing private financing requires that sectoral challenges be addressed and spending in the agriculture sector be reoriented. Public spending on the agrifood sector is heavily focused on infrastructure and input subsidies, with minimal investment in research, extension and technology transfer and marketing, which are essential for CSA technologies and smallholder value chain development. As discussed in Chapter 3, reallocating funds from fertilizer subsidies to CSA extension services can improve farmers’ knowledge and fertilizer use efficiency which, in turn, could strengthen business proposals. Resources can also be redirected to better-targeted cash transfers for poorer farmers, which can be tied to digital financial inclusion programs. Improvement in the targeting of existing fertilizer and water subsidies is estimated to save 0.17 percent of GDP in spending per year that could be redirected to these other resilience investments.176 There is room to modernize existing agri-insurance mechanisms and to expand coverage through digital solutions. This would require coordinated efforts to improve climate data availability. In addition, the National Credit Guarantee Institution Limited could introduce a specific window to offer guarantees with more favorable terms to support these investments. Building on the new secured transactions regime and registry, authorities and financial institutions should work together on increasing the acceptance of collaterals specific to agriculture (farmland, equipment, and agricultural commodities), which support the development of appropriate agri-finance instruments and boost farmers’ willingness to invest in CSA. Recent reform efforts in the energy sector provide opportunities for unlocking financing for renewable energy investments. More than half of the financing needed to scale up renewable energy generation can be deployed by private finance, provided the conditions are right. Public financing can also be used catalytically to scale up renewable energy sources. The financing needed to upgrade transmission and distribution grids to enable renewable energy will have to rely primarily on public funding. As discussed in Chapter 5, GoSL has taken steps to improve the operational efficiency and financial stability of CEB through cost-recovery energy tariffs and a new legal framework. However, commitment to these reforms needs to be sustained, and further efforts are required to attract private finance and support renewable energy investments. 176 World Bank Public Finance Review (forthcoming). Fertilizer subsidies, totaling over LKR 57 billion in 2022 (0.2 percent of GDP), make up more than 75 percent of development subsidy spending. However, wealthier households are more likely to receive fertilizer subsidies. Cutting subsidies to non-vulnerable households could free up 73 percent (0.15 percent of GDP) of the total spending on fertilizer subsidies, but this needs to be accompanied by well targeted cash transfers (using the remaining allocation for fertilizer subsidies) to offset the potential poverty impacts. The existing Aswesuma system can be used, with enhanced targeting criteria, to identify vulnerable farming households. A similar analysis for water subsidies shows that 0.02 percent of GDP could be saved. 57 Country Climate and Development Report 7.6 International climate finance Sri Lanka is eager to tap into global climate finance. The country has established initiatives such as the Sri Lanka Climate Fund and the Sri Lanka Carbon Crediting Scheme to tap into international climate finance sources, including the Green Climate Fund, Global Environment Facility, and development financing from multilateral development banks. Despite these efforts, Sri Lanka’s access to international dedicated climate finance has been limited (Table 8), highlighting the need for better identification of climate-smart projects aligned with national priorities and improved data collection on project baselines and emissions reductions. Table 8. Access to International Dedicated Climate Finance - Active Projects Climate Fund Projects Amount (US$ mn) 14 national projects 39 Global Environment Facility 11 regional/global projects 36 5 projects 105.8 Green Climate Fund 4 technical assistance programs 5.5 Adaptation Fund 1 project 7.99 Climate Investment Funds None to date Source: World Bank Analysis. Carbon markets and results-based climate finance present promising opportunities for Sri Lanka to attract additional grant-equivalent finance. The country is building experience in this area through small-scale clean development mechanism projects in renewable energy sectors and the establishment of the Sri Lanka Carbon Crediting Scheme. Sri Lanka signed a memorandum of understanding with Singapore in August 2023 to facilitate carbon credit trading under Article 6.2 of the Paris Agreement. Private sector engagement is also crucial, with companies like Dilmah Tea achieving carbon neutrality and Sri Lankan Airlines gaining accreditation for its sustainability program, demonstrating the country’s growing commitment to carbon offset initiatives. However, while Sri Lanka has a designated national authority for carbon markets, policies, institutional arrangements and capacity building are needed to advance carbon market readiness. This includes market infrastructure and registries to register, monitor and track emission reduction projection projects and results-based investment opportunities. 