By Harsha Gunasena –

Harsha Gunasena

The Government, prior to assuming the power, convinced the voters at the elections that the State faced a financial crisis in 2022 due to the corruption of the previous successive governments and if they come to power they would punish the persons who were responsible. The voters liked this punishing part as in several previous elections.

It is true that the state was corrupt. The tragedy is that it is still corrupt. The head of the Criminal Investigations Department of the Sri Lanka Police, which is a key institution which investigates  corruption, is  a political activist of the JVP. The secretary of the relevant ministry is  also a political activist of the JVP. The other institution which investigates of corruption is the Commission to Investigate Allegations of Bribery or Corruption and the Director General of which faced allegations that he was a member of the JVP to which he has not responded appropriately. It seems to be that there are no investigations against certain individuals. Therefore it looks like that the Government acts selectively in respect of investigations against the individuals of the previous governments.

Corruption was not the main cause which led the state to a financial crisis. There were several causes. One of them was the long- term deficit budgeting. Since the income generated was not sufficient for the expenses, the requirement was to borrow over and over again. Exports as a percentage of the GDP reduced gradually. Trade deficit was widened and as a result there was a deficit of the current account in the external sector. Electricity and fuel which were government monopolies, were sold at a loss. The deficit was financed by the state banks. In addition to these two, there were several loss making SOEs which were financed by the government budget. Since the per capita income of the country increased, it was difficult to get low interest loans and at the same time government did not like to adhere to the conditions aligned with the low interest loans. In 2007 the government issued International Sovereign Bonds of which the interest rate was high and the repayment period was shorter. However, there were no conditions  for these loans  and those  were utilised mostly for the projects where the rate of return was lower than the interest rate. This situation created serious consequences.

The government elected in 2019 reduced the taxes considerably and as a result the ability of the government to repay the loans was diminished. This led the rating agencies to down- grade the credit ratings of Sri Lanka. The economy was affected due to Covid. The government placed much emphasis on local debt and money supply or so- called money printing was increased drastically. As a result, inflation was increased. The government refused to seek assistance from the IMF. Import of chemical fertiliser was halted abruptly. The government tried to keep the exchange rates artificially low so that the cost of the dollar in the black market was increased and as a result the supply of dollars to the market in authentic channels was diminished. Finally the government did not have sufficient foreign currency to pay for the essential goods imported.

Later there was an agreement with the IMF and taxes and  the government revenue were  increased. Electricity and fuel were sold at cost reflective prices. Government expenses were reduced drastically. As a result, primary account of the fiscal accounts was made positive. Money printing was stopped. Interest rates were increased. Inflation was reduced gradually. Exchange rates were not fixed artificially. Hence although there was a trade deficit the current account recorded a positive balance.

This was the situation when this government came to power.

They claimed that the IMF agreement would be revised by revisiting  Debt Sustainability Analysis. However, they did not initiate it and continued with  it as it was. It was  a relief.

Accordingly these are the data. In 2025 as a percentage of the GDP government revenue was 16.7% (agreed with the IMF 14.9%); primary account balance 5.4% (agreed with the IMF 2.3%); budget deficit 2.3% (agreed with the IMF 5%); central government debt 91.6% (agreed with the IMF 103.3%); economic growth 5% (agreed with the IMF 2.6%);current account balance in the external sector 1.6%. These indicators are very good in the point of view of the financial stability of the government but the question is whether that is sufficient.

This situation reflects the situation in the beginning of the second term of President Mahinda Rajapaksa (2010-2012) In that period the country experienced the highest ever economic growth rate (8%-8.6%) Construction sector contributed most to the growth after the war. This was financed by the debt with high interest rates. The rate of return of some constructions were lower than the interest. During that period exports recorded very low percentage of the GDP.  (19%-20%) Although the government debt was increased, due to the high growth rate it ended up with a lower value as a percentage of the GDP. The Central Bank kept the artificially low exchange rates. Although these data could be interpreted positively at a glance, the dangerous situation is reflected in the data.

The objective of the IMF is the financial stability of the government. As a result, the debt repayment ability of the government increases. The government cannot stay nonplussed after handing over the control of government finance to the IMF. The government should act for the economic development of the country. It is not visible that this government does so. A country like ours should have export development as a component of the economic growth. One cannot grow only exports and imports come along which means trade should grow. This was the case even during the time of Parakramabahu the Great.

The President announced in the last budget speech that import tariff mainly para tariff will be reduced gradually based on the IMF recommendations.  However, the projected revenue of the government indicated an increase of income from para tariff which was contrary to the statement.  If implemented, in 2029