As Parliament prepares to unveil the 2025 Budget tomorrow (17), the stakes have never been higher. The country is still reeling from the economic crisis of recent years, with the soaring cost of living and rising poverty putting immense pressure on policymakers to deliver a budget that not only provides relief but also sets the stage for long-term stability and growth.
Will Budget 2025 introduce the reforms needed to restore investor confidence and economic resilience, or will it follow the familiar pattern of mere paper promises? To understand what this Budget should prioritise, The Sunday Morning Business spoke to leading economists who have been closely analysing Sri Lanka’s economic trajectory.
Former Deputy Governor of the Central Bank of Sri Lanka (CBSL) Dr. W.A. Wijewardena, Advocata Institute Chairman Murtaza Jafferjee, economist and Ernst & Young Sri Lanka Director Consulting Talal Rafi, University of Colombo (UOC) Department of Economics Professor Priyanga Dunusinghe, economist and UOC Economics Department Lecturer Umesh Moramudali, and economist and Attorney-at-Law Dr. Shanuka Senarath shared their insights on what policymakers should focus on.
Following are excerpts:
What key areas should the Government prioritise in the upcoming Budget to help stabilise the economy and support businesses and households?
Dr. W.A. Wijewardena: The new Government’s Budget is constrained by two key factors. The first factor is that it has already committed to continuing the Extended Fund Facility (EFF) programme under the International Monetary Fund (IMF), which comes with certain quantitative benchmarks that the Sri Lankan Government must meet.
One of these benchmarks is that Government revenue – excluding any privatisation proceeds – must reach at least 15.1% of GDP. Based on the estimated GDP for 2025, this means Government revenue must increase to approximately Rs. 5.5 trillion, up from the Rs. 4 trillion expected in 2024. This implies that the Government must raise an additional Rs. 1.5 trillion in revenue during the 2025 fiscal year, which will inevitably require new taxes.
The second constraint comes from the Economic Transformation Act, which was passed in Parliament before the Presidential Election. This act also imposes quantitative benchmarks, including the requirement that Government revenue must meet 15% of GDP, reinforcing the conditions set by the IMF.
Therefore, the entire Budget is constrained by these requirements. Any priority spending areas must remain within these constraints and the Government must introduce new tax laws to meet its revenue targets.
One of the proposed taxes under the IMF programme was the imputed rental tax. This means that if a person owns a house, the Government calculates the potential rental income of that house and includes it in their taxable income. For example, if the Government determines that a house could generate Rs. 100,000 in rental income and the owner falls under a 30% marginal tax rate, they would have to pay Rs. 30,000 in taxes.
This tax was agreed upon by Ranil Wickremesinghe’s administration, so the new Government must either continue with it or renegotiate with the IMF to remove it and replace it with an alternative tax to recover the lost revenue.
As a result, this Budget will not be an easy one for the Government to prepare, given these two constraints. Everything it does must be within these limits.
How should the Budget address inflation and the rising cost of living while ensuring long-term economic stability?
Prof. Priyanga Dunusinghe: The only way to counter the rising cost of living due to inflation is by enhancing productivity – both labour productivity and the overall productivity of the economy. When productivity improves, we expect wages to rise accordingly. In such a scenario, people will be better equipped to manage the high cost of living in the long term.
If we examine the experiences of other countries, we see a similar approach. Even the Prime Minister of Singapore recently stated that the solution to the rising cost of living lay in productivity enhancement. When productivity increases, we expect incomes and wages to rise, allowing individuals to manage higher living costs. However, to achieve this, public policy interventions are necessary.
The Government must introduce specific economic reforms to facilitate productivity growth. At the same time, individuals must also play their part, whether they are employees in workplaces and offices, farmers in agricultural fields, students in universities, or professionals in other sectors. Everyone must work diligently in their respective fields to drive the improvement of overall productivity.
Ultimately, this approach will enable people to sustain a rising cost of living in the long term.
