A new year, a new Government, a new Budget, yet familiar patterns persist. Sri Lanka’s fiscal trajectory over the past 35 years and even beyond has been marked by a steady rise in expenditure, widening deficits, increasing reliance on domestic borrowing, and, at times, overly ambitious targets. 

While tax revenue and grants have shown a degree of growth, Government expenditure, particularly on debt servicing, subsidies, and public sector wages, has consistently outpaced revenue collection, resulting in chronic budget deficits. These deficits, in turn, necessitate financing through either domestic or foreign borrowing, perpetuating a cycle of fiscal stress.

Budget 2025: A recap 

Budget 2025, in this context, cannot be expected to undo decades of policy mismanagement in a single year. However, it does raise a key question: does this Budget take the first meaningful step in the right direction? 

The projected deficit reduction to 6.7% of Gross Domestic Product (GDP) signals an effort at fiscal consolidation, though the real test will be in execution. Total expenditure is set at Rs. 7.1 trillion, with historic allocations directed towards the health and education sectors, long-standing areas of underinvestment that are very important for human capital development.

There are notable structural shifts in policy. The Government has refrained from issuing vehicle permits for Members of Parliament (MPs), despite lifting the ban on vehicle imports. However, such discipline is less evident in other areas, particularly in the continued financial support extended to loss-making State-Owned Enterprises (SOEs). 

The allocation of Rs. 20 billion to service SriLankan Airlines’ debt highlights the persisting challenge of State intervention in inefficient sectors.

Beyond these headline measures, Budget 2025 introduces several key initiatives aimed at long-term economic transformation. The Government has noted investment in digitalisation, with the aim of modernising revenue collection, expanding the digital economy, and reducing tax evasion. 

Measures include the introduction of a Trade National Single Window (TNSW) to streamline export-import procedures (a proposal that can be seen in every budget under consecutive governments), the expansion of Double Taxation Avoidance Agreements (DTAAs), and reforms in tax administration to enhance compliance.

Despite these ambitions, long-standing structural challenges remain. The Government’s plan of increasing capital expenditure to 4% of GDP is an encouraging sign, as investment in infrastructure and productivity-enhancing projects is critical for sustainable growth

The effectiveness of these policies will depend on their implementation. Historically, Sri Lanka has struggled with fiscal discipline, inefficiencies in revenue collection, and slow progress on economic reforms. While Budget 2025 presents a framework for fiscal consolidation and economic restructuring, execution risks remain. 

The extent to which these measures translate into meaningful fiscal stability will be determined by the Government’s ability to manage expenditure efficiently, reduce waste, and sustain long-term revenue growth.

With these considerations in mind, it is necessary to examine the broader fiscal trends that have shaped Sri Lanka’s budgetary sphere over the past 35 years. Understanding the patterns of revenue generation, expenditure priorities, deficit management, and debt accumulation over multiple economic cycles provides a clearer context for assessing both the challenges and opportunities that lie ahead.

35 years of budgeting 

The 1990s and 2000s saw steady increases in Government spending, but from 2015 onward, the country’s fiscal position worsened dramatically, culminating in the 2022 economic crisis and sovereign default.

1990s: Rising revenue but worsening deficits

The 1990s saw a steady increase in tax revenue, growing from Rs. 61,206 million in 1990 to Rs. 166,029 million in 1999. However, Government spending surged at a much faster pace, with total expenditure reaching Rs. 279,159 million in 1999, nearly three times the 1990 level.

Key trends in the 1990s:

• Revenue growth was driven by expanding the tax base, but the increase in grants was inconsistent, peaking at Rs. 8,280 million in 1992 before declining.
• Expenditure more than doubled from Rs. 99,814 million in 1990 to Rs. 279,159 million in 1999, with capital and net lending contributing significantly to this rise.
• Budget deficits worsened, ranging from 6.1% of GDP in 1992 to 9.8% in 1991, reflecting the difficulty in balancing spending and revenue.
• Domestic financing became the primary source of funding, with reliance on foreign borrowing decreasing over time.

2000s: Escalating debt and structural fiscal challenges

The 2000s marked a period of increasing deficits and higher domestic borrowing, as efforts to contain Government spending failed. Revenue surpassed Rs. 200 billion for the first time in 2000 and reached Rs. 655,259 million by 2008, but expenditure skyrocketed to Rs. 1.2 trillion by 2009.

