Sri Lanka’s basic social indicators such as the life expectancy, adult literacy, total fertility rate, access to health services rank far above those of its neighbors in South Asia. Therefore, the country is often cited as a success story in human and social development. However, its precarious macro economic situation, coupled with the continuing civil conflict expresses that the cost of maintaining high human and social development has risen while the country’s public finance base has been eroding. This background study, carried out by the Asian Development Bank, has been prepared for the 1998-2001 Country Operational Strategy Study for Sri Lanka. It is the first effort by the Bank to examine both the social sector and two important cross cutting issues; gender and poverty, and to make recommendations for future Bank activities. It is hoped that it will form the basis for increased dialogue between the Bank and the Government of Sri Lanka on social sector development.