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Budget presents healthy fiscal outcomes for first time in decades
View(s):By Kapila Bandara
Sri Lanka’s budget 2026, supported by a solid fiscal performance for the first time in decades, is poised to build on the hard-earned macroeconomic stability and work towards resilient, long-term, inclusive economic growth, while holding course on fiscal consolidation and providing relief, including for the needy.
President Anura Kumara Dissanayake, who is also Finance Minister, and who will present the budget on Friday, has said rural communities in particular, must be integrated into the economy in pursuing economic growth.
Fiscal numbers reflect healthier public finances due mainly to target-exceeding revenue gains and grants accompanied by accelerated structural reforms as well as the international sovereign bond exchanges done in December and completion of debt restructuring domestically, with external debt overhaul now in the last lap. A bilateral amended deal was signed with France in June following agreements with Japan and India earlier.
The fiscal deficit has dropped by more than half, debt ratios have declined, the primary surplus has improved further to Rs 1.4 trillion, and the National People’s Power Government is expected to produce a budget where balances that matter are positive for the first time than that recorded over many decades under a parade of binge borrowing, credit card governments.
From January to September, the budget deficit is Rs 441.4 billion, a drop of 54.5% from Rs 910.06b in 2024, Department of Fiscal Policy data show. Government revenue and grants in that period have increased to Rs 3.834 trillion from Rs 2.927tn in 2024, up by 31%.
The primary balance to September exceeds Rs 1.4 tn versus Rs 648b the year before.
Records of past governments reveal primary surpluses were gained in only five years since independence, in vastly different circumstances — 1954, 1955, 1992, 2017, and 2018.
Central Bank Governor Dr Nandalal Weerasinghe said this week that for the first time in a long time, the actual fiscal outcome is more than what had been announced in the 2025 budget. “I think it’s the first time in history, or (for) several decades’’, that a positive fiscal performance is achieved.
Fiscal sinkholes over the decades mirror rulers living beyond means. In 2015, for example, the fiscal chasm was Rs 830b or 7.17% of GDP. But by 2020, it had blown out to Rs 2.090tn, or 13.34% of GDP.
This year, the sharply narrowed fiscal deficit was also made possible by lower capital expenditure — regardless of recurrent expenditure including public sector salary revisions — rising slightly to Rs 3.381tn from Rs 3.041tn. Capital and lending minus repayments, such as lending to public enterprises, was Rs 331.18bn versus Rs 435.32b. Capital spending is also constrained by interest payments on legacy debt, which swallows up more than 54% of revenue. As of the second quarter, principal payments on external debt were US$715m and interest payments US$237m, adding up to US$952m, Public Debt Management Office data show.
Revenue to September surged to Rs 3.827 trillion versus Rs 2.918tn the year before. Of which income tax revenue came in at Rs 831b. Non-tax revenue increased to Rs 226.24b from 209.2b. VAT revenue is Rs 1.239tn nearing the target of Rs 1.615tn.
Customs revenue, the biggest chunk, is Rs 1.7tn, versus the target of Rs 2.115tn and Excise revenue is Rs 168bn.
Bank credit to the public sector grew at a rate lower than that to the private sector, suggesting less government borrowing. CBSL data in the last week of October show that net credit to the government has dropped to Rs 8.381tn in August from Rs 8.535 tn in July.
Secretary to the Treasury Dr. Harshana Suriyapperuma, said this week, the Treasury has a “cash balance of more than a trillion’’. Records show that the Treasury cash balance at end 2021 was Rs 832b.
Remittances from Sri Lankans working overseas, for decades an economic pillar, are substantial at US$5.811b from January to September, a 20% jump. Tourism earnings are high and export earnings exceed US$9b up to September. But the trade gap has swelled beyond US$4b.
Second quarter gross domestic product growth came in at 4.9%.
IMF Deputy Director of the Asia and Pacific Department, Thomas Helbling said this week, Sri Lanka “is going to its trend growth of 3.1%’’. He was signalling the average medium or long term growth rate. Growth will return “to trend a bit sooner’’ considering “the stronger rebound than we actually expected in 2024 and 2025’’. For 2026, the IMF revised growth to 3.1%.
In 2024, Sri Lanka clocked real economic growth of 5%, the highest since 2014, having gained legs from structural reforms mandated by the IMF Extended Fund Facility programme.
For well over a decade, ruling parties had overstated economic growth (by over 2.5%, data show) and estimated revenue, hand in hand with spectacular policy stumbles and destructive fiscal behaviour. From 2019 to 2021, the budget deficit forecasts, for example, were way off base.
At a time Sri Lanka seeks firmer ground and with the medium term fiscal pathway going three years past the IMF handholding from 2028 to 2030, challenges are aplenty including sustainable levels of debt, controlling spending and paring the gross financing need of 34.6% of GDP in 2022 to below 13% in 2027 to 2032, and the rate of poverty in 2024, measured at the purchasing power parity threshold of US$3.65 (about Rs 1,112) for a person for a day, was at 24.5%.
The rupee depreciated by 3.3% against the US dollar in the first half, having gained over the past two years. By end August the greenback changed hands at Rs 302.44.
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