What steps should the Government take in this Budget to attract foreign investment and boost local industries?
Talal Rafi: For a nation to develop, it needs investments. The Government needs to increase capital expenditure in the Budget as recurrent expenditure has dominated the expenditure side of the budget for decades.
It is not only about increasing capital expenditure, but also about spending the capital in the right areas like education, health, infrastructure, digitisation, and research and development. Improvements in these areas will drive economic growth.
The Government at the moment is not in a position to invest heavily through capital expenditure due its fiscal constraints. Therefore, Foreign Direct Investment (FDI) is needed. For FDI, especially export-driven FDI, we need more free trade agreements, trade liberalisation, and trade facilitation. Human capital development through better education, improved ease of doing business through digitisation, and access to supplies are essential.
How can the Budget balance infrastructure development with the need for fiscal discipline and debt management?
Umesh Moramudali: One way is to focus on investment instead of debt, utilising models such as Build-Operate-Transfer (BOT) and other Public-Private Partnership (PPP) frameworks that ultimately benefit the public.
However, the challenge here is that not all models are suitable for every infrastructure project. For essential infrastructure, the Government would need to open competitive bidding processes to ensure efficiency and transparency.
The second option is to seek long-term concessional loans that include a local financing component to minimise outflows of foreign currency. Ideally, these loans should have 30-, 40-, or even 50-year repayment periods with a grace period of at least 10 years to ease immediate financial pressure.
From a numerical and theoretical perspective, the key challenge is ensuring that Sri Lanka does not accumulate excessive debt beyond IMF parameters. However, in terms of debt targets, the country has performed relatively well, which means there is some room for borrowing next year.
This does not mean the Government should recklessly accumulate debt, but rather, it can strategically borrow for large-scale concessional infrastructure development projects, ensuring that the annual debt burden remains limited.
One critical aspect to consider is that loans are not disbursed in full within a single year – they are typically distributed over multiple years. This means projects can be structured in phases so that only a portion of the debt is incurred in any given year, thereby limiting the immediate financial strain. Over the next one to two years, if loan disbursements are phased appropriately, the actual debt burden will not rise significantly.
Additionally, if the loans are concessional with long grace periods, there will be no immediate repayment obligations for 8-10 years, reducing external debt outflows in the near term. This is especially beneficial if the interest rates are kept low.
However, these loans must not be acquired on commercial terms, as that would increase financial risks. Instead, they should be secured through bilateral and multilateral agreements, requiring extensive negotiations with other governments and international financial institutions.
Dr. W.A. Wijewardena: Debt management is also a significant issue for the Government. The debt restructuring plan that was agreed upon by Wickremesinghe’s administration with sovereign bondholders and bilateral creditors means that from 2025 onwards, once the agreements are signed, Sri Lanka must resume repaying both interest and principal on its loans.
According to World Bank estimates, these repayments will amount to approximately $ 2 billion per year to bilateral creditors. Additionally, Sri Lanka must make a one-time payment of 1.8% of the principal value as a commission fee to sovereign bondholders, which amounts to approximately $ 220 million.
This means there will be a notable outflow of foreign exchange from Sri Lanka. With this outflow, the total foreign exchange reserves held by the CBSL will not be sufficient to fully reopen the economy.
As of January, the CBSL reported that Sri Lanka’s total foreign exchange reserves stood at $ 6 billion. However, out of this, $ 1.4 billion is unusable because it includes the Chinese swap facility, which Sri Lanka cannot access freely. After deducting this amount, Sri Lanka’s usable foreign exchange reserves stand at approximately $ 4.6 billion.
Once Sri Lanka repays its debts, including the $ 2.2 billion in upcoming payments, the remaining usable reserves will drop to just $ 2.4 billion.
This means Sri Lanka does not have enough foreign exchange to finance major infrastructure projects. Therefore, for any new infrastructure development, the Government must rely on borrowing from multilateral lenders such as the World Bank, the Asian Development Bank (ADB), and friendly nations.
