Challenges facing transition towards digital economy in Sri Lanka

President Anura Kumara Disanayake in his capacity as Minister of Finance placed a special emphasis on the digital economy during the 2025 Budget speech. The Government has projected that the growth of the digital economy by 2030 will reach a value of $ 15 billion or increase to 12% of the GDP. The Government set aside $ 10 million or 3 billion Sri Lankan Rupees for digital transformation strategies this year while proposing the establishment of a new apex Digital Economic Authority, which will oversee the country’s transition towards a cashless economy.

One of the major focus areas as part of the broader digital economy program is the drive towards expanding cashless transactions within economic activities. As per the Government, a cashless economy will not only curb tax evasion and illicit financial activities but also enhance fiscal efficiency, thereby contributing towards Sri Lanka’s economic stability and growth. GovPay – an online payment platform designed to facilitate digital transactions – was launched last February as the initial step in the digitalisation of the country’s government services. With the launch of GovPay, digital payments for government services are expected to double as a minimum of 100 government agencies are hoping to join the online platform.

Despite the concerted efforts to promote cashless payments among citizens, fears of getting caught by the tax net apart from many other obstacles are preventing people from shifting to cashless payment methods. As per the latest (3Q24) Payment Bulletin of the Central Bank, the currency in circulation grew to Rs. 1.33 trillion, representing a year-on-year growth of 19.7%. Many speculate that the Government’s rigorous drive to bring as many people as possible under direct taxation is encouraging people to use coins and notes without making the shift towards digital payments. As cash transactions are less noticeable than digital payments, tax agencies find it difficult to measure incomes or transactions. The recent hike in the withholding tax on interest income earned from bank accounts from 5% to 10% has become another source of discouragement.

Despite the repeated announcements from the Central Bank that it is illegal to impose extra charges on credit/debit card transactions, trading establishments have not stopped the practice of applying a 3.5% extra fee on card-based transactions. This illegal but common practice acts as a major barrier to create a cashless society in the country. Small-scale traders and commoners still prefer cash and show no interest for digital payment methods. Drivers registered on popular riding apps like PickMe and Uber refusing card payment rides is quite a regular occurrence. 

Furthermore, there are forces with vested interests that undermine the initiatives which promote digital economy in Sri Lanka. Last month, this column extensively focused on the Postal Trade Unions expressing displeasure over the move to enable digital payment of traffic fines via the GovPay online system, as the changeover towards the online payment system resulted in the Department of Post losing revenue in the range of Rs. 600 million to Rs. 800 million annually. Increased digitalisation would also prevent underhand income earning activities, which might not please certain unsavoury sections of the society.

In spite of considerable improvements with regard to internet connectivity, broadband coverage in rural areas of the island remains poor. Unlike in the past, people access the internet not through computers but from smartphones. Prices of smartphones have risen significantly over the last few years due to the unprecedented depreciation of the local currency. Moreover, as a consequence of the economic crisis, people lost the means to buy expensive mobile phones, creating a digital divide. 

The digital economy is an idealistic dream of many. Yet, there are numerous political, social, and economic challenges that need to be addressed for it to become a reality.