Sri Lanka’s 2025 Budget, presented by President Anura Kumara Dissanayake on Monday (17), has left many discussing its compatibility with International Monetary Fund (IMF) targets. The Budget projects total revenue and grants at Rs. 4,990 billion, total Government expenditure at Rs. 7,190 billion, and a budget deficit of Rs. 2,200 billion, accounting for 6.7% of Gross Domestic Product (GDP).
It anticipates a 23% increase in total revenue, a 13.5% rise in non-tax revenue, and a 17% expansion in Government spending. In evaluating the IMF compliance of these key fiscal parameters, particularly the projected primary surplus target of 2.3% of GDP in 2025, many economists believe that Budget 2025 aligns closely with most IMF targets.
IMF compliance
Speaking to The Sunday Morning, University of Peradeniya Department of Economics and Statistics Professor in Economics Wasantha Athukorala noted that IMF compliance could be observed in Budget 2025, with many aspects being compatible with IMF targets.
The IMF suggests a revenue target of 15.1% of GDP in 2025, which is in line with the 15.1% total revenue estimation in Budget 2025. Further, Government expenditure at 21.8% of GDP and the primary surplus at 2.3% of GDP are also consistent with the IMF targets. Therefore, he noted that no concerns could be raised regarding these specifics.
However there is a gap in the IMF target for the budget surplus/deficit, as the anticipated budget deficit of the IMF is 5.2% of GDP, while the Government expectation is a deficit of 6.7% of GDP.
Prof. Athukorala explained that this gap resulted from the interest cost. In 2024, the interest bill was Rs. 2,690 billion, which has increased in 2025 to Rs. 2,950 billion, resulting in a change of almost Rs. 260 billion. This indicates that an additional amount of money should be paid as debt interest this year.
He further explained that out of the Government tax revenue, 64% was spent on interest payments and added that this was a point of struggle for the Government. He noted that the Government had also allocated a significant amount of money for investment.
He added that Sri Lanka had spent Rs. 817 billion on Government investments in 2024. This year, the Government has allocated Rs. 1,315 billion for Government investment, amounting to an increase of almost Rs. 500 billion.
“This is a positive sign as expanding the economy is integral for long-term development. The IMF doesn’t expect a higher growth rate in the short term and expects gradual expansion of the economy.
“However, the country’s potential is greater. While IMF expectations ranged from 2.7-4% in economic growth, even in 2024 Sri Lanka showcased faster-than-expected macroeconomic stabilisation by achieving 5% economic growth. Economic growth for this year should ideally be higher.
“Therefore, it is important to focus on expanding the economy. What the Government is suggesting is positive. Despite people criticising the IMF targets, the only target deviations is the budget deficit arising due to the Government’s attempt to expand the economy, while all other targets are in alignment.”
Moody’s Ratings stated that Sri Lanka’s draft 2025 Budget reflected the Government’s dedication to its IMF programme, particularly in achieving the primary surplus target and introducing new revenue sources to offset losses from tax policy changes.
However, it also stated that the Budget projected higher expenditure than Moody’s earlier estimates, mainly due to increased interest payments. This is expected to widen the fiscal deficit in 2025 and slow the pace of fiscal consolidation.
Accordingly, this suggests that Sri Lanka’s fiscal authorities will continue to face challenges due to weak debt affordability, a limited revenue base, and social constraints.
Public sector focus
Government spending comprises Rs. 2,936 billion allocated for recurrent expenditure (excluding interest payments), Rs. 2,950 billion for loan interest, and Rs. 1,315 billion for capital expenses. Additionally, Rs. 1,290 billion has been allocated for subsidies and transfers, while Rs. 1,230 billion is allocated for public sector salaries and wages.
However, the need for substantial structural reforms in Sri Lanka’s public sector has been highlighted by the IMF, with a focus on strengthening overall governance as part of its continued support for the country’s economic recovery.
Commenting on proposals pertaining to the public sector in this context, Prof. Athukorala highlighted that rather than constraining recruitment, the IMF’s focus lay on the country increasing public sector efficiency, maximising productivity, and effectively utilising the public sector workforce.
He noted that while this required the gradual reduction of the public sector in case of a surplus, whether a surplus existed was determined by whether the workforce was utilised. “We are currently not utilising most of the public sector workforce efficiently, which may account for the appearance of a surplus.”
He highlighted that Department of Census and Statistics figures indicated that in Q2 2020, the total number of public sector workers amounted to 1.18 million (1,180,450). However, in Q2 2024, it amounted to 1.14 million (1,146,395), resulting in a vacancy of approximately 34,000 public sector employees.
