2026 a growth Budget for Sri Lanka?

President and Finance Minister Anura Kumara Dissanayake

The Budget broadly aligns with the IMF program’s path of revenue based fiscal consolidation by aiming for a primary surplus of 2.5% of GDP, a total Government revenue goal of 15.4% of GDP, and a deficit of 5.1% of GDP for 2026.  However, the growth target of about 7% in 2026 in the Budget seems a tad ambitious considering the lower IMF growth projection of 3.1%, the country’s historic growth rates and global economic shocks

After a remarkable recovery from a very deep crisis in 2022, Sri Lanka’s recent Budget consolidates economic stablisation and introduces a few markers for further growth (e.g. on trade, digitalisation and the Port City), but more needs to be done to embed a growth strategy and transform its economy to avoid further IMF austerity programs. 

It is fair to say that Sri Lanka has defied economic expectations in the 2020s. Following its historic pre-emptive sovereign default in April 2022, Sri Lanka experienced its worst economic crisis since independence. Then the country fell into a vicious cycle of a deep contraction, spiralling inflation, rising income poverty and public protests over shortages and rising prices. 

But, compared with many in the developing world, the country’s debt induced contraction and inflation spiral was remarkably short-lived. Fast forwarding to November 2025, the economy grew by 4.8% in the first half of 2025, inflation down to about 2% but poverty remains stubbornly high. This is due to a combination of Indian emergency aid, a tough 17th $ 2.9 billion IMF program, and decisive policies by the Government of Sri Lanka (including the Central Bank of Sri Lanka).

A new Government led by left leaning President Anura Kumara Dissanayake since late 2024 deserves credit for adopting a pragmatic approach and continuing with the IMF program. This is a major departure for his left-wing political alliance, the National People›s Power (NPP), which campaigned to renegotiate terms under the IMF program to include more welfare measures. With Sri Lanka mid-way through its current IMF program, the pressing public policy question is this time going to be different and might Sri Lanka avoid having to seek a further 18th IMF program in the future by transforming its economy? 

The 2026 national Budget presented by President Dissanayake (in his capacity also as Finance Minister) to Parliament on 7 November offers some clues. This year, the chosen Budget theme is “Steady and Strong: Committing to Fiscal Discipline for a Resilient Economy”. The Budget broadly aligns with the IMF program’s path of revenue based fiscal consolidation by aiming for a primary surplus of 2.5% of GDP, a total Government revenue goal of 15.4% of GDP, and a deficit of 5.1% of GDP for 2026. 

However, the growth target of about 7% in 2026 in the Budget seems a tad ambitious considering the lower IMF growth projection of 3.1%, the country’s historic growth rates and global economic shocks. At the same time, because of the Government’s success in raising the tax to GDP ratio to an estimated 13.5% in 2024 (up from 8.2% in 2022) through widening the tax base and revenue administration reforms, the Budget has also provided some relief to the NPP’s political base. 

Sri Lanka needs to urgently operationalise its concluded FTAs with Singapore and Thailand as well conclude long-standing negotiations for a comprehensive trade deal with India and resume stalled negotiations with China. It also needs to build trade negotiations capacity for trade agreements which promote integration into global supply chains and digital trade which have driven the spectacular success of East Asia and India. 

Noteworthy measures

Noteworthy measures in the Budget include allocations to build new houses for low-income families, investment in irrigation infrastructure vital for agriculture development, raising salaries for public servants, creating 75,000 new public sector jobs and importing double cabs vehicles for MPs. 

The Budget also announced three important measures to support growth and a resilient economy. These were exactly the kind of measures identified as among the priorities in the independent growth study conducted in 2025 under the auspices of ODI Global and the Centre for Poverty Analysis Sri Lanka. 

First, is the appointment of an expert committee to examine existing Free Trade Agreements (FTAs) and investigate new ones. This is a welcome move in a small economy like Sri Lanka and perhaps overdue. For instance, improved market access, better trade facilitation and simpler investment rules in FTAs could help to make the country more attractive to export-oriented foreign direct investment (FDI) and unleash the powerful forces of technology transfer and trade-led growth. 