7.7 Implementing a national climate finance strategy Given the coordination needed, a climate finance strategy could help scale up investments to support Sri Lanka’s climate goals and needs. The strategy can define how financing will be mobilized in the short and long term across all sectors (Table 8). It could spell out roles of the private and public sectors, and actions to mainstream climate objectives into sector policies and planning practices as well as instruments to mobilize private financing. The strategy also provides a platform for stakeholder consultation and coordination across development partners. This can be supplemented by sector-specific analysis and planning to ensure that sector policies are aligned with climate goals and develop a pipeline of bankable projects. Given the resource constraint, in the short term, authorities may consider focusing on sectors like agriculture, energy, and transport, where financing is already flowing. 58 Country Climate and Development Report Recommendations: Financing and policies to achieve sustained resilient growth • Establish a climate finance task force to strengthen coordination, define roles and sources of climate financing, and raise private sector awareness of climate investment opportunities • Align financial sector strategies with climate goals and related risks: • Develop a pipeline of bankable projects and identify transactions with high “demonstration” effects in coordination with the private sector. • Incorporate climate considerations in SOE and SOFI strategies, governance and restructuring plans. • Reflect climate-related opportunities and risks in financial sector development plans and build financial sector capacity to expand climate investments. • Develop climate finance instruments and related guidelines (sustainable loan and insurance, thematic bonds) and pilot blended finance mechanisms. • Incorporate climate considerations into state-owned financial institution strategies. • Strengthen institutional capacity and governance for the implementation of national climate policies to attract more donor and private investment. 59 Country Climate and Development Report 8. Priority Recommendations Based on the conceptual framework presented in the Executive Summary, this CCDR identifies five high-level objectives: 1. Maintain macro-fiscal-financial stability and implement key structural reforms 2. Build resilient livelihoods 3. Enhance urban livability and prosperity 4. Expand clean domestic energy 5. Private and climate finance Key Recommendations for achieving the five High-Level Objectives are presented in Table 9. These recommendations synthesize the detailed recommendations that are identified throughout the report at the end of the individual sections. They are assessed and ranked in terms of their timeframe and urgency for implementation. The progress indicators cover the next five years. In this context, short-term actions refer to a one- to two-year timeframe to implement the recommendation, and medium-term actions to a three- to five-year timeframe. Urgency is defined by “a delay in action increasing the cost of achieving the same end point”. Darker green indicates most urgent and shortest-term actions. Feasibility is determined by the ability of the relevant actor to overcome barriers (including political economy considerations, institutional capacity and readiness, affordability, and financing). Policy actions are marked with a ‘ ’ symbol, investments ‘ ’ symbol), and research/analysis/knowledge a ‘ ’ symbol. Cross-cutting linkages/synergies (where action facilitates the achievement of other development objectives) are also illustrated. 60 Country Climate and Development Report Table 9: Priority Recommendations Recommendation Time frame Progress indicator  Feasibility, Cross-cutting and implementation barriers linkages  urgency and actors  High-Level Objective 1: Maintain macro-fiscal-financial stability and implement key structural reforms Short term Total FDI inflows (in USD)  Feasibility: MEDIUM (Urgent: Increase in exports,  Vested interests and uneven (1.1) Boost competitiveness and these decrease in import private sector and investment Economic growth facilitate trade and investment for a structural dependence playing field and jobs stronger baseline recovery: reforms Labor force participation  Coordination required across  strengthen the FDI legal and are critical rate (%); participation government, trade unions and institutional environment through to boost rates by gender & age (%) private sector Increased implementation of a revised economic investments and Increase in credit to the  Actors: President’s Office, Prime Economic Transformation Act and growth and lower costs for private sector Minister’s Office, MOF, Ministry remove FDI restrictions. consolidate renewable energy, Enhanced SOE  of Industry, Ministry of Trade,  advance SOE reform and PPP legal debt agri-business and governance and Ministry of Labor, Board of framework to mainstream climate sustainability) climate smart profitability Investment considerations and enable private agriculture participation.  