Key fiscal trends (2000-2009):

• Tax revenue growth was steady, but expenditure increased at a much higher rate, reaching Rs. 1.2 trillion in 2009, creating record-high deficits.
• The budget deficit peaked at 9.9% of GDP in 2009, signalling unsustainable fiscal expansion.
• Domestic financing surged as the Government relied on local borrowings due to global financial constraints.

2010s: Fiscal consolidation attempts amidst rising expenditure

The 2010s saw mixed attempts at fiscal consolidation, with rising revenue but also higher public spending and debt servicing costs.

Key fiscal trends (2010-2014):

• Revenue exceeded Rs. 1 trillion for the first time in 2012, reflecting tax collection efforts.
• Expenditure continued to rise, reaching Rs. 1.8 trillion by 2014, maintaining a budget deficit of around 5% to 6% of GDP.
• Debt servicing and public sector salaries dominated spending, limiting capital investments.

2015-2025: Crisis, default and fiscal reforms

From 2015 onward, the budgetary situation became increasingly precarious, necessitating a detailed year-by-year breakdown.

2015: Record deficit of 7.2% of GDP

• Revenue: Rs. 1,454,878 million, up from previous years.
• Expenditure: Rs. 2,290,394 million, marking a significant increase.
• Capital expenditure: Rs. 588,737 million, indicating heavy investment in infrastructure.
• Overall budget deficit: 7.2% of GDP, showing the continued fiscal strain.

2016: Temporary improvement in fiscal balance

• Revenue rose to Rs. 1,686,062 million, reflecting tax hikes.
• Expenditure grew to Rs. 2,333,883 million, but the deficit was controlled at 5% of GDP.
• Foreign borrowing surged to Rs. 391,914 million, reducing reliance on domestic financing.

2017-2018: Renewed fiscal stress

• 2017 revenue reached Rs. 1,831,531 million, but expenditure crossed Rs. 2.5 trillion, widening the deficit to 5.1% of GDP.
• 2018 revenue increased to Rs. 1,919,973 million, but expenditure surged to Rs. 2,693,228 million, pushing the deficit further to 5% of GDP.

2019: Warning signs of crisis

• Revenue peaked at Rs. 1,890,899 million, but expenditure crossed Rs. 3.3 trillion, leading to a 9% deficit.
• Domestic borrowing reached Rs. 896,448 million, reflecting difficulties in securing foreign loans.

2020: Covid-19 shock and economic contraction

• Revenue fell to Rs. 1,367,960 million, reflecting pandemic-driven economic slowdown.
• Expenditure jumped to Rs. 3,040,996 million, causing a record deficit of 10.5% of GDP.
• Domestic borrowing hit Rs. 1,750,887 million, the highest in history.

2021: Fiscal distress worsens

• Revenue stagnated at Rs. 1,457,071 million, but expenditure soared to Rs. 3,521,735 million, pushing the deficit to a historic 11.6% of GDP.
• Domestic borrowing surged to Rs. 2,071,826 million, raising concerns over debt sustainability.

2022: Sovereign default and IMF bailout

• Sri Lanka defaulted on external debt in April 2022.
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• Revenue increased slightly to Rs. 1,979,184 million, but expenditure hit Rs. 4.47 trillion, resulting in a 10.2% deficit.
• The Government turned to the IMF for a bailout, imposing tax increases and spending cuts.

2023: Initial signs of recovery

• Revenue surged to Rs. 3,048,822 million, reflecting tax reforms.
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• Expenditure remained high at Rs. 5,356,600 million, but the deficit narrowed to 8.3% of GDP.

2024-2025: Stabilisation efforts

• 2024 revenue is projected at Rs. 4,031,000 million, with expenditure at Rs. 6.1 trillion, narrowing the deficit to 6.8% of GDP.
• 2025 revenue is expected to grow to Rs. 4,960,000 million, keeping the deficit at 6.7% of GDP, showing gradual fiscal stabilisation.

(Insert excel sheet)

Expenditure and revenue under the new Budget

Revenue breakdown

The Government has projected a total revenue of Rs. 4,990 billion, which consists of Rs. 4,960 billion from tax and non-tax revenue and Rs. 30 billion from grants. The tax revenue forms the bulk of this, amounting to Rs. 4,590 billion, which is expected to be 13.9% of GDP. 

