Impressive budgetary gains

Living beyond means has been a salient feature of Sri Lanka’s post-independent economy. Except for two years (in 1954 and 1955 under the premiership of Late Sir John Kotelawala), all Budgets in the island have ended up in deficits. Fiscal discipline is perceived by lawmakers as a political liability while Governments that strived hard to achieve fiscal prudence have often been defeated by voters at elections.

The recent announcement by the Treasury that Sri Lanka’s budget deficit declined by 55% or Rs. 411 billion in August 2025 from a year earlier is a noteworthy development in the backdrop of revenue-based fiscal consolidation having been recognised as a key benchmark of the IMF-mandated economic reforms. According to the latest figures, tax revenue expanded to Rs. 3,068.5 billion over the first eight months of the year from Rs. 2,348.5 billion during last year. The increase in Government revenue has been ably assisted by the increase in import volumes as a result of the economic recovery in addition to gradual relaxation of import restrictions.

Meanwhile, the Customs Department had collected Rs. 1,724 billion in revenue during the first nine months of this year compared to Rs. 1,116.1 billion in the same period last year, representing a 54.5% growth. As of mid-September 2025, over 220,000 vehicles have been imported into the country since the import ban was lifted on 1 February 2025. Sri Lanka Customs has set a revenue target of Rs. 2,115 billion for this year, compared to Rs. 1,553 billion during previous year. Customs had earned Rs. 165 billion from vehicle imports since the ban was lifted and expect tax revenue of Rs. 450 billion for the current year from vehicle imports.

The decline in capital expenditure to Rs. 331.2 billion from Rs. 435 billion last year too has contributed towards the decline in the budget deficit. A reduction in capital expenditure is generally associated with lowered growth prospects. However, in Sri Lanka, capital spending, particularly with regard to construction of roads, highways, and buildings is often associated with corruption and political patronage. Given the funding constraints, the Government would be well advised to explore public-private partnerships to implement essential infrastructure development programs to ensure economic growth is not constrained by fiscal tightening. 

Despite the Government’s vociferous commitment to reduce waste and unnecessary spending, recurrent expenditure until August rose to Rs. 3,381.3 billion by 11.2% from Rs. 3,041.6 billion last year. Recurrent expenditure cannot be brought down by trivial measures like taking over the official residences of former presidents or by indulging in frugality as some politicians in the Government opine. Recurrent expenditure is likely to increase further with the Government expecting to recruit a considerable number of individuals into the public sector, including the postal service which has experienced a substantial reduction in demand for its services.

The NPP administration should review its stance on State-owned commercial enterprises. The plans to privatise loss-making enterprises like SriLankan Airlines were reversed by the Government and as a consequence the taxpayers’ money needs to be doled out as current transfers to ensure the continuity of such entities. Reforming institutions like the CEB, CPC and SriLankan Airlines is imperative to rectify persistent fiscal shortcomings. It is also vital to assess the island’s bloated public sector workforce which has been a huge burden on the island’s taxpayers over the years.

The IMF had pointed out that Sri Lanka needs to entrench fiscal discipline to avoid the repetition of the crisis it experienced in 2022. Prioritisation and rationalisation of public expenditure too needs to be pursued vigorously while expanding the Government revenue to maintain prudence in public finances. In spite of adverse political repercussions, steps need to be taken to close down State institutions that have outlived their usefulness.