The Government cannot issue international bonds or borrow from commercial markets because Sri Lanka has no access to global financial markets at present. Therefore, securing long-term concessional financing from bilateral and multilateral lenders will be critical.
At this point, President Anura Kumara Dissanayake is like an acrobat walking a tightrope; if he loses balance, he will fall. Managing this situation will not be easy.
What role should taxation play in the upcoming Budget? Should the Government focus on reducing taxes to boost spending or increasing taxes to strengthen public finances?
Murtaza Jafferjee: The third review of the IMF programme is subject to the Budget, so I don’t expect any announcements that can lead to veering off the agreed targets with the IMF.
Economic activity does not require any fiscal stimulus by lowering taxes since momentum is increasing on the back of relatively favourable weather, declining soft commodity prices, a strong tourism season, etc. The tax buoyancy (tax revenue growth exceeding economic growth) due to stronger growth than initially expected will drive revenue growth.
There is still room for changes in tax policy, since for reasons best known to the powers that be, tax holidays, concessionary rates without sunset clauses, vehicle permits that lower tax rates, etc. have not been cancelled. This is indefensible when you factor that there was a 70% inflation tax on everyone in 2022, domestic debt held by superannuation funds were restructured, etc.
It is completely immoral for the Government, especially for this Government that came to power on a good governance mandate, not to cancel these concessions, because burden-sharing has to be widespread.
The tax effort needs to be further increased because administration is weak; not enforcing the law not only reduces Government revenue but also distorts the marketplace, favouring the noncompliant over the compliant. In the case of Value-Added Tax (VAT), a noncompliant business gains a significant competitive advantage over a compliant business.
What measures should be included in the Budget to strengthen social welfare programmes while keeping public spending under control?
Murtaza Jafferjee: In terms of social welfare, the cash transfer programme ‘Aswesuma’ should be further strengthened by fixing operational problems and improving targeting. It is bad policy to provide relief to the poor through prices; for example, as per my computation, the price of diesel and petrol should have been increased by Rs. 20 in January.
By not doing so, the burden has been transferred to the petroleum retailing companies, leading to large losses. The private firms are all foreign, so this sends a very bad signal to foreign investors and as per computations done by the World Bank, 70% of the benefit will accrue to the richest 30% of households.
Price controls, super high border tariffs, etc. are bad policy instruments for the benefit of the wrong people and they significantly distort the marketplace, impacting much needed growth. It is best to simply use cash transfers – improve affordability by giving eligible households more cash to overcome price shocks and giving production-linked subsidies in the case of industries that the Government wants to encourage.
Should the Government allocate more resources to education and healthcare? If so, how can it do this without straining the economy?
Prof. Priyanga Dunusinghe: Before discussing resource allocation, we must first examine how these additional resources will be collected. Are we going to increase taxes? Who are we going to borrow from? Where will the money come from?
At present, we have already tapped into all possible financial sources, leaving very few options. Allocating additional resources, either by borrowing or printing money, will likely be harmful to the economy in the medium to long term.
Raising taxes further is also problematic. Given the current economic downturn, excessive taxation will further slow down growth. The Government has already imposed substantial taxes and the present tax policy is not conducive to economic expansion.
When discussing sectoral allocations, we must ask which sectors should be prioritised. Even with limited budgetary allocations, which areas should receive the most attention? The debate between education versus other sectors is particularly relevant.
While education and healthcare are key, simply increasing funding for these sectors does not guarantee economic benefits for Sri Lanka. Unless the country develops its industrial sector and strengthens its economy, the new skills generated through education and healthcare improvements may end up benefiting other countries instead of Sri Lanka.
For instance, expanding education without sufficient economic opportunities results in brain drain, where skilled individuals seek better opportunities abroad. Similarly, advancements in the healthcare sector must be accompanied by higher efficiency and productivity improvements to be truly effective.
