The Central Government has begun implementing a policy shift to end routine financial transfers to local authorities, compelling them to become financially independent. This major reform was first signalled in the 2023 National Budget and has since become a central element of the country’s fiscal restructuring agenda amidst a turbulent economic recovery.
The shift, presented as a drive towards empowering local bodies, has triggered vigorous debate across policy circles, local administrative sectors, and academia. Supporters argue that the proposal will enhance local autonomy, promote innovation, and reduce inefficiencies. Critics warn that practical implementation, especially in underdeveloped regions, may expose systemic weaknesses in infrastructure, human capital, and financial literacy.
Sri Lanka’s current local government framework comprises 341 institutions: 29 municipal councils, 36 urban councils, and 276 pradeshiya sabhas. Historically, these authorities have been reliant on annual grants from the Central Government, allocated through the Finance Commission. These funds covered operational costs, capital development, and frequently, salaries.
“Over the decades, this dependency has created a culture of complacency,” said former Deputy Governor of the Central Bank of Sri Lanka Dr. W.A. Wijewardena. “Local authorities simply waited for allocations rather than seeking innovative ways to generate their own revenue.”
He added: “When these councils don’t need to worry about where their money comes from, there is little incentive to promote tourism, encourage local enterprises, or improve tax collection. That mindset has to change.”
This perspective aligns with the intentions of the Government. The 2023 Budget stated unequivocally that the local authorities must assume financial responsibility and gradually reduce dependence on the central Treasury.
This move is part of broader fiscal reforms designed to address the nation’s economic challenges following the 2022 financial crisis and to meet the conditions of the $ 2.9 billion International Monetary Fund (IMF) bailout secured in 2023. To this end, the Ministry of Finance launched a five-year transition programme to progressively cut funding to local governments.
A phased transition
The first phase began on 1 January 2024, with a 20% reduction in Central Government contributions to salaries of municipal council employees. Urban councils were set to undergo the same reduction from January 2025.
Pradeshiya sabhas, which make up the bulk of the country’s local authorities and are concentrated in rural areas, are expected to begin transitioning by 2026. The ultimate goal is full self-financing status by 2028.
Dr. Wijewardena welcomed this direction. “Capital expenditure must be generated by the councils themselves. The Central Government may need to support salary payments during the initial phase, but over time, even that must stop,” he said.
However, he remained realistic about the pace. “This transformation will take at least 10-15 years to fully materialise. But it must begin now.”
Mixed reactions
While the strategy sounds rational on paper, the Finance Commission outlined certain issues that may need to be addressed
Finance Commission Secretary A.T.M.U.D.B. Tennakoon confirmed that the proposal, which took effect in 2024 with an initial 20% reduction in grants to municipal councils, was part of a phased plan to gradually eliminate central financial assistance to local authorities by 2029.
“Another 20% reduction is expected in 2025 and this will continue progressively,” said Tennakoon. “The ultimate objective is to completely phase out these grants over a five-year period. However, there are problems because not all local authorities are capable of funding themselves.
“The Central Government may have to decide how to ensure these local authorities are able to continue to perform their functions. Some local authorities may not be able to cope with the reductions. That’s why we have recommended that this proposal be re-evaluated and studied further,” he added.
While the rationale behind the move is to encourage greater financial self-sufficiency among local authorities, Tennakoon cautioned that the transition could pose serious challenges, particularly for councils with limited revenue-generating capacity.
According to the Finance Commission, a significant portion of current grants is allocated for salary payments to staff and elected members. The proposed cuts would require local authorities to absorb the shortfall through their own income.
“If the Government reduces funding by 20%, only Rs. 80,000 will be provided for someone earning Rs. 100,000. The remaining Rs. 20,000 must come from local sources,” Tennakoon explained. The Government may have to establish some minimum safety net, he suggested.
Dr. Wijewardena partly agreed, referring to a foreign loan-based solid waste management project offered to several councils. “Only the Ratnapura Municipal Council accepted the challenge, borrowing funds under the project to convert garbage into compost and electricity. The other local authorities abstained, saying they didn’t want to deal with debt. That’s a symptom of institutional apathy.”
Ratnapura’s proactive stance paid off. During the recent push for organic farming under former President Gotabaya Rajapaksa’s administration, Ratnapura stood out as a top producer of organic fertiliser. “It shows what is possible when councils are willing to lead,” said Dr. Wijewardena.
How local authorities can self-fund
In the 2024 Budget, President Anura Kumara Dissanayake introduced measures to encourage local government bodies to become self-sufficient.
As of 1 January 2024, the Central Government reduced its contribution to municipal councils’ salary payments to 80% and it is set to decrease further, with a gradual reduction in funding to urban councils starting from 1 January 2025. The objective is to promote self-financing models within local authorities over the next five years.
To support this transition, the Government has announced a series of initiatives. One such measure is that provincial councils are now encouraged to allocate 50% of their income towards capital expenditure for development projects, rather than limiting funds to recurrent expenses.
Further, amendments to the Industrial Promotion Act No.46 of 1990 have expanded the powers of provincial councils. They can now permit export-oriented industries with higher capital investments and larger workforces, enhancing their ability to attract and manage significant industrial projects.
The Government is also considering GovPay, a centralised digital payment platform, to streamline revenue collection for the services of local authorities.
The Government is also focusing on improving the governance of financial assistance to local authorities. The Committee on Public Enterprises (COPE) has highlighted the need to formalise the operations of the Local Loans and Development Fund, the primary institution providing financial support to local government bodies.
Recommendations include establishing clear guidelines for loan disbursement and recovery, appointing permanent audit personnel, and ensuring equitable distribution of funds across provinces.
According to Tennakoon, local authorities are allowed to generate revenue through various means, including property taxes, rates, stamp duties, and certain business ventures. Stamp duty, in particular, is a major income stream for many councils. Some also turn to public-private partnerships and organise events like local fairs to raise additional funds.
However, Tennakoon acknowledged that the financial health of local authorities varied widely. While some, especially those in urbanised or high-value property areas, may be able to manage, others, particularly in less developed regions, would face significant hurdles.
“The impact will vary by region,” he said. “Some authorities are capable of generating adequate revenue, while others are not.”
Despite having autonomy over their finances, local authorities remain under the oversight of provincial ministries of local government, supported by commissioners and assistant commissioners. Internal audit systems, however, are still being developed, which raises concerns about the capacity of councils to manage greater fiscal responsibility effectively.
The Finance Commission has urged the Ministry of Local Government to appoint a dedicated committee to reassess the proposal. “If there are any issues, they will need to be addressed and possibly revised through Parliament,” Tennakoon noted.
Fate of the Finance Commission
Another significant consequence of this transition is the diminishing role of the Finance Commission, which has historically determined the criteria for fund distribution from the Central Government to local authorities.
“Once the councils become self-sufficient, the commission’s role will become increasingly redundant,” said Dr. Wijewardena. “Its current job is to allocate money equitably, but if there is no central money to distribute, the job no longer needs to be performed,” he added.
He also suggested that even under a self-financing model, the Finance Commission could play a regulatory or advisory role, monitoring fiscal health, ensuring equity, and preventing regional disparities.
Despite the challenges, Dr. Wijewardena and Tennakoon both concurred that the long-term goal of self-financing local governance was worthwhile. “We must move away from the colonial era mindset of central control. Local issues are best resolved by local actors. If you empower them with financial autonomy, you also build accountability,” Dr. Wijewardena said.
As the country continues to emerge from the economic crisis, such reforms may hold the key to resilient and inclusive growth. Whether Sri Lanka can build a model of local governance that is both independent and equitable remains to be seen, but the journey has begun.