• Budget 2026 maintains same direction; that stability is positive
• Lack of a clearly articulated growth strategy is a weakness
• Opportunities lie in linking more deeply to global supply chains
• Economy is still fragile; any external shock can derail progress
• Real growth will come from expanding goods and services exports
• Only way to improve compliance and enforcement is digitisation

If there are no major external shocks, Sri Lanka may be able to “muddle through” and meet its debt repayment obligations by 2028 as pledged by President Anura Kumara Dissanayake, says Advocata CEO Dhananath Fernando.

“But the world is full of uncertainties. Our economy is still vulnerable. A shock can disrupt cash flows, trigger rating downgrades, and increase borrowing costs sharply. Debt servicing becomes easier only with sustained growth and reforms. That is why reform momentum is essential,” he asserted in an interview with The Sunday Morning. 

The interview primarily focused on Budget 2026 and Fernando shared a Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis of the Budget, while lauding its stability in maintaining the same direction without surprises on either revenue or expenditure. He explained that its weaknesses were in relation to structural aspects, highlighting Sri Lanka’s slowness in execution, and the lack of a clearly articulated growth strategy. 

In terms of opportunities, he emphasised the importance of linking more deeply to global supply chains, especially with southern Indian states. Main threats listed were climate and weather shocks and geopolitical disruptions. “Our economy is still fragile, and any external shock can derail progress,” he warned.

He also spoke on staying within the International Monetary Fund (IMF) framework, economic growth, State-Owned Enterprise (SOE) reform, taxes and tax administration, and the need for more spending discipline.

“Instead of rationalising expenditure, governments repeatedly cut capital spending because it is the easiest option. For example, the last Budget allocated Rs. 20 billion to SriLankan Airlines, while only Rs. 5 billion was allocated for plantation worker attendance – just a quarter of what was allocated to an airline used mostly by wealthier travellers. We must reduce the size of government and spend where it is necessary, especially on healthcare and education. I do not yet see a clear shift in thinking on expenditure,” he noted.

As for whether the Government’s vision of ‘A Thriving Nation, A Beautiful Life’ would remain a distant dream or become a reality, Fernando said: “The Government has not done anything drastically wrong. It has broadly stayed on course. But doing nothing wrong is not enough. There are many right things still left undone: trade reforms, investment reforms, SOE restructuring, tax simplification, labour-market reforms. A thriving nation becomes possible when markets function well and when strong institutions and reforms support them. Without those reforms, the slogan will remain a slogan.”

Following are excerpts:

To start off, could you do a brief SWOT analysis of Budget 2026?

The 2026 Budget maintains the same direction without surprises on either revenue or expenditure, and that stability is positive.

The weaknesses are more structural. Several proposals are repeated from the previous Budget and from older governments. Proposals such as the Public-Private Partnership (PPP) act, the SOE holding company act, and the investor protection act have been discussed for years. While repeating them signals commitment, it also shows that as a country – not just a Government – we are slow in execution.

Another weakness is the lack of a clearly articulated growth strategy. The aspiration for 7% growth was stated, but the path to achieving it is not sufficiently explained. The Budget contains many micro-level proposals, but an overarching growth framework would have been more effective.

Opportunities lie in linking more deeply to global supply chains, especially with southern Indian states growing at around 11%. The main threats are climate and weather shocks and geopolitical disruptions. Our economy is still fragile, and any external shock can derail progress.

You pointed out earlier that ‘the problem is not in what is said, but in what gets done.’ Do you expect this Budget to be executed satisfactorily given Sri Lanka’s weak implementation record?

Budget implementation has two sides. One is macro performance: revenue, expenditure, primary balance, and deficit. The second is the implementation of the policy proposals themselves. Some proposals require money, but many are policy decisions with no fiscal cost.

I am hopeful that the policy-related items will move forward. I am less concerned about micro-level project implementation, because in some cases it is better if certain expenditure items do not get executed. But policy decisions such as the SOE reform legislation and the PPP act must be implemented. Non-implementation carries a cost that cannot be measured only in rupees.

We also have limited space to miss the macro targets because we are in an IMF programme. The challenge is that the Government plans to increase the budget deficit as a share of Gross Domestic Product (GDP) compared to 2025. With elections approaching, there is a real risk of drifting away from fiscal discipline. So yes, the targets can be achieved if the Government stays committed, but in some areas not implementing certain proposals may actually be better.

Staying within the IMF framework, has the Government got the formula right for growth?

Growth reforms could have been sharper and more strategic. Sustainable growth comes from factor market reforms: land, labour, capital, and entrepreneurship. There are proposals touching on these, but not in an overarching, coherent manner.