The sources of revenue are as follows:

1. Tax revenue: Rs. 4,590 billion (92% of total revenue)

Tax revenue is divided into three major components:

• Income tax (Rs. 1,167 billion)
• Corporate income tax and personal income tax are expected to bring in significant contributions.
• The Budget introduces stricter tax compliance measures, including digital monitoring of businesses.
• Taxes on goods and services (Rs. 2,772 billion)
• VAT, excise duties, and levies on goods and services contribute the largest share of tax revenue.
• The VAT rate remains at 15% and the Government is expanding its scope to cover digital services.
• Higher excise duties on cigarettes, liquor, and gaming are expected to increase revenue.
• Taxes on external trade (Rs. 651 billion)
• The resumption of vehicle imports is expected to significantly boost Customs revenue.
• Import duties on luxury goods and selected essential items remain unchanged.
• Higher port and airport levies are expected to contribute to revenue. 

2. Non-tax revenue: Rs. 370 billion (7.5% of total revenue)

Non-tax revenue sources include:

• Dividends from SOEs (Rs. 200 billion)
• Fees, fines, and other Government charges (Rs. 120 billion)
• Revenue from licences and permits (Rs. 50 billion)

3. Grants: Rs. 30 billion (0.6% of total revenue)

Grants from bilateral and multilateral partners remain minimal, reflecting the country’s reliance on domestic revenue.

Expenditure breakdown

The total estimated expenditure for 2025 is Rs. 7,190 billion, accounting for 21.8% of GDP. This consists of Rs. 5,886 billion in recurrent expenditure and Rs. 1,315 billion in capital expenditure. Additionally, Rs. 4,550 billion is allocated for total debt servicing, of which Rs. 2,950 billion is for interest payments.

1. Recurrent expenditure: Rs. 5,886 billion (82% of total expenditure)

Recurrent expenditure includes salaries, welfare payments, and other routine Government costs.

• Salaries and wages (Rs. 1,230 billion)
• A public sector salary increase of Rs. 110 billion is included.
• Pensions and allowances for retired Government employees are also accounted for.
• Interest payments (Rs. 2,950 billion)
• The largest single expense in the Budget, accounting for nearly 41% of total spending.
• The Government is exploring debt restructuring options to reduce future interest burdens.
• Social welfare and transfers (Rs. 1,290 billion)
• Subsidies for low-income households, public assistance programmes, and pension schemes.
• The ‘Aswesuma’ welfare programme is expanded with an additional Rs. 232.5 billion in allocations.
• Goods and services (Rs. 416 billion)
• Operational expenses of Government ministries and agencies.
• Expenditures on maintaining public infrastructure and utilities. 

2. Capital expenditure: Rs. 1,315 billion (18% of total expenditure)

Capital expenditure is allocated towards infrastructure development and investments. Some of them include:

• Education and skills development (Rs. 145 billion)
• Rs. 135 billion allocated for university and school improvements.
• Rs. 10 billion for new technical and vocational education programmes.
• Health sector development (Rs. 604 billion)
• Rs. 185 billion for essential medical supplies and hospital facilities.
• Expansion of rural healthcare services and public health programmes. 
• Agriculture and food security (Rs. 5 billion)
• Programmes to boost domestic food production and reduce import dependency.
• Rs. 1 billion allocated for improving irrigation systems. 
• Tourism and digital economy (Rs. 3 billion)
• Incentives for international tourism marketing campaigns.
• Investments in IT infrastructure to promote digital services. 

3. Debt servicing: Rs. 4,550 billion

• Interest payments (Rs. 2,950 billion)
• Debt repayments (Rs. 1,600 billion)
• The Government plans to meet these obligations through domestic and international borrowing.

Fiscal deficit and borrowing plan

The fiscal deficit is projected at Rs. 2,200 billion, which is 6.7% of GDP. The Government aims to finance this through a mix of domestic borrowing (Rs. 2,125 billion) and foreign borrowing (Rs. 375 billion).

• Domestic borrowing: Rs. 2,125 billion
• Issuance of Treasury bonds and bills.
• Loans from State-owned banks.
• Foreign borrowing: Rs. 375 billion
• Concessional loans from development partners.
• Limited access to international bond markets due to debt concerns.

Budget 2025: A real turning point? 

The Sunday Morning posed some questions on Budget 2025 to several leading economists – Advocata Institute Chairman Murtaza Jafferjee, Verité Research Lead Economist Raj Prabu Rajakulendran, Advocata Institute Chief Executive Officer Dhananath Fernando, and Ernst & Young Sri Lanka Director Consulting Talal Rafi.

Sri Lanka has faced persistent budget deficits for decades, with a deficit of 11.6% of GDP in 2021. With the 2025 deficit expected at 6.7%, is this a sustainable improvement or are deeper fiscal reforms needed?

