S L’s mid-year budget success faces tougher test ahead
Sri Lanka’s fiscal position improved distinctly in the first half of 2025, with resilient revenues and a shrinking budget deficit pointing towards progress in financial consolidation.
According to the Ministry of Finance’s Fiscal Review Report for January–June 2025, government revenue ascended nearly 24.7 per cent year-on-year to Rs. 2.3 trillion while the deficit narrowed by 32.3 per cent to Rs. 405.6 billion, compared with Rs. 598.9 billion in the same period of 2024.
These figures suggest that the government is broadly on track to meet its target of limiting the budget deficit to 6.5 per cent of GDP by year-end, a senior ministry official said.
But a renowned economist who did not want to be named pointed out weaknesses that raise questions about the sustainability of such a performance. Most of the revenue growth came from excise duty on motor vehicles, which rose to Rs. 129.1 billion due to withdrawal of import restrictions earlier this year.
While this bonanza provided a fillip to the government, it also renders its fiscal policy susceptible to dangers created by import demand volatilities, exchange rate volatilities, and policy shifts, he pointed out.
The International Monetary Fund has already cautioned that excessive reliance on such volatile sources will not be sustainable and that the government must implement precautionary measures in case of underperformance indications.
Other tax heads also performed well, with income tax receipts increasing by 9.2 per cent to Rs. 489 billion and VAT collections expanding by 27.6 per cent to Rs. 876 billion. Within this, VAT on imports contributed Rs. 354 billion, up 34.3 per cent, while the Special Commodity Levy rose by 70.5 per cent to Rs. 77.6 billion.
On the expenditure side, fiscal pressures remain constrained. Total government spending increased by 10.9 per cent to Rs. 2.7 trillion, with recurrent expenditure climbing 13 per cent to Rs. 2.5 trillion. Interest payments alone accounted for Rs. 1.2 trillion, underscoring the structural burden of debt servicing.
More disturbingly, capital expenditure and net lending fell by 8.6 per cent to Rs. 224 billion. This contraction, while helping to contain the deficit in the short run, risks undermining long-term growth by starving infrastructure and development projects of funding, a former treasury secretary said.
Sri Lanka’s mid-year fiscal performance offers genuine reasons for optimism, but the underlying foundations remain fragile.
The narrowing deficit signals progress towards stabilisation, yet the government’s reliance on vehicle duties and import-related taxes, coupled with high debt servicing costs and weak investment spending, poses significant risks.
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