Rather than indiscriminately increasing funding, we should focus on improving resource utilisation efficiency. Whether in schools, universities, or hospitals, reforms should be introduced to ensure that existing resources are used to their maximum potential.
Additionally, the education and healthcare sectors must be opened up to private sector participation under a well-structured regulatory framework. Unlike in the 1960s and 1970s, when the Government played a dominant role, today’s private sector, both local and foreign, is capable of making notable contributions.
If the Government tries to control every sector, it will stifle private sector involvement. We must shift away from that outdated State-centric mindset. Instead, the Government should focus on establishing clear policy frameworks that cover all levels of education, from primary schools to universities and postgraduate institutions.
Furthermore, Sri Lanka should ensure that the skills developed through education and vocational training remain within the country. At the same time, the healthcare sector must be strengthened to support workforce productivity. A healthy workforce is important for maintaining high productivity levels and ensuring sustainable economic growth.
What policies in the upcoming Budget could help improve export growth and trade competitiveness in the global market?
Talal Rafi: Over 70% of global trade involves supplies for multinational companies. Due to globalisation and the rise of intra-industry trade, it is very difficult for even global economic superpowers like the US or China to produce a product end-to-end within their borders at a competitive price with good quality.
Therefore, Sri Lanka should focus more on trying to find niches in global supply chains and find where the country has comparative advantage in terms of resources and human capital to specialise in exporting that niche product. This is how China and Southeast Asian nations became exporting powerhouses in the last few decades.
China imports components from 43 different countries to make an iPhone. Therefore, Sri Lanka, which is much smaller than China, cannot and should not try to focus on making finished goods. For that, we need free trade agreements, trade facilitation, and trade liberalisation.
If multinational companies cannot import and export parts of their value chain freely, they will not outsource the manufacturing of components to Sri Lanka. Sri Lanka only has three more years as most debt repayments are due in 2028; the Budget needs to give incentives for exporters and for Sri Lankan companies that want to export. This is very important as we need foreign exchange to face the debt repayments coming due by 2028.
What fiscal strategies should the Government adopt to reduce budget deficits while still driving economic growth and development?
Dr. Shanuka Senarath: Sri Lanka’s budget deficit remains a chronic issue, worsened by the country’s bankruptcy and limited access to external financing. While the IMF remains a key financial backer, the Government must find new ways to balance fiscal discipline with economic growth.
One major concern is debt repayments. From 2025 onwards, Sri Lanka must resume interest and principal payments to bilateral creditors and sovereign bondholders, totalling over $ 2 billion annually, with an additional $ 220 million one-time commission fee to sovereign bondholders. This creates a significant foreign exchange outflow, which will strain the country’s already weak reserves.
As of January, Sri Lanka’s usable foreign reserves are estimated at $ 4.6 billion. Once debt repayments are made, only $ 2.4 billion will remain, which is insufficient to fully open the economy. This leaves the Government no choice but to seek long-term concessional loans from multilateral lenders like the World Bank and ADB, as commercial borrowing remains unavailable.
Managing the budget deficit requires a shift away from excessive taxation, which stifles economic growth and exacerbates inflation. Increasing taxes further will reduce consumption and weaken investor confidence. Instead, the Government must cut unnecessary spending, streamline public administration, and rationalise defence expenditures.
Defence spending stands at Rs. 442 billion or 10% of the total budget despite Sri Lanka facing no immediate threats. Public administration accounts for another 25%, leading to inefficiencies and waste. A restructuring of governance structures, including merging redundant provincial and Local Government bodies, could reduce fiscal waste.
Sri Lanka must also move beyond its dependence on tourism as a primary foreign exchange earner. Tourism remains a fragile and seasonal industry, with high operational costs and low net returns. Instead, the Government should focus on industrial expansion, IT services, trade, and high-value exports, following successful models like India’s tech-driven economy.