Due to Sri Lanka’s capital spending consistently falling short of budgeted levels – averaging only 3% of GDP between 2022 and 2025, below the 5-6% typically allocated – this has limited the Government’s ability to sustain multi-year investment programmes and has undermined the credibility of medium-term fiscal planning, a recently released Asian Development Bank report said.
“Sri Lanka’s capital spending has consistently fallen short of budgeted levels, averaging only 3.0% of GDP between 2022 and 2025 – substantially below the 5.0-6.0% typically allocated,” the report said.
“This pattern has become entrenched, limiting the Government’s ability to sustain multi-year investment programmes and undermining the credibility of medium-term fiscal planning,” the ADB’s Asian Development Outlook April 2026 report said.
Accordingly, the report noted that in 2024, actual spending remained at just 2.6% of GDP, less than half of the 5.4% that had been projected in the budget. Looking ahead to 2026, it noted that capital expenditure is projected to be 37.2% higher than the actual spend seen in 2025, with Rs. 1.37 trillion (approximately $ 4.4 billion) allocated.
“In 2024, actual capital spending stood at just 2.6% of GDP, less than half the 5.4% projected in the original budget. For 2026, capital expenditure is projected at Rs. 1.37 trillion (approximately $ 4.4 billion), a 37.2% increase over the 2025 actual spending, but achieving this will require overcoming persistent structural and fiscal constraints.”
The report also noted that recurrent expenditure – typically day-to-day expenditure which includes salaries, subsidies, interest payments and the cost of servicing debt – are factors which contribute to lower-than-expected fiscal space for spending on long-term infrastructure or assets.
“On the financing side, recurrent expenditure has repeatedly exceeded budgeted levels, particularly due to higher than-expected interest payments averaging 17.8% of annual budgeted expenditure during 2020-2024, up from 10.5% during 2015-2019.”
“The problem is compounded by rigidity in other recurrent spending items, while revenue persistently underperformed by an average of 14.7% during 2015-2024,” the report said.
The report further detailed that due to the lack of buffer or contingency funds to absorb unexpected shocks, Sri Lanka has relied on compressing capital spending, thereby using capital expenditure compression as a means of balancing the books.
“In the absence of sufficient fiscal buffers, the deficit has been contained by compressing capital spending by an average of 28.6% over 2015-2024 – except in 2019, 2020, and 2022.”