Real growth will come from expanding exports of goods and services. For that, clarity on trade agreements, industrial land allocation, labour market reforms, and investor protection frameworks is essential. Investor confidence needs stronger support through reforms.

A major portion of Government spending goes towards debt repayment and interest. How can Sri Lanka grow in such conditions and what are the low-hanging fruits?

The only true low-hanging fruit is tourism. But tourism alone cannot deliver 7% growth. Even tourism will not thrive unless our cost of construction and electricity prices come down. These depend on the broader factor market reforms.

Given our debt situation, much of the repayment in the coming years will likely depend on rolling over debt. For that, the country’s credit rating must improve. We need about 7% sustained growth to comfortably manage debt repayments.

The biggest low-hanging fruit is reforms. Reforms save money. For example, serious SOE reform would reduce expenditure, increase revenue, attract foreign investment, and send a strong positive signal to investors.

We have been discussing SOE reform for decades. This Government has been in office for just over a year. Do you see real progress or are we stagnant on SOE reform?

The Government has again announced plans to bring the SOE holding company act, which is also an IMF requirement. While I would prefer deeper private sector involvement, a holding company structure is still better than what we have today. As of now, we do not have details.

However, a concerning statement in the Budget suggests that certain dues of SOEs, including mandatory payments such as Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF), may be borne by taxpayers. That is not the right path. Overall, SOE reform needs far more clarity and focus if it is to deliver results.

The Government wants to shift the direct-indirect tax ratio from 25:75 to 40:60. How do you view this?

If the Government wants to achieve this, it should come from better tax administration, not new taxes. In this Budget, the Value-Added Tax (VAT) and Social Security Contribution Levy (SSCL) thresholds have been reduced, so the burden will fall more on indirect taxes.

There is nothing wrong with broadening the tax net and ensuring a level playing field. Digitisation will be key to achieving this. VAT is the most reasonable tax because it only taxes value addition. Expanding the VAT net is acceptable, but since Simplified Value-Added Tax (SVAT) has been removed, timely VAT refunds for exporters are essential. Exporters are a crucial part of the economy.

The Budget does not significantly address weaknesses in tax administration. What is needed right now?

Tax administration reform must be multifaceted.

First, there are serious resource gaps at the Inland Revenue Department. Many assessors earn below the tax threshold. It is difficult to ensure proper tax administration without the right talent and pay scales. A structural change in reporting lines may be needed, because simply raising salaries without structural checks could worsen problems.

Second, digitisation is essential. We have taken small steps, and the Budget refers to an upgraded Revenue Administration Management Information System (RAMIS) system. Digitisation is the only way to improve compliance and enforcement.

We must follow core tax principles: simplicity, transparency, neutrality, and stability. The same applies to Customs. We need a simple three- or four-tier tariff structure and the removal of para-tariffs like cess and Ports and Airports Development Levy (PAL). Both this Budget and the previous one mentioned this. Hopefully the reform happens next year.

Do you believe Sri Lanka is on track to fully repay debt by 2028, as the President claimed?

If there are no major external shocks, we might be able to muddle through. But the world is full of uncertainties. Our economy is still vulnerable. A shock can disrupt cash flows, trigger rating downgrades, and increase borrowing costs sharply.

Debt servicing becomes easier only with sustained growth and reforms. That is why reform momentum is essential.

Do you see improved spending discipline in Budget 2026 or are we still going in circles?

We need much more spending discipline. Ultimately, Government expenditure is also Government revenue, because every rupee spent must be collected through taxes or inflation.

Instead of rationalising expenditure, governments repeatedly cut capital spending because it is the easiest option. For example, the last Budget allocated Rs. 20 billion to SriLankan Airlines, while only Rs. 5 billion was allocated for plantation worker attendance – just a quarter of what was allocated to an airline used mostly by wealthier travellers.

We must reduce the size of government and spend where it is necessary, especially on healthcare and education. I do not yet see a clear shift in thinking on expenditure.

Sri Lanka still spends far more than it earns. Will we stay disciplined after exiting the IMF programme or are repeat crises inevitable?

The IMF is not a solution to all our problems, but there is no alternative. Critics rarely offer any workable solutions. The strong revenue performance in 2025 also happened because of IMF oversight.

Whether we repeat past mistakes depends entirely on our behaviour after the programme ends. I cannot predict it, but I hope we have learnt a lesson.

Will the Government’s vision of ‘A Thriving Nation, A Beautiful Life’ remain a distant dream, or do you see it becoming a reality?

The Government has not done anything drastically wrong. It has broadly stayed on course. But doing nothing wrong is not enough. There are many right things still left undone: trade reforms, investment reforms, SOE restructuring, tax simplification, labour market reforms.

A thriving nation becomes possible when markets function well and when strong institutions and reforms support them. Without those reforms, the slogan will remain a slogan.