implement the new National Tariff Policy to eliminate para-tariffs and gradually cut duties.  update labor legislation to ensure a more inclusive and flexible labor market, and lift restrictions on female labor force participation.  introduce a modern insolvency regime (including out-of-court mechanisms) and promote digital financial services to expand credit to private sector. 61 Country Climate and Development Report Recommendation Time frame Progress indicator  Feasibility, Cross-cutting and implementation barriers linkages  urgency and actors  Short term Tax revenue as a share of  Feasibility: MEDIUM (1.2) Enhance tax policy and (Urgent: GDP Resistance from beneficiaries of administration to increase revenues fiscal and debt  existing system of tax incentives Improved Tax for resilience investments: sustainability Administration Diagnostic Broad-based fatigue of tax policy  limit new tax incentives and and Assessment Tool scores reforms in the aftermath of the introduce transparent, rules-based government’s  eligibility criteria for granting # of new registered crisis tax hikes capacity taxpayers time-bound incentives. Resistance towards the to invest  introduce a minimum corporate tax Higher compliance rates  introduction of modern tax hinge on the rate in line with the Global Minimum among taxpayers administration information sustained Tax Initiative and progressive tax technology systems to maintain and equitable rates on capital income, wealth and current opacity of the system inheritances. increase in revenues) Hikes in energy prices following  conduct a review of core tax removal of implicit subsidies processes to eliminate inefficiencies pose political economy and design a unified framework as constraints to carbon pricing the basis for a tax procedural code.  investin information technology to Actors: MOF, Inland Revenue Revenues strengthen tax administration and Authority, Board of Investment to support collection capacity. public sector gradual introduction of  consider resilience and carbon pricing mechanisms. energy efficiency Short term  # of rural households Feasibility: MEDIUM investments (1.3) Prioritize resilience (Urgent: with access to reliable • High up-front costs for resilient investments and protect poor and the level transport, water, digital transport infrastructure marginalized households: infrastructure and literacy and severity projects  develop a comprehensive resilience compared to baseline Market of climate • Limited funding for expanding and adaptation investment plan, access + shocks is  Coverage of the poorest coverage and improving setting clear public investment economic escalating, 20 percent by cash services priorities. opportunities and the transfer programs  ensure rural access to crucial • Delays in the production economic services such as transport of core statistics (i.e. crisis has connectivity, safely managed water households’ poverty & enhanced supply and sanitation, and digital Aswesuma beneficiary status) Public health infrastructure and literacy. Sri Lanka’s make it difficult to assess improvements vulnerability  enhance the adaptability of social whether cash transfers protection systems by: (a) expanding are targeting the poor and social registry coverage and quality; vulnerable (b) setting aside climate shock response funds; and (c) assessing • Limited analytical capacity and improving the main cash within the Welfare Benefits transfer program (“Aswesuma”)’s Board to monitor and improve targeting methodology . registry data quality  integrateclimate change sensitive • Inflexible systems and approaches to Sri Lanka’s North processes for recertification and East Territorial Development limit the ability to deliver swift Strategy and Clean Sri Lanka when disaster relief inclusively addressing spatial inequalities. Actors: Ministry of Irrigation and Water Resource Management  adapt safeguards to ensure climate-related interventions do (MoIWRM), Ministry of not exacerbate regional disparities, Technology (MOT), Ministry of historical grievances, or inequality, Digital Economy, MOF; Dept. of and actively support inclusion and Social Services social cohesion where relevant. 62 Country Climate and Development Report Recommendation Time frame Progress indicator  Feasibility, Cross-cutting and implementation barriers linkages  urgency and actors  High-Level Objective 2: Build resilient livelihoods Short term  Hectares of terrestrial Feasibility: MEDIUM (2.1) Adopt an integrated (Urgent) and aquatic areas under Requires significant Supports landscape management approach: enhanced conservation/ institutionalization and policy sustainable high management development value nature-  Enhance institutional coordination based tourism across ministries and government.  