Editorial

With the economy staying largely on course for recovery from the 2022 debacle, the JVP/NPP Government is negotiating the final week before the Budget with different sectors making strong demands for a larger slice of the limited ‘economic pie’.

The ruling party hierarchy has not given a straight answer to their ideological shift from being an ultra-Left party in Opposition to what many see them now – in government – as a social-democratic party. They have not fully discarded their red shirts for western suits choosing to flourish only a red tie, but their hierarchy continues to waffle regarding this shift. They also maintain, to the confusion of many, that there is a difference between the JVP and the NPP. It is as if they want the best of both worlds; the old guard loyal to socialist policies while embracing a liberalised economy and an IMF programme in toto that demands the restructuring of dead-weight public enterprises despite stridently critiquing this very policy earlier.

In venturing on this road, the Government hasn’t disturbed the fragile economy in any radical way. That was the fear in more moderate quarters when they took office. By continuing to replicate what their predecessors were doing in managing the economy under the supervision of the IMF, they have also wrong-footed the Opposition that has found it difficult to blame the incumbents in office at least on economic policy because this is their own trademark policy. With this shift in direction by the JVP-NPP supporting public-private partnerships (PPPs) and the liberalised economy, it is the remaining Left rump that is left to stir up the trade unions while asking the legitimate question; “What is the mainstream Opposition shouting about?”

For now, the economy appears, at least ex-facie, to be surviving the turbulent global economic winds and currents. Yet, it is on a slippery slope, as it has been for years, with its external reserves over-reliant on income from tourism, remittances from overseas workers and exports, the latter vastly dependent on the vagaries of an individual’s mood in Washington’s Oval Office and the country’s obligations to a UN agency in Geneva under vote bank pressure in London, Paris and Toronto. The breakout of regional wars can send shock waves in oil prices – all variables, like the COVID epidemic that can throw any economy into a spin.

Domestically, they are content that revenue collection has recorded an unprecedented high though much of it is from Customs and other duties by opening up of vehicle imports after a five-year ban and the pent-up demand for them. The Rs. 500 plus billion so far earned from this exercise is ten-fold what it last was. While this new revenue stream in local currency has given a turbo-boost to domestic revenue collection, it has been at the expense of a total of USD 1.5 billion from its foreign reserves. Partly due to this, the USD to LKR parity rate has depreciated from Rs. 294/$ to Rs. 304/$ over the last 10 months.

Despite the Finance Ministry expressing concern at this outflow of foreign exchange, the Minister – President A.K. Dissanayake outlining Government policy told Parliament that there would be no change to the import of vehicles policy. This has seen the ‘big boys’ of the corporate world jumping into the vehicle import business to shore up their profit margins even starting a mini ‘car war’ among themselves. While the average annual expenditure on vehicle imports in the past has been in the region of USD 700 million, and the Government set aside US 1 billion, the sudden spurt in imports has offset expectations. Whether unrestricted imports that will continue for 2026 will derive the same domestic revenue collection is to be seen as the immediate thirst for new vehicles has been met – and unless duties drop making vehicle prices more in the reach of the middle-class citizen.

Notwithstanding relatively healthy foreign exchange inflows, the Government is walking on eggshells. Its reserves have stagnated at approximately $6.2 billion throughout 2025, creating a pressing need for action. The urgency is compounded by a looming deadline: starting 2028, Sri Lanka must begin repaying its defaulted commercial loans at a rate of $1 billion per year. To meet this commitment, the Government must prioritise a significant build-up of reserves between now and 2027.

The 2025 Budget identified around $2 billion in disbursable programme and project loans to facilitate this. However, the Government’s first 9 months has yielded little progress, with implementation rates languishing at roughly half of what is required. This sluggish execution, particularly in critical sectors like transport, ports, agriculture, and irrigation, has stifled both reserve accumulation and faster economic growth. Mega projects, some suspended due to reasons ranging from corruption to bankruptcy in the past are yet to ‘take-off’. While the cautious approach is partly attributable to past issues, it is also shaped by a pervasive hesitancy among public officials, who fear reprisal for taking decisive action.

Even though the pre-Budget outlook shows targets have been met, some areas remain of serious concern. Exporters are complaining about the controversial service export tax and labour costs outpricing tea, rubber, coconut and even garments in competitive overseas markets. Then there is the future of the national airline that is bleeding the country’s Treasury. The latest accounts show a staggering loss of Rs. 7 billion. The airline continues to trot out its familiar refrain – ‘but we are having an operating profit’ – that fools nobody. It is the accumulated losses that are frightening off possible investors. The Government may be compelled yet again to step in to save the airline.

Meanwhile, the Government periodically alleges that ‘mafias’ are manipulating the markets for essential goods like rice, salt, dhal and even petrol. This story, however, overlooks a more central question: do these cartels appear only intermittently, or are these crises primarily caused by acute shortages due to weather or external shocks? A more effective remedy to sudden price hikes would be to promptly permit imports during these shortfalls. This approach is superior to the theatrics of politicians, who are often accustomed to controlling trade, publicly decrying so-called mafias, instead of addressing the root cause of the supply shortages.

It will be interesting to see if the 2026 Budget will be an ‘election Budget’ as the Government appears somewhat jittery about a pending election promised next year, or if it will stand its ground as a Government – no longer an Opposition – and continue with the current trajectory of economic recovery.