Institutional analysts say Budget 2027 broadly toes fiscal line, warn of post-IMF tests

• 93% of Budget deficit before supplementary funded locally; State stays ‘biggest borrower in town’
• 2.3% primary surplus just meets IMF target, but 4.5% deficit overshoots IMF’s 3.7%
• Rs. 2 t capex jumps 35%; analysts see execution, not funding, as key risk
• Interest still absorbs about 43% of revenue, three times peer economies’ average

Budget 2027, presented by President and Finance Minister Anura Kumara Dissanayake on 12 November, keeps the country on its fiscal consolidation path, with a primary surplus that just meets the International Monetary Fund (IMF) target. 

However, leading investment houses warn that a wider deficit, a 35% jump in capital spending, and the end of the IMF program in March 2027 will test the Government’s fiscal discipline, pointing to the Government’s good sense to explore alternatives with the IMF post-Extended Fund Facility (EFF) program.

Reviews by HNB Stockbrokers, CT Smith, Softlogic Stockbrokers, First Capital Research, and accounting and tax firm Evolve broadly agree that the Budget avoids major tax changes and stays close to the IMF framework.

 Revenue and grants are budgeted at Rs. 6.18 trillion, up 3.3%. Expenditure is budgeted at Rs. 7.93 trillion, up 8.5%, including a Rs. 260 billion supplementary estimate for Cyclone Ditwah reconstruction. The overall deficit widens to 4.5% of GDP from 3.7% in 2026. The primary surplus, which is revenue minus all spending except interest, narrows to 2.3% of GDP from 3.6%.

First Capital Research said fiscal discipline remains intact, with the deficit comfortably within the Government’s target of below 5% of GDP. “The 2027 Budget maintains Sri Lanka’s medium-term fiscal consolidation path while allowing a temporary increase in public investment to support growth, disaster recovery, and economic modernisation,” it said.

First Capital’s comparison with IMF projections shows where the gap lies. The Budget sets total expenditure at 20.3% of GDP, against the IMF’s 18.7%. Capital expenditure is 5.1% of GDP, against the IMF’s 4%. The deficit is 4.5% of GDP, 0.8 percentage points wider than the IMF’s 3.7% for 2027. Revenue, at 15.8% of GDP, is above the IMF’s 15.1%. First Capital also noted that the gross borrowing requirement is higher. 

“Despite increased spending, the gross borrowing requirement is estimated slightly higher at Rs. 3.8 trillion, with the Ditwah supplementary expenditure expected to be financed from existing cash buffers,” it said.

Softlogic Stockbrokers took the most upbeat view. It described the fiscal framework as broadly aligned with IMF objectives and called the Rs. 2 trillion of public investment particularly encouraging. “We view the 2027 Budget as growth-oriented, marking a shift from stabilisation towards investment-led growth,” Softlogic said. “We are also positive about the Government’s commitment to maintaining fiscal discipline and considering a successor IMF program beyond the current EFF, due to conclude in March 2027.” 

Softlogic pointed to Fitch’s upgrade of Sri Lanka’s rating to B- from CCC+, with a Stable Outlook. It said the upgrade strengthens the case that the macro recovery is becoming more durable, but added that effective implementation and private sector participation will be key.

HNB Stockbrokers said the primary surplus just meets the IMF target. It warned that the margin for error narrows once the EFF ends and Sri Lanka is likely to return to international Bond markets. 

“Continued fiscal discipline remains key to sustaining improving fiscal dynamics and building buffers with a view to securing credit rating upgrades as the IMF program comes to an end, particularly in the backdrop of heightened external risks,” it said. HNB Stockbrokers noted that Sri Lanka’s term premium remains elevated against higher-rated peers, which would raise the cost of new borrowing. The term premium is the extra yield investors demand to hold longer-dated debt.

On revenue, HNB Stockbrokers said the decline to 15.8% of GDP from 16.6% leaves it slightly below the Government’s medium-term target of at least 16%. The decline reflects tax relief measures and fading vehicle import revenue. 

HNB Stockbrokers estimates that taxes other than vehicle-related taxes must grow by 7.6% to meet the Rs. 5.69 trillion tax target. It considers this feasible given expected nominal GDP growth of 7% to 8% and continued efforts to widen the tax net through digitisation. CT Smith put the annual cost of tax relief measures at Rs. 28.4 billion. It noted that income tax is only 23.6% of tax revenue, against the Government’s stated aim of a 40:60 direct-to-indirect tax ratio.

Debt service remains the heaviest burden. Interest costs are budgeted at Rs. 2.64 trillion, or 6.8% of GDP, and account for a third of total expenditure. CT Smith said interest will absorb 43% of revenue, down from 79.1% in 2022. HNB Stockbrokers said the ratio has plateaued at around 43% to 46% since 2025 and is still roughly three times the peer average, well above safe levels. First Capital noted that Central Government debt fell from 114% of GDP in 2022 to 95% in 2025, and that the IMF projects 87% by 2032.

The biggest test lies in capital spending, which rises 35% to Rs. 2 trillion, or 5.1% of GDP, from 4.1%. “Key risk is execution, not funding,” CT Smith said. “Capital spending has a record of falling short of plan.” CT Smith said about 75% of the 2025 capital budget was spent and only about 30% of the 2026 allocation was used in the first nine months. 

CT Smith also said primary expenditure of 13.6% of GDP exceeds the 13% statutory ceiling in 2027, with a return to about 12.9% projected from 2028. HNB Stockbrokers pointed out that underspending could help the fiscal numbers. If capital expenditure falls short of budget as in previous years, the primary surplus is likely to be higher, giving a further fiscal buffer.

HNB Stockbrokers also flagged recurrent spending as a medium-term risk. “We note, however, that the planned recruitment of a further c. 110,000 public sector employees has the potential to undermine fiscal discipline in the coming years,” it said.

Financing has implications for interest rates. Evolve said Rs. 1.38 trillion of the Rs. 1.49 trillion deficit before the supplementary estimate will come from the domestic non-bank market. “Nearly all of the gap is borrowed domestically, which is why interest stays the biggest line,” Evolve said. “For a business, that is the Budget’s clearest signal on where interest rates are heading: the State remains the biggest borrower in town.” CT Smith said net domestic financing rises 45.7% to Rs. 1.64 trillion, of which Rs. 260 billion is drawn from the Treasury cash buffer.

HNB Stockbrokers estimates gross financing needs (GFN) at about 14% of GDP in 2027. GFN is the total the Government must borrow to cover the deficit and maturing debt. HNB Stockbrokers expects it to peak at about 15% in 2028 as large Bond maturities fall due, and to average about 13% over 2027-32, around the benchmark set under the IMF program. Yields rose across the curve after the Central Bank’s 100-basis-point policy rate hike to 8.75% in May 2026. HNB Stockbrokers expects Bond rates to decline gradually as credit growth moderates and consolidation continues, assuming no further external shocks.

The post-IMF path remains open. CT Smith said a committee is to report on whether Sri Lanka should enter another IMF program. It listed October 2026 inflation of 8.3% and an El Niño forecast to peak in February 2027 among the risks to watch.

HNB Stockbrokers said the Budget is likely to be viewed as broadly neutral for the stock market, with no major adverse measures. It described the market and economic outlook as broadly positive but contingent on further building internal and external buffers amid heightened geopolitical risks. Evolve cautioned that the tax measures are still subject to enactment. “Everything here is a proposal until the Bills pass,” it said.