Beneficiaries with Actors: GoSL; Ministry of and jobs through enhanced resilience to Education (MOE); MoIWRM;  Strengthen local development conservation climate risks Ministry of Agriculture, Mahaweli programs for natural resource and watershed management, integrating  Operational multi- Authority of Sri Lanka, provincial stakeholder platforms councils and local actors Reduces climate risk reduction. established for specific disaster risks such  Builddata and decision-support as landslides, large landscape systems for climate-informed drought and floods interventions: (a) planning of rivers, watersheds, across rural and hydropower/soil and landscapes. urban areas conservation; (b) irrigation/agriculture/ forest; (c) conservation Supports corridors/tourism; resiliency of (d) coastal zone hydropower, road, management/seascapes/ and irrigation tourism) investments  # of communities engaged in collaborative, Supports multi-sector spatial improved water planning and quality and management with other availability: GoSL institutions crucial for  # of new policies and integrated water tools, including digital management (see tools, deployed to support 2.2), agriculture, landscape planning hydropower, and water supply Medium term  Updated Water Resources Feasibility: HIGH (2.2) Harness water (Urgent) Act • Lack of coordination among resources for development  Implemented river basin agencies to share data Optimizes water and mitigate impacts of water- level approach use efficiency, • Evolving dam safely regulatory related risks through integrated enhances  Increased water storage framework water resources management: resilience, Update the policy, legislative and  Increased water security • Budgetary constraints for and promotes regulatory framework, to clarify  Kilometers of irrigation maintenance and regulatory sustainable mandates, water allocation rules, canals rehabilitated/ oversight practices, and incentivize operation and expanded Actors: MoIWRM benefiting maintenance and dam safety; irrigation, introduce river basin level planning; hydropower, scale-up integrated landscape and and agriculture tank-cascade programs; rehabilitate through improved and expand irrigation infrastructure, governance, and enhance water security (storage, cost-sharing & inter-basin transfers, demand-side environmental management). protection 63 Country Climate and Development Report Recommendation Time frame Progress indicator  Feasibility, Cross-cutting and implementation barriers linkages  urgency and actors  Short term  # of people with Feasibility: HIGH (2.3) Promote, incentivize (Urgent) strengthened food and • Lack of a unified land Boosts and upscale CSA by: nutrition security administration system with climate resilience  Implement CSA by promoting and  Beneficiaries with clearly defined institutional + scaling CSA solutions through enhanced resilience to responsibilities & simplified Agricultural incentives, integrated landscape climate risks procedures for changing land productivity management, participatory  # of new policies/ use Promotes planning, climate risk tools, and amendments that • High cost of credit and lack of sustainable rural policy reforms to enable land use facilitate private sector awareness among farmers development  flexibility and high-value agriculture. participation in paddy • Access to capital differs across Clear targets  Reforming public spending to land management crop type and landscape- prioritize resilience-building across  Improvement in land use • Lack of coordination and level planning value chains, invest in research efficiency (e.g., yield per planning can ensure that and extension, and mobilize CSA hectare) agricultural and Actors: Ministry of Agriculture; financing through PPPs and banking fisheries policies MO sector capacity building. are aligned and mutually reinforcing Short term  Management plan Feasibility: LOW (2.4) Develop a climate-informed (Less Urgent) developed and • Lack of capacity for data fisheries management plan with implemented achieving collection, technology use and Supports jobs, enforcement mechanisms, improve sustainable fish stocks, monitoring of fishing activities nutrition and rural infrastructure to reduce waste and healthy ecosystems, and growth among • Resistance to co-management enhance postharvest handling. economic and social poor coastal and climate considerations + Strengthen value addition through benefits for communities communities, as from stakeholders involved in processing support for small- well as export overfishing scale actors, promoting economic opportunities diversification, and enhancing Actors: Ministry of Fisheries sustainability across the fisheries sector. Medium-Long  # of people who benefit Feasibility: MEDIUM (2.5) Enhance resilient term from improved access • High up-front costs transport connectivity in high- (Urgent) to sustainable transport Improves access Actors: MOT poverty areas susceptible to high infrastructure and to education and climate risk. services healthcare Strengthens disaster preparedness and response Medium-Long  # of people provided with Feasibility: HIGH (2.6) Accelerate access to term access to water supply • Large capital outflows and Reduce resilient water supply and sanitation (Less Urgent: and sanitation services limited public funds waterborne by: gradual scale- diseases • Limited involvement of private  Addressing growing water pollution up needed) sector in financing Sustainable by expanding wastewater treatment Actors: Ministry of Water Supply, water and improving management of NWSDB, Dept. Of National management agricultural and industrial effluent. Community Water Supply. practices and agriculture  Accelerating universal access to safely managed water and sanitation, focusing on underserved areas in the north and other vulnerable communities.  