Jafferjee: The fiscal outlook must be broken down into two key components. Firstly, the primary balance target for 2025 is set at 2.3% of GDP, which is lower than the achievement in 2024. While this target remains within the parameters set by the International Monetary Fund (IMF), its attainment should ideally come from meeting revenue projections rather than cutting capital expenditure, as was done last year.

Secondly, the projected interest expenditure stands at a staggering Rs. 2.95 trillion, equivalent to 8.8% of GDP, one of the highest levels globally. A key factor behind this unsustainable burden stems from a critical policy misstep in mid-2022 during the domestic debt restructuring. At that time, policymakers failed to enforce a comprehensive restructuring of all crisis-era bonds. 

Of the Rs. 9 trillion in outstanding bonds, approximately Rs. 1.9 trillion had been issued at crisis-level yields of 27%. However, only 22% of these bonds – those held by superannuation funds – were restructured. As a result, a large portion of the debt remains subject to exorbitant interest rates, exacerbating the fiscal strain.

This situation has created a scenario where a select group of bondholders, including those who sold at a capital gain when yields declined, has secured extraordinary profits, while the broader population bears the cost. 

Looking ahead, some of the restructured bonds feature a step-down coupon structure, and yields in the Government securities market are trending downward. However, without sustaining economic growth at 5% or higher, Sri Lanka may once again face the need for further debt restructuring.

Rajakulendran: While it would be ideal for Sri Lanka’s total revenue to exceed total expenditure, achieving a budget surplus is quite difficult for a country like Sri Lanka. Instead, the focus should be on achieving a primary surplus – that is, revenue exceeding expenditure before interest payments. 

Interest payments are obligations tied to past debt and these must be repaid regardless. The key measure of fiscal responsibility is therefore the primary balance, which should ideally be in surplus.

The 2025 Budget aims for a 2.3% primary surplus, meaning revenue will exceed primary expenditure before interest payments. This is aligned with IMF targets and achieving this goal would be a step in the right direction. 

Historically, Sri Lanka has struggled to maintain a primary surplus, having achieved it only five times since 1950, most recently between 2016 and 2018. If we can sustain a primary surplus over the next 5-10 years, it would greatly improve fiscal sustainability.

Fernando: I believe deeper fiscal reforms are essential. The budget deficit has slightly exceeded the IMF limit of 5.2%, reaching 6.7%. While this may not derail the programme since it is not a strict conditionality, given the primary focus is on the primary balance and tax revenue, we still need fiscal reforms. 

One of the major issues is public sector salaries. As I have mentioned multiple times before, this does not mean employees don’t deserve a salary hike, but rather that restructuring is necessary before increasing wages. Raising salaries without restructuring fails to address the core issue.

The fiscal pressure mainly comes from salary costs. This year alone, the additional cost from salary increases amounts to Rs. 110 billion, and over the next three years, the total will amount to around Rs. 300 billion, twice the current tax revenue collection. To manage this, restructuring is necessary, ensuring that salary increments are aligned with productivity improvements.

Right now, the approach taken does not create incentives for fiscal discipline.

Rafi: Deeper fiscal reforms are essential. Sri Lanka cannot continue in this manner. The expected fiscal deficit for 2025 is 6.7%, but if the expected revenue does not come, it could be bigger. 

In the next two years, we have to create a fiscal buffer to face 2028, which is when most debt repayments come due. The issue is that the IMF programme will come to an end in 2027 and so will the guardrails. 

Tax revenue collapsed to 8.3% of GDP in 2021 but is projected to recover to 15.1% in 2025. What policy changes are crucial to maintaining long-term revenue stability?

Jafferjee: Tax revenue must increase through a combination of tax buoyancy, where taxes grow at a faster rate than economic growth due to higher marginal tax intensity, improved administration, and tax policy reforms. 

However, public resistance to taxation remains high, largely due to a lack of perceived benefits. To address this, the Government must introduce a social compact that fosters greater trust in public spending and tax fairness. At the same time, taxpayer rights must be strengthened, as compliant taxpayers continue to face undue scrutiny and harassment. 

Meanwhile, significant revenue losses persist due to long-standing tax holidays, some lasting as long as 25 years, and preferential tax concessions granted without sunset clauses. These exemptions not only erode Government revenue but also create an uneven playing field, disadvantaging businesses that operate without such benefits.

Following the country’s debt default and the resulting 70% inflation that eroded citizens’ savings, no agreement should be considered sacrosanct. These outdated concessions must be phased out swiftly to restore fairness, improve revenue collection, and eliminate distortions in market competition.

