Monday Jan 12, 2026
Monday Jan 12, 2026
Monday, 12 January 2026 00:24 - - {{hitsCtrl.values.hits}}
Non-debt options such as grant mobilisation and revenue enhancement measures such as time-bound solidarity taxes are critical to financing Sri Lanka’s record Rs. 500 billion supplementary allocation for Cyclone Ditwah recovery, as additional borrowing will tighten already-constrained fiscal space, Verité Research said.
In its report ‘Rs. 500 billion Supplementary Allocation for Cyclone Ditwah Recovery Narrows Fiscal Space,’ Verité notes: “There are several non-debt options that governments, including Sri Lanka in the past, and other countries in similar crises, have used to create fiscal space,” highlighting grants and revenue measures as priority tools.
Parliament approved the Rs. 500 billion supplementary allocation on 19 December 2025 to fund post-cyclone recovery, marking the largest such allocation in Sri Lanka’s recent history. The spending is split between infrastructure restoration (Rs. 250 billion), business and livelihood recovery (Rs. 150 billion), and direct relief and housing (Rs. 100 billion). Of the total, Rs. 150 billion is recurrent expenditure and Rs. 350 billion capital expenditure.
Verité points out that foreign grants have historically played a major role in disaster recovery. After the 2004 tsunami, Sri Lanka received inflation-adjusted grants of $ 1.18 billion, equivalent to around Rs. 360 billion at current exchange rates. “Foreign aid has played a significant role in financing disaster recovery,” the report states.
On the revenue side, the think tank says improving collection from under-utilised sources is another non-debt option. It notes that Sri Lanka has committed to the International Monetary Fund (IMF) to increase cigarette excise duties in line with inflation-adjusted indexation introduced in 2024, but that “there has still been no increase in cigarette prices in line with this indexation for 2026.”
The report also highlights temporary solidarity taxes used internationally during exceptional fiscal pressures. Countries including Japan, Australia, Portugal, and the US have imposed time-bound surcharges on higher personal incomes and levies on corporate profits. An IMF special series identifies such measures as tools to mobilise resources from higher-income groups “which are least affected” during crises.
However, Verité cautions that these measures must be strictly time-bound.
“Sri Lanka has a poor track record of phasing out ‘temporary’ taxes,” it said, citing the Nation Building Tax and the Social Security Contribution Levy as examples that have undermined policy credibility. The think tank has also advocated raising withholding tax rates as “an efficient way to improve tax collection through withholding at source.”
The supplementary allocation lifts total Government expenditure in 2026 from Rs. 7,057 billion to Rs. 7,557 billion, raising spending by 1.5% of GDP. With revenue unchanged at 15.4% of GDP, the budget deficit widens from 5.1% to 6.5%, while primary expenditure rises to 14.3% of GDP, above the 13% ceiling under the Public Finance Management Act.
Verité says that while the Government has cited liquidity from over Rs. 1 trillion in cash buffers and affordability space from a lower-than-planned 2025 deficit, the core challenge lies in debt space.
Lower-than-expected inflation has reduced nominal GDP, raising the debt-to-GDP ratio and requiring higher primary surpluses to offset this effect. As a result, the report concludes that debt-creating methods of financing, especially if they are more costly than existing forms of debt, will not help address the challenge.