In this vein, Sri Lanka needs to urgently operationalise its concluded FTAs with Singapore and Thailand as well conclude long-standing negotiations for a comprehensive trade deal with India and resume stalled negotiations with China. It also needs to build trade negotiations capacity for trade agreements which promote integration into global supply chains and digital trade which have driven the spectacular success of East Asia and India. Our previous work identified major economic gains from concluding (deep) FTAs, and we are currently working on analysing deepening the Sri Lanka – India FTA.

This is a Budget that does not harm Sri Lanka’s upward growth trajectory but may do some good in terms of supporting growth through FTAs, digitisation and attracting FDI into the Colombo Port City. Thus, it is a Budget that continues IMF style economic stabilisation from the crippling economic crisis and put some markers for reforms

Digitalisation

Second, measures to strengthen digitalisation and modernisation of public administration. About $ 98 million

 was allocated to the Sri Lanka Unique Digital Identity project, the e-Grama Niladhari platform, and the Digital Economy Advancement Program. These projects are expected to support the creation of a centralised and secure digital framework to facilitate efficient communication and service coordination across Government agencies.

Additionally, plans exist to expand electronic procurement and payment systems to improve fiscal management as well as tax revenue administration by upgrading the Revenue Administration Management Information System (RAMIS). Digitisation is important for Sri Lanka because it can improve the efficiency, transparency, and accessibility of public services, leading to a more inclusive and productive society. This transformation helps optimise Government operations, reduces costs, and can stimulate economic growth by providing better services and more opportunities for citizens, particularly for SMEs. We are currently working to explore the role of e-commerce in fostering growth, using a detailed firm level survey.

Third, amendments to Colombo Port City law. The Colombo Port City is a 269-hectare land reclamation project designed to expand Colombo commercial centre. Financed by an initial Chinese investment of $ 1.4 billion with the ambition of becoming international financial, business and a leisure hub with a special economic zone framework. However, there was a risk of this becoming a white elephant project with little actual inward FDI due to regulatory uncertainty and fragmented authority across state agencies. 

Successive governments delayed putting into place a conducive incentive, legal and regulatory framework. In this vein, the 2026 Budget mentioned amending the Strategic Development Projects Act and Colombo Port City Economic Commission Act to boost Foreign Direct Investment (FDI). It is important that Sri Lanka supports the productive economy through such measures and aligns the direction of the economy with its trade, FDI and SME policies. This is a key topic for further analysis and policy development.

In the final analysis, this is a Budget that does not harm Sri Lanka’s upward growth trajectory but may do some good in terms of supporting growth through FTAs, digitisation and attracting FDI into the Colombo Port City. Thus, it is a Budget that continues IMF style economic stabilisation from the crippling economic crisis and puts some markers for reforms. These are all very important achievements, certainly in the light of how quickly Sri Lanka is emerging from the crisis.

However, a cautious policy approach alone may not be fit for purpose. Significant debt repayments (capital) are due in 2028 and there are concerns as to whether the build-up of foreign reserves would be sufficient. Furthermore, the world economy is in an unpredictable phase beset by messy geopolitics, trade policy uncertainty, and volatile capital flows. A bolder set of ‘big bang’ reforms and growth policies (e.g. around deeper trade reforms, financial innovation and sectoral productive economy is needed to put Sri Lanka on a truly transformative path to 2030 and avoid further IMF programs. And these reforms need to be maintained to show results as the gains from reforms take time to become visible. 

The ODI Global and CEPA growth study outlines 30 recommendations under six crucial policy areas that form the bedrock of a sustained growth plan for Sri Lanka:

• Maintaining robust macroeconomic stability and enhancing credibility.
• Deepening integration into global supply chains, boosting exports and attracting foreign direct investment.
• Improving the efficiency and accessibility of factor markets.
• Designing and implementing targeted policies for key sectors and markets.
• Developing and strengthening policies to significantly reduce poverty.
• Building strong political consensus and enhancing state capacity to effectively implement growth policies.

Colombo Port City​

(Professor Dirk Willem te Velde is Director of the International Economics Development Group at ODI Global in London and Dr. Ganeshan Wignaraja is a Visiting Senior Fellow at ODI Global. The ODI Global Centre for Poverty Analysis Report is at: https://odi.org/en/publications/sustaining-transformative-growth-in-sri-lanka-odi-cepa-growth-study-report/)