Fitch: Sri Lanka’s Budget sticks to fiscal consolidation path
View(s):The Sri Lankan government’s latest budget indicates that the authorities remain committed to reducing government debt/GDP over the medium term after beating their targets in the 2025 budget. In a media release, Fitch Ratings said it believes sustained strong revenue performance will remain key to meeting the government’s fiscal goals.
The budget targets a deficit of 5.1 per cent of GDP in 2026, wider than the 4.5 per cent that the government expects in 2025. The original deficit target for 2025 in last year’s budget was 6.7 per cent of GDP, but in March the IMF projected a lower figure of 5.4 per cent. The latest budget forecasts the primary balance before interest payments will remain in surplus at 2.5 per cent of GDP in 2026, down from an expected 3.8 per cent in 2025, but still above the 2.3 per cent target under Sri Lanka’s IMF programme. The government aims to reduce the fiscal deficit to 3.8 per cent of GDP by 2030 under its medium-term fiscal framework.
Continuing to meet the key fiscal markers laid out in the IMF programme would help the authorities to improve Sri Lanka’s policy-making record, Fitch said.
Macroeconomic stability would also benefit. The official budget deficit projection for 2026 is wider than the 4.6 per cent of GDP that Fitch anticipated when it affirmed Sri Lanka’s rating at ‘CCC+’ in October 2025, and the primary surplus is marginally lower. However, the effect on Sri Lanka’s debt trajectory could be more than offset by the over-performance in 2025, when Fitch had expected a budget deficit of 5.4 per cent and a primary surplus of 2.4 per cent.
The government expects revenue/GDP to decline to 15.4 per cent in 2026, from 15.9 per cent in 2025, although this is still above Fitch’s projection for 2026 of 15.3 per cent. Failure to maintain growth in tax revenue in line with GDP could over time add to the fiscal stresses on Sri Lanka’s credit profile.
The government assumes taxes from external trade will drop 1.2 per cent in 2026 after a surge in vehicle imports lifted revenues this year. It also projects goods and services taxes will rise just 3.5 per cent, with income taxes up 8 per cent. “We view the goods and services tax projection as conservative, given that the authorities expect nominal GDP to increase by over 7 per cent and new measures such as a lowering of the threshold for VAT registration and improvements to the tax auditing process could support revenue growth. Upside surprises to import growth could also result in higher tax inflows, although Sri Lanka’s external balances could face additional pressure under such a scenario,” the statement said.
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