Enhancing NWSDB’s efficiency and mobilizing private sector financing 64 Country Climate and Development Report Recommendation Time frame Progress indicator  Feasibility, Cross-cutting and implementation barriers linkages  urgency and actors  High-Level Objective 3: Enhance urban livability and prosperity Short term Decrease in annual flood  Feasibility: LOW (3.1) Use an evidence-based (Urgent) losses • Lack of capacity for approach to identify flooding and # of urban areas with  expanding broadband, climate risk hotspots and revise updated and implemented digital infrastructure and urban development plans. for collecting and validating climate-resilient plans climate risk data • Limited expertise in developing city-level climate action plans • Resistance to revising urban zoning & land use planning Actors: Ministry of Urban Development and Housing (MoUDH); local governments; MOE; Disaster Management Centre Enhances Medium-Long Extent of property damage  Feasibility: LOW resilience, protects (3.2) Design and implement term (using property value • Lack of capacity for planning development measures to mitigate and adapt (Less Urgent: assessments or damage and implementing reservoirs gains, and to projected climate risk in cities, gradual scale- reports) and river defenses ensures especially flooding and extreme up needed) # of people affected by  • Lack of technical expertise for sustainable urban heat. extreme weather events integrating flood management growth Improved response time  & NbS of EWS; community • Resistance to large-scale participation in infrastructure projects & land preparedness drills; acquisition issues implementation of safety • Limited funding for protocols maintaining natural and built Periodic vulnerability  flood infrastructure assessments at the • Inadequate EWS and community level  community-based disaster preparedness programs Actors: MoIWRM; MoUDH; MOE; local government Medium term Public transport ridership;  Feasibility: MEDIUM (3.3) Accelerate low-carbon (Less Urgent: reduction in vehicle • Poor enforcement of solid urban solutions via: changing kilometers traveled; traffic waste dumping laws; an integrated urban mobility and codes and congestion levels municipal solid waste recoup city planning strategy practices is Updated building  fees collected only from a gradual codes; energy efficiency commercial establishments,  a SWM master plan for CMC and process) limiting waste management Greater Colombo Area ratings; green building financial sustainability certifications  invest in improved GHG/air quality • Limited resources and SWM master plan; waste  monitoring and data insufficient technical expertise Reduced air collection coverage  updated green building codes and Air quality index  for utilizing advanced pollution certifications monitoring technologies improvement  invest in urban-rural infrastructure # of monitoring stations  • Inadequate energy codes & Public health linkages efficiency standards; high improvements # of transportation links  upfront costs for green between urban and rural buildings; low consumer areas Increased awareness of green buildings energy efficiency and lack of certified auditors Actors: MOT; Ministry of Power and Energy (MoPE); MOE; Waste Management Authority Western Province; MoUDH; local city government; Green Building Council of Sri Lanka 65 Country Climate and Development Report Recommendation Time frame Progress indicator  Feasibility, Cross-cutting and implementation barriers linkages  urgency and actors  High -Level Objective 4: Expand clean domestic energy Short term  Reduction in financial Feasibility: HIGH (4.1.) Fully implement the new (Urgent) losses of the CEB • Inadequate regulations and Electricity Act to ensure commercial  Increased private enforcement capabilities Attracting foreign sustainability while implementing investment and domestic • Lack of effective coordination procurement reforms that enhance investment in among agencies involved in transparency and private sector the electricity energy policy implementation participation. sector, creating • Impact of economic crisis jobs, fostering Medium term  % share of renewable on households’ ability to a competitive (4.2) Strengthen transmission (Less Urgent) energy in the total afford basic items, including market, and distribution infrastructure to electricity mix energy, due to inflation and greater energy manage variable renewable energy,  Reduced frequency and employment destruction. independence update the grid code and use duration of power outages Households have few integrated planning software. strategies to manage Short term  Reduction in procurement increased energy prices (4.3) Implement an integrated (Urgent) delays and increased • Need for significant private procurement reform agenda to public disclosure of financing strengthen