“As the Government did not undertake recruitment over the last few years, these vacancies exist. This is why the Government is trying to recruit 30,000 public sector workers, which therefore does not indicate a deviation from IMF compliance.
“Therefore, when considering the Government’s salary bill, it has not increased significantly. Last year’s salary bill was Rs. 1,096 billion while this year it amounts to Rs. 1,230, billion, indicating an increase of approximately Rs. 130 billion in the salary bill.”
He further highlighted that this was expected given the higher inflation in the country. However, he also explained that since there was a change in salaries, the demand in the country would increase, leading to an increase in inflation and necessitating careful handling by the Government at the macroeconomic level.
Debt settlement concerns
Debt restructuring and fiscal consolidation remain central to Sri Lanka’s long-term economic stability goals, as also highlighted by the IMF. As part of the IMF-supported reform programme, the Government is aiming to raise revenue to 15.4% of GDP and increase gross international reserves to $ 15.1 billion by 2028.
In order to ensure debt sustainability, it is important that Government expenditure is set to be capped at 20% of GDP in 2025 while the budget deficit is kept below 5% of GDP.
Speaking to The Sunday Morning, economist Dr. Roshan Perera stated that Budget 2025 had kept to the targets of the IMF programme, adding that achieving these revenue targets may be challenging.
“The budget has been prepared taking into account both IMF targets and the Public Financial Management Act. Adhering to these targets is a positive sign. However, debt sustainability is still a concern, as we have only been given a grace period. After the next few years, capital repayment is essential.”
She noted that even with debt restructuring, the debt-to-GDP ratio remained rather high at over 100%. Therefore, growth is essential while challenges to growth exist. She added that while expansion measures, such as increasing exports to $ 19 billion, were present, the specifics of achieving these targets should be elaborated upon and given more focus.
Revenue concerns
The IMF’s fiscal framework emphasises the importance of revenue mobilisation in maintaining a sustainable primary balance path as part of the broader effort to restore fiscal sustainability.
According to the Budget, revenue growth for 2025 is anticipated to stem from several key areas, including the relaxation of restrictions on motor vehicle imports, the imposition of Value-Added Tax (VAT) on digital services, corporate income tax on service exports, and higher taxation on products such as cigarettes, liquor, and gaming.
The Government projects total tax revenue to reach 13.9% of GDP and the fiscal strategy remains centred on attaining a 15.1% revenue-to-GDP ratio for 2025. Strengthening tax compliance and administration, along with the integration of digital systems, is expected to improve fiscal sustainability and reduce tax leakages.
For 2025, the tax revenue is Rs. 4,590 billion, while non-tax revenue is Rs. 370 billion.
Commenting on the revenue generation aspects outlined in the Budget, Prof. Athukorala noted that the revenue expected from taxes stood at over 90%, acting as the base of total revenue, as was the case in many countries. The three major components of tax revenue are income tax, taxes on goods and services, and taxes on external trade.
“However, the issue is that in Sri Lanka, there are several problems with tax collection, such as lack of digitalisation, leakages, and the low tax base. Fewer than one million people/firms are paying taxes in the country out of 22 million people. Therefore, this low tax base must be expanded. There are approximately two million people who can pay income taxes but are not included in the system,” Prof. Athukorala observed.
He highlighted that while simplifying the tax system could increase revenue, it was also essential that the Government implemented strategies to integrate those who should be liable to pay taxes into the tax system. He also pointed out the need for converting corruption leakages into Government revenue.
“The Government should consider these aspects of expanding the economy, which is part of the revenue generation process. If revenue is not increased gradually, the Government will be unable to achieve the revenue target in future,” he noted.
Meanwhile, commenting on meeting revenue generation targets to finance expenditure, Dr. Perera stated that while tax revenue would always be the largest source of revenue, the issue lay with rates and the system, with simplification being a necessity.
“While we have maximised the type of taxes that can be collected, it is now a matter of broadening the base and effectively identifying the corporations and individuals liable to pay taxes. It is not about increasing or changing taxes, but rather about improving the administration. Therefore, I am uncertain about the extent of attention given to improve tax administration measures,” she said.
Speaking to The Sunday Morning, Advocata Institute Chairman Murtaza Jafferjee noted that the key challenge at present was ensuring that policymakers remained committed to the agreed stability and growth framework, particularly the reforms outlined in the IMF programme, without deviation or resorting to short-term political expediency.
He further noted that policy missteps remained a persistent threat, given Sri Lanka’s history of self-inflicted economic setbacks due to poor decision-making.
Advocata Institute Chief Executive Officer (CEO) Dhananath Fernando noted that economic expansion was directly tied to revenue collection and remained a critical challenge.