Rajakulendran: The structure of taxation is critical for maintaining stable revenue growth. A fundamental issue in Sri Lanka is the over-reliance on consumption-based taxes instead of income-based taxation.

Currently, much of the tax revenue comes from consumption taxes, such as Value-Added Tax (VAT). This places a disproportionate burden on lower-income groups, as both wealthy and low-income individuals pay the same VAT rate on essential goods like milk powder. This regressive tax system needs to be adjusted.

Instead, the focus should be on income taxation, including corporate income taxes, personal income taxes, rental income, and tuition income. As a country’s economy grows, incomes rise, and an income-based tax system allows for more equitable revenue generation.

The 2025 Budget has introduced some positive steps, such as raising withholding tax from 5% to 10% and increasing capital gains tax from 10% to 15%. These measures are aligned with best practices and will help increase income-based tax revenue. 

However, to meet the projected revenue targets, taxes will likely need to increase further by 12-13%. Without additional measures, the revenue target may not be met.

Fernando: After dropping to 8%, tax revenue has gradually improved, but a key issue remains: tax administration. A weak tax administration is just as problematic as a weak tax policy. Sometimes, tax administration issues cannot be resolved solely through policy changes. Addressing administrative inefficiencies is critical, but it is also challenging.

Sustainability in tax revenue depends on strengthening tax administration. One crucial step is upgrading the Revenue Administration Management Information System (RAMIS) to make it more independent. 

For instance, there was a feature in RAMIS that allowed tax files to be randomly assigned to assessors over time, but tax authorities have not enabled it. Without this feature, assessors repeatedly evaluate the same files, allowing relationships to form that can lead to system manipulation. Addressing such gaps is essential. 

The goal is to minimise human intervention, ensuring that tax assessments are automated, leading to more efficient and sustainable revenue collection.

Rafi: In the early 1990s, Government revenue was over 20% of GDP. Today, we are struggling to achieve 15% of GDP in Government revenue; even 15% of GDP in Government revenue is still one of the lowest in the world. Tax rates cannot be raised as they are very high. What is needed is increasing the tax base through digitisation of revenue collection and of the economy. 

With domestic borrowing exceeding Rs. 2 trillion in 2025 and foreign financing still negative, how should Sri Lanka balance debt restructuring and economic stability?

Jafferjee: The gross borrowing requirement stands at Rs. 4 trillion, of which Rs. 2 trillion constitutes new borrowing, while the remaining Rs. 2 trillion is a rollover of existing debt. A key priority must be reducing interest rates, particularly at the long end of the yield curve, where the term premium remains excessively high at approximately 350 basis points. 

Since prices are determined at the margin, attracting foreign investors, especially for long-term debt, is essential to lowering the term premium to a more sustainable level of around 200 basis points.

Rafi: There is no other way other than to grow the economy by growing the tradable sectors as exports are needed to repay external debt as well. The most important aspect is reducing the fiscal deficit. 

Capital expenditure is set to increase in 2025, but past public investments have led to inefficiencies. What sectors should the Government prioritise to ensure real economic growth?

Jafferjee: Capital expenditure is budgeted at Rs. 1.3 trillion for this year, compared to Rs. 1.7 trillion allocated last year, of which only Rs. 0.85 trillion was actually spent. There now appears to be greater rationality in prioritising expenditure, ensuring that resources are directed more efficiently. Additionally, the revised procurement law is expected to enhance competition, ultimately driving down costs and improving value for public investments.

Rajakulendran: A major challenge with capital expenditure in Sri Lanka is that budgets often project large figures without ensuring they are realistically achievable. If revenue collection falls short or other expenditures increase, capital expenditure is often reduced – sometimes by as much as 50% of the budgeted amount.

For Sri Lanka to achieve sustained economic growth, particularly a 5% GDP growth rate, we need consistent and strategic capital investments. The concern is whether capital expenditure will once again be cut mid-year, as has happened in the past.

While investment in transport and highways has been a priority, there needs to be greater diversification. Capital investment should also focus on education, healthcare, agriculture, and Research and Development (R&D). The historical over-concentration on transport and highways has not yielded broad-based growth. Therefore, investment needs to be more balanced across multiple sectors.

Fernando: Economic growth depends on productivity and productivity can only improve through structural reforms – there is no alternative. The key lies in implementing difficult but necessary changes. 

Some positive steps were mentioned in the Budget, such as reforms related to the Customs Ordinance, the bankruptcy law, and the establishment of a State-owned holding company. These structural changes are essential and the Government must follow through with their implementation.

Rafi: The most important areas the Government should spend capital expenditure on would be infrastructure, digitisation, R&D, education, and health. 

Given Sri Lanka’s ongoing IMF programme and external debt challenges, what are the biggest risks to economic recovery in 2025?

Jafferjee: The greatest risk to economic recovery stems from external shocks, particularly weather-related disruptions. The last major series of weather shocks occurred in 2016-’17, when three consecutive droughts severely impacted economic stability. Such events have the potential to derail progress once again. 

Additionally, policy missteps remain a persistent threat. Sri Lanka has a history of self-inflicted economic setbacks due to poor decision-making. The key challenge now is ensuring that policymakers remain committed to the agreed stability and growth framework, particularly the reforms outlined in the IMF programme, without deviation or short-term political expediency.

Rajakulendran: Many people refer to this as an IMF budget, but it is important to differentiate between three key elements: financial targets, economic methods, and governance methods.

• Financial targets: These include revenue targets and primary balance targets, which are non-negotiable under the IMF programme. The IMF’s Debt Sustainability Analysis (DSA) determines these targets, which are updated every six months.
• Economic methods: While financial targets are fixed, the Government has control over how they are met. Revenue can be increased in multiple ways; for instance, by raising VAT to 25-30%, although this would not be ideal. The Government has alternative methods and the IMF is flexible as long as Sri Lanka can prove alternative revenue sources are viable.
• Governance methods: Governance reforms are also under Sri Lanka’s control. The previous Government frequently failed to meet governance-related IMF conditions, despite achieving financial targets. The 2025 Budget has emphasised anti-corruption efforts and structural governance reforms, which is a positive step.

The biggest risks to economic recovery in 2025 lie in economic and governance methods. If revenue collection is not managed effectively, the Government may be forced into short-term fixes, which delay meaningful reform. Moreover, governance issues must be addressed; Sri Lanka’s economic crisis was, at its core, a governance failure.

While the Budget outlines governance reforms, the key challenge is implementation. If the Government successfully follows through on governance and strengthens economic policies, economic recovery will be more sustainable.

Fernando: There are two primary risks. The first is failing to meet the 5% growth target. Achieving this target requires structural reforms; without them, growth will falter, leading to lower tax revenue. Economic expansion is directly tied to revenue collection, so this is a critical challenge.

The second major risk is geopolitical. During his first term, US President Donald Trump made several trade-related decisions that impacted global markets. If similar policies return, such as country-wise trade deficit comparisons, Sri Lanka could face difficulties. 

Currently, Sri Lanka has a trade surplus with the US, meaning the US has a trade deficit with us. If tariffs are imposed on Sri Lanka due to this surplus, our exports could suffer significantly, considering that the US accounts for 25% of our export market.

A third risk involves revenue collection. 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. 

In that case, the Government will have to either revise tax policies, introduce new taxes, or cut capital expenditure to maintain the budget deficit. However, reducing capital expenditure would hurt economic growth, as development projects require sustained investment.

Another challenge is borrowing. If revenue generation falls short, the Government may have to borrow more. Increased borrowing could push interest rates higher or pressure the Central Bank to artificially lower rates, which would undermine monetary stability. 

These are the key risks Sri Lanka faces.

Can we be confident about the revenue sources outlined in the Budget? For example, the Government expects a substantial portion of tax revenue to come from vehicle imports, but demand for vehicles is currently low. Does this make the revenue projection reliable?

Fernando: I don’t foresee any new tariffs being introduced. However, in terms of revenue sources, the only viable correction mechanism is improving tax administration. The Government cannot impose more taxes or increase tax rates significantly. The only way forward is to enhance tax collection efficiency.

The way forward 

President Anura Kumara Dissanayake remains firm on the proposals outlined in his first Budget, asserting that they represent the most pragmatic course of action given Sri Lanka’s economic realities. With the country emerging from prolonged financial mismanagement, he stressed the necessity of a structured fiscal plan to restore stability and lay the groundwork for long-term growth.

Addressing these concerns at a post-Budget forum, Dissanayake expressed confidence in his administration’s approach, describing Budget 2025 as a framework designed to drive inclusive economic expansion, particularly by integrating rural communities into national development.

“Either we build on this foundation or we collapse with it altogether. If we allow emotions to dictate decisions, we will fail. Our objective is to remain within this framework and chart a way forward,” he said.  

It remains to be seen whether this Budget will be the first step in correcting decades-long policy mismanagement, corruption, and poor governance.