Fiscal performance improves despite Govt. back in red with Rs. 119 b Budget deficit in July

 Cumulative Budget deficit down 80% from year ago, primary balance surplus up 38%

Sri Lanka’s Budget swung to a deficit of Rs. 119.23 billion in July, wiping out the Rs. 9.51 billion surplus the Government had accumulated over the first half of the year, as expenditure continued to outpace revenue collection into the third quarter, the latest fiscal operations data from the Central Bank of Sri Lanka (CBSL) showed.

The July reversal followed a similar pattern in June, when a Rs. 197.34 billion surplus recorded at end-May had narrowed to just Rs. 9.51 billion by end-June, implying a deficit of around Rs. 187.83 billion for that month alone. The Government had maintained an overall Budget surplus for most of the year after reporting a Rs. 3.01 billion deficit in January.

With the cumulative overall Budget balance falling further into deficit, at Rs. 109.72 billion for the seven months to July from a surplus position as recently as May, the data point to a sustained pickup in Government spending through the middle of the year.

Despite the recent monthly deficits, the cumulative fiscal position for the January-July period remained sharply improved from a year earlier, when the Government had recorded a deficit of Rs. 556.11 billion over the same seven months. The year-on-year (YoY) narrowing of about 80.3% reflects strong revenue growth that has outpaced the year-earlier base, even as the pace of improvement has slowed since mid-year.

Total revenue and grants for January-July rose 25.1% YoY to Rs. 3,421.26 billion, from Rs. 2,734.86 billion in the corresponding period of 2025. Revenue alone increased 25.2% YoY to Rs. 3,417.87 billion. Tax revenue, the largest component, grew 23.8% YoY to Rs. 3,136.32 billion, while non-tax revenue rose 44% YoY to Rs. 281.55 billion. Grants fell 38.4% YoY to Rs. 3.39 billion.

Expenditure and lending minus repayments for the seven months rose at a more moderate 7.3% YoY to Rs. 3,530.98 billion, from Rs. 3,290.97 billion a year earlier. Recurrent expenditure increased 4.9% YoY to Rs. 3,149.13 billion, while capital expenditure and lending minus repayments rose a faster 31.6% YoY to Rs. 381.85 billion, reflecting stepped-up capital spending during the period.

The primary balance, a key indicator monitored under Sri Lanka’s International Monetary Fund (IMF)-supported reform program, strengthened 38.5% YoY to a surplus of Rs. 1,348.58 billion for January-July, from Rs. 973.63 billion a year earlier, continuing the improving trend seen through the first half of the year.

According to economists, revenue collections tend to bunch early in the fiscal year, aided by import-related taxes tracking early-year import activity and the settlement of previous-year corporate tax liabilities, while expenditure, particularly capital spending and lending, typically accelerates in the second half as public investment projects move from planning to disbursement. 

Sri Lanka has run an annual Budget deficit in almost every year over the past four decades, so a mid-year surplus narrowing or reversing into a deficit later in the year would not be unusual. What is more distinctive this year is that the Government posted a surplus at all in the first half of 2026, a marked improvement from the Rs. 405.6 billion deficit recorded in the same period of 2025, reflecting the fiscal consolidation drive under the IMF-supported program. 

The subsequent slide into deficit by July suggests the improved fiscal position this year is occurring on a stronger revenue base than in previous years, even as the familiar seasonal pattern of front-loaded revenue and back-loaded spending persists.

The IMF has said the Government remains committed to restoring the primary surplus target to 2.3% of GDP in 2027, following temporary fiscal easing this year, to safeguard macroeconomic stability. 

It has called for continued efforts to strengthen tax compliance, broaden the tax base, and improve public financial management, while accelerating public spending execution, including disaster-related support. 

The Fund has also urged accelerated State-owned enterprise reforms, continued cost-reflective energy pricing, and stronger social safety nets to contain fiscal risks, alongside steps to strengthen the Public Debt Management Office as debt restructuring nears completion.

On the debt front, total outstanding Central Government debt rose to Rs. 30,795.04 billion by end-May 2026, from Rs. 29,994.69 billion at end-2025. Total domestic debt eased slightly to Rs. 18,609.43 billion from Rs. 18,675.32 billion, with Treasury Bills falling to Rs. 2,517.54 billion from Rs. 3,136.29 billion and Treasury Bonds rising to Rs. 15,819.77 billion from Rs. 15,427.75 billion. Total foreign debt increased to Rs. 12,185.61 billion from Rs. 11,319.36 billion over the same period.