Structural reforms with quick results

Contrary to some claims of “courageous NPP executing reforms,” the promised Public Commercial Business Management Bill that includes the creation of a Temasek-like holding company, appears stalled

Reducing para-tariffs and quickly negotiating bilateral and plurilateral trade agreements is essential to hedge against policy volatility in our biggest export market. This is the only way to generate Vietnam-like growth

Four short years ago, Sri Lanka suspended debt repayments. The people experienced a dramatic fall in their living standards. Small businesses died. Fuel supplies could not be unloaded from ships in harbor without full payment because we were not seen as credit worthy. Worth a reminder.

Things may look normal on the surface now, but the businesses that went bust have not come back. The effects of malnourishment driven by the crisis will take years to remedy. Sri Lanka is celebrating the restoration of its upper-middle income status, while Vietnam, which also reached upper-middle income status this year, is unhappy the 10% GDP growth target has not yet been achieved. Our debates are about whether we will hit 5% or 3%, as predicted.

The discipline imposed by the IMF program that Sri Lanka entered is coming to an end. Government revenues that were in a parlous state have been restored to a level where the 2.3% of GDP primary surplus, then deemed challenging, has been exceeded. Foreign reserves are lower than projected, but otherwise things do not look bleak. But the people are suffering, businesses are straining, and the young people are leaving. Growth is the missing factor. Without growth, stability is fragile.

Many have said that structural reforms are needed, without fully explaining why. Here, the rationale is provided.

Reducing para-tariffs and quickly negotiating bilateral and plurilateral trade agreements is essential to hedge against policy volatility in our biggest export market. This is the only way to generate Vietnam-like growth. The burden imposed by the excessively high VAT rate must be brought down to 15%. These actions will yield quick results. Land and labour reforms are essential and must be initiated now. But they will not yield quick results.

 Unilaterally increasing fees for passports, expressway tolls, etc. can yield only so much. What must be done is to fill the divestiture proceeds line by the outright sale of some SOEs and the listing of others 

Rearranging revenue streams

Taxes on domestic trade, primarily VAT, generated 56.7% of total Government revenues in 2025. The Treasury will fight any proposals to reduce the VAT rate. Given the debt overhang, Sri Lanka cannot afford to allow revenues to slide back to pre-2022 levels. The lowering of the VAT rate will have a negative effect on the largest component of Government revenues. Something else must pick up the shortfall.

Eliminating para-tariffs will impact the revenues brought in by taxes on foreign trade, 12.8% of total revenues. Same problem. Unless something else picks up the slack, the overall revenues and our ability to service our debt will be affected. Is it realistic to increase the revenues generated from taxes on income and profits (currently 22%)?

Only one source remains: Non-tax revenues which contribute a paltry 8% now and were 9.3% in 2024. As the efficiency of the Inland Revenue Department improves the tax take, the contribution from non-tax revenues will shrink as a percentage. But if non-tax revenues can be increased, the VAT rates can be lowered and the para-tariffs eliminated without risk to the ability to manage the debt.

The burden imposed by the excessively high VAT rate must be brought down to 15%. These actions will yield quick results. Land and labour reforms are essential and must be initiated now. But they will not yield quick results 

Increasing non-tax revenues

All sorts of things are counted as non-tax revenues. Included are earnings from railways (Rs. 16.4 billion in 2024; costs are much higher and reported elsewhere), embarkation levy (Rs. 14.4 billion); fees from passports and related services (Rs. 38 billion, excluding the one-day surcharges shared among the staff); and dividends (Rs. 7.9 billion). In many cases the State is the monopoly provider and can raise fees, as was done across the board in 2022. Despite the existence of around 500 State-Owned Enterprises (SOEs), dividends are dwarfed by revenues from things like passports. There is an entry for divestiture proceeds in the revenue accounts that has been zero since 2022.

Fees collected by the Telecom Regulatory Commission (TRC) are listed, oddly, as profits. That may be because the TRC is a reliable contributor (Rs. 12.7 billion in 2025) to the Treasury. This is also much larger than the dividends generated by the Government stake in Sri Lanka Telecom (Rs. 227 million the same year).

The last time SriLankan Airlines declared dividends was before it was renationalised during the first Mahinda Rajapaksa Government. Since then, it has not been given to the Treasury, only taken. The 2025 Mid-Year Fiscal Position Report states that the Treasury has taken over the servicing of SriLankan debt of $ 210 million (over Rs. 63 billion) and of Rs. 31.5 billion owed to domestic banks. These transfers are described as equity injections to the technically bankrupt airline.

In 2024 total equity contributions by the Treasury amounted to Rs. 69 billion; in 2025, to Rs. 101.9 billion. These dwarfed the total dividend income from SOEs: Rs. 7.9 billion in 2024 and Rs. 12.6 billion in 2025 and the profits from the state banks (Rs. 11 billion projected for 2026).

Unilaterally increasing fees for passports, expressway tolls, etc. can yield only so much. What must be done is to fill the divestiture proceeds line by the outright sale of some SOEs and the listing of others.

Contrary to some claims of “courageous NPP executing reforms,” the promised Public Commercial Business Management Bill that includes the creation of a Temasek-like holding company, appears stalled. There is no holding company. Even the listing of SOEs has not progressed. The only discernible movement is on Canwill Holdings, the SOE that owns the empty tower known as the Hyatt, and the Mattala Airport.

More than the one-off contributions, full and partial divestiture will have positive effects on the expenditure side. Equity injections will no longer be necessary. If expenditures are brought down, the current fixation with increasing tax revenues can be moderated. What matters is the primary balance, not Government revenues per se.

Sri Lanka Telecom was partially privatised in 1997 and Maxxis currently owns 44% of the company. The shareholders’ agreement that gave management control to the private investor was unfortunately not renewed in 2002. Thereafter, the usual dysfunctions of political control crept in. For example, the board was chaired in 2015-2019 by a person whose only qualification was that of being the President’s younger brother. Its return on equity is lower than that of its comparable competitor. Yet, it is one of the few SOEs that produces dividends for the Treasury and does not demand equity injections.

If the heavy hand of SOE market power can be lifted, key markets will function better, creating employment and better inputs for the economy. Taxes on foreign trade can be lowered, allowing Sri Lankan enterprises to participate in global production networks

More SOEs can be made like SLT, but better. The expenditures incurred on propping them up can be put to better uses that will actually produce benefits to society in addition to dividends. If the heavy hand of SOE market power can be lifted, key markets will function better, creating employment and better inputs for the economy. Taxes on foreign trade can be lowered, allowing Sri Lankan enterprises to participate in global production networks. Taxes on domestic trade can be lowered, increasing the spending ability of consumers and generating demand for businesses. Growth will accelerate, allowing further reductions of taxes and the management of debt.