“There is risk involved with revenue collection as well. The Government has placed additional reliance on vehicle imports to generate revenue, expecting a boost from higher prices. If these imports do not materialise as expected, there will be a revenue shortfall,” he said.
In such a scenario, he added that the Government would have to either revise tax policies, introduce new taxes, or cut capital expenditure to maintain the budget deficit. However, reducing capital expenditure will hurt economic growth, as development projects require sustained investment.
Legal and governance proposals
The IMF Governance Diagnostic Assessment identifies key risks related to corruption and administrative inefficiencies, particularly in macroeconomically significant sectors. These concerns include vulnerabilities in anti-corruption mechanisms, anti-money laundering initiatives, and counterterrorism financing efforts.
Fiscal governance challenges are also noted in areas such as public financial management, tax policy, revenue administration, State enterprise management, and public procurement. Additional governance gaps are identified in Central Bank operations, financial sector oversight, contract enforcement, and property rights protection.
In the Budget, several policy reforms among the proposed 11 new laws appear to be aligned with these parameters. These include the State Business Enterprises Management Act, Public-Private Partnership (PPP) Investment Management Act, Public Procurement Law, Public Asset Management Act, and the Strengthening of Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) Framework. However, while many stakeholders commend these laws, they also highlight the need for their efficient implementation.
Further, restructuring loss-making State-Owned Enterprises (SOEs) has long remained under the focus of the IMF, although the need for privatisation has fluctuated among administrations.
For instance, Budget 2024 placed more emphasis on the privatisation/restructuring of SOEs which were deemed inefficient, such as the Ceylon Electricity Board (CEB) and Ceylon Petroleum Corporation (CPC). However, Budget 2025 advocates for PPPs to manage State enterprises more efficiently and privatisation is not addressed.
Commenting on these governance proposals, Verité Research Lead Economist Raj Prabu Rajakulendran noted that the governance matters proposed indicated the Budget’s heavy focus on systemic reforms as well, in addition to economic methods and financial targets, especially given the introduction of 11 new laws.
He added that Budget 2025 consisted of a mixture of financial targets, economic matters, and governance matters, and met most of the financial targets set in the IMF programme. He explained that many of the economic methods were also positive and progressive, while some methods may require further consideration, especially with regard to certain taxes.
“While people say that this is an IMF budget, a continuation of the previous budget, or a reform budget, I would say it is a mixture of all these aspects. The financial targets are formulated from the Debt Sustainability Analysis perspective of the IMF and economic matters discuss the methods of achieving these targets. Economic matters should not be set by the IMF or the Government alone, but rather done based on analysis, emerging from the country itself.”
Rajakulendran noted that the analysis had been done by Sri Lanka and that the analysis itself should determine the economic methods, which could then be negotiated by the Government. One example is the imputed rental income tax, which will not be implemented by the current Government despite IMF recommendations.
“The IMF has put the current review on the board, suggesting that it accepts the changing of economic methods as long as the set targets can be met. Therefore, proposals such as raising public sector salaries will not lead to issues with the IMF programme if the targets are met,” he said.
Govt. stance on expanding the economy
Commenting on public sector recruitments amid IMF concerns regarding rightsizing the public sector workforce during a televised economic discussion following Budget 2025, Deputy Minister of Finance Harshana Suriyapperuma stated that incremental changes would not help Sri Lanka grow to the next level, adding that it instead required the economy to be allowed to expand in a manner different from before.
“For instance, the banking sector always says that over 50% of the economy is not within the reported economy. Therefore, encouraging the non-reported informal economy to be transferred to the formal economy will lead to transactions going through the banking system.”
He noted that while the Government sector was currently tail-heavy, certain levels were required to perform essential tasks in order to deliver these expanded economic activities, such as revenue collection and efficient recruitment-related activities.
“We will be using digitalisation to the maximum possible level. However, due to many who have left the Government sector in the middle level, which is required for these transformational efforts, there is a vacuum which will be filled by these 30,000 recruitments in order to start adding value rather than merely providing employment.”
Further, he noted that the primary focus of the Government was the recruitment of graduates to this level. Explaining the reason for requiring 30,000 workers, he said that there was limited capacity at the revenue collection level to add value, particularly at Government institutions like the Inland Revenue Department, Customs, and Excise Department.
“The current public sector workforce manages the delivery of the economy. Moving to a bigger economy requires either digitisation or people to bridge the gap.”
He also noted that the Government would not attempt to deprive people of jobs, as families were dependent on these limited earnings. The objective instead is to grow the economy.
Attempts by The Sunday Morning to contact the Deputy Minister of Finance, the Ministry of Finance, or a Government spokesperson regarding the IMF compliance of Budget 2025 proved unsuccessful.