transparency and procurement information accountability in renewable energy Actors: MoPE, CEB projects. Medium term  % of hydropower plants Feasibility: MEDIUM Improves (4.4) Enhance resilience and (Less Urgent) with updated risk- • Political considerations integrated modernize hydropower assets by: informed maintenance influencing the water resource undertaking a comprehensive and emergency response implementation of management multi-hazard risk assessment of plans in place comprehensive risk hydropower plants; establishing assessments and regulatory Bolsters food  Improved efficiency and transparent water rights regulations frameworks for water rights; security safety during incidents to expand reforestation and high political and governance Enhances  Lower cost of repairs, sustainable farming in upstream risks that can affect the overall catchment areas; implement replacements, and implementation of water resilience improved drainage systems and downtime post disaster to climate change resource management rainwater management solutions policies and other natural around energy infrastructure. hazards + • Limited financial resources available for risk assessments strengthens and the implementation of disaster risk new regulations management Actors: Ministry of Water Supply Medium term  Adoption rates of Feasibility: MEDIUM (Less Urgent) e-vehicles across all • Need to strengthen technical (4.5) Accelerate clean categories (%) expertise and operational transportation by devising and Increased  # of charging points skills of local stakeholders enact a national policy, secretariat coordination and platform for e-mobility installed and working • High upfront costs of among sectors including: across the infrastructure e-vehicles & charging (transport, network infrastructure energy, urban  e-buses fleet  Reduction of air pollutant • Lack of regulations for development,  explore PPPs between municipal emissions from the transport service quality fiscal policy) entities and the private sector for transportation sector Actors: MOT; MOE charging network infrastructure   electrification of two- and three- wheelers Reduced air pollution Short term % of social protection  Feasibility: HIGH (4.6) Improve targeting of (Urgent) reaching the bottom Inefficiencies in social Strengthens compensation mechanisms to 40%of households protection responses livelihoods protect vulnerable households from Actors: Department of energy price fluctuations without Social Services relying on inefficient universal subsidies. 66 Country Climate and Development Report Recommendation Time frame Progress indicator  Feasibility, Cross-cutting and implementation barriers linkages  urgency and actors  High -Level Objective 5: Mobilize private and climate finance Short term Increase in climate  Feasibility: HIGH (5.1) Establish a climate finance (Urgent) financing Actors: GoSL; MOE; MOF; CBSL; task force and strategy. Mechanisms for  Colombo Stock Exchange; IRCSL; reporting & tracking financial sector authorities; progress Relevant sector ministries Medium term  # of bankable projects Feasibility: MEDIUM (5.2) Align financial sector (Urgent) developed Substantive capacity building, strategies with climate goals and  # and value of strong political will, adequate related risks: sustainable financing financial resources, and effective  Develop a pipeline of bankable transactions stakeholder engagement to projects  # and value of private implement and monitor these Promote climate finance  financing mobilized with strategies are needed instruments, including thematic support of risk-sharing Actors: GoSL; MOE; MOF; CBSL; Enhances bonds and risk-sharing mechanisms instruments Colombo Stock Exchange; transparency, Insurance Regulatory reduces Incorporate climate considerations  Commission; SEC Climate bureaucratic into state-owned financial institution Change Secretariat; SOFIs hurdles, and strategies ensures efficient resource Short term  Increase in donor and Feasibility: HIGH allocation, (5.3) Strengthen climate (Less urgent) private investment inflows While Sri Lanka has a creating a stable policy and finance institutional  Improvements in designated national authority for and predictable capacity and governance to attract carbon markets, further policies, environment that institutional capacity more donor and private investment. attracts more through training institutional arrangements and donor and private programs, technical capacity building are needed investment assistance, and to advance carbon market establishment of new readiness. This includes market governance frameworks infrastructure and registries to register, monitor and track emission reduction projection projects and results-based investment opportunities. Actors: MoF, MOE, Climate Change Secretariat, development partners, developers 67 Country Climate and Development Report Photo Credits Page xiii - Thilina Kaluthotage Page 6 - © Shutterstock Page 19 - © Shutterstock Page 23 - Thilina Kaluthotage Page 30 - Nazly Ahmed Page 31 - © Shutterstock Page 39 - © Shutterstock Page 48 - Thilina Kaluthotage Page 49 - © Shutterstock Page 51 - Nazly Ahmed Page 60 - Nazly Ahmed 68 Country Climate and Development Report