President and Finance, Planning and Economic Development Minister Anura Kumara Dissanayake led National People’s Power (NPP) Government deserves continuity for stabilising the economy and the political environment. Regardless of political ideology or manifesto promises, President Dissanayake has continued the International Monetary Fund (IMF) programme with strong leadership from the point where former President Ranil Wickremesinghe left off. This has been a critical element for improving the economy rather than focusing on political priorities.
Sri Lanka has made significant progress in achieving macroeconomic stability. The gross domestic product (GDP) grew by five per cent last year (in 2024) and 4.9% in the second quarter of this year (2025), which is higher than the expectations of multilateral agencies such as the IMF, the World Bank, and the Asian Development Bank (ADB). Inflation dropped to 2.7% in 2025 from 78% in 2022. Interest rates are now in single digit, and foreign reserves have increased to US $ 6.5 billion, with expectations of reaching $ 6.8 billion by the end of 2025. This shows strong momentum compared to the conditions seen in 2022 and 2023.
The first rollout of domestic bonds since the 2022 default has also improved investor confidence, signalling that Sri Lanka is gradually moving out of its economic crisis. Resuming market operations is expected to enhance monetary activities and mount official reserves, avoiding the policy mistakes made in the past.
The Budget framework reflects classical economic thinking, similar to Scottish economist Adam Smith’s view that Governments should maintain fiscal discipline, minimise debt, and allow private enterprise to drive economic growth (An Inquiry into the Nature and Causes of the Wealth of Nations. 1776).
The Government’s Budget framework is based on classical economic principles, with elements that support social mobility and long-term development. It also reflects key promises in the Ruling Party’s manifesto, such as reducing corruption, improving accountability, digitising the economy, and promoting equitable social development.
The NPP Government passed next year’s (2026) Budget with a two-thirds majority. The Budget prioritises revenue growth to reduce the deficit, though spending remains largely limited to recurrent expenses. It contains a primary surplus of 2.5% and targets revenue equivalent to 15.4% of the GDP. The Budget aims to achieve 7% GDP growth in the next few years and reduce public debt to 95% of the GDP by 2032. This strategy depends on private-sector-led investment and growth, attracting foreign direct investment (FDI), modernising State-owned enterprises (SOEs), and promoting export-driven economic expansion.
Sri Lanka’s economy depends mainly on sectors such as tourism, apparel and textiles, agriculture, and services. Tourism usually plays a major role, but, it remains vulnerable to external shocks, as seen during
Covid-19 and the recent economic crisis. Tourist arrivals are expected to fall in the coming months due to the impact of cyclone Ditwah. The severe weather has also disrupted other sectors, especially agriculture, on which a large portion of the population depends.
The private sector has also been disrupted by the recent deadly cyclone. The financial assistance given to the small and medium enterprise (SME) sector will not be enough for a full recovery, although it may help to restart basic business activities. Exports are likely to decline, and it will take time to rebuild resources, repair factories, and restore logistics operations.
Private investment growth, FDI, and export-led growth are all interconnected. Public-private partnerships (PPPs) can help restructure the commercial public sector, and the proposed Investment Protection Act is an important step. For private investment to grow, the introduction of new technology is essential, and FDI can support this while also creating new jobs. However, the cost of doing business, skills, competitiveness and expected profitability will strongly influence foreign investment decisions, especially when compared with more competitive economies. The Port City project has the potential to attract foreign investment, but, this depends on geopolitical stability and transparency in how the project develops.
A digital single-window system at the Board of Investment (BOI) can greatly improve the efficiency of investment coordination and reduce time and transaction costs. However, securing FDI also requires strong free trade agreements (FTAs) that provide more space for investment and reduce trade barriers. In this regard, reviewing and redesigning the Indo-Sri Lanka FTA is important. India, now the world’s fourth largest and one of the fastest-growing economies, plays a major role in global trade. Many multinational companies such as Apple, Foxconn, Samsung, Mercedes, Range Rover, Suzuki, Toyota, and others have already invested in India, especially in South India. This presents an opportunity for Sri Lanka. Even China is seeking to expand its investments in India.
Growing investment interest in neighbouring India can open doors for Sri Lanka. However, Sri Lanka’s integration into global value chains depends on improving its own policy environment, economic conditions and becoming more attractive to international markets. Strengthening trade links between Sri Lanka and India can cement the foundation for building an export-based economy.
Loss-making SOEs continue to burden the economy. The NPP Government’s attempts to improve SOEs may fall short if issues of accountability and skills remain unresolved. Adopting PPPs or moving toward the privatisation of SOEs is critical to build credibility with foreign investors and avoid returning to the crisis that Sri Lanka faced in 2022.
Rising poverty remains a serious concern. Although macroeconomic indicators have improved, the poverty rate is still high above 25% of the population (based on $ 3.65/day). Severe weather conditions, agricultural disruptions, and rising food prices due to the cyclone could increase poverty further. However, with economic growth holding at around 5%, Government spending on rebuilding infrastructure and targeted cash transfers can support households and maintain economic stability. Public debt will rise more than expected because of cyclone-related costs. Thus, staying with the IMF programme, expanding social support, and attracting FDI through strong bilateral and multilateral FTAs can reinforce the economy to remain resilient and avoid returning to crisis levels or requiring another IMF programme.
Sri Lanka’s focus on export-led growth and strengthening trade partnerships reflects British economist David Ricardo’s principle of comparative advantage, where nations benefit from specialising in areas where they are most competitive (On the Principles of Political Economy and Taxation. 1817).
The writer is an economist and researcher in trade, investment and capital markets
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The views and opinions expressed in this column are those of the author, and do not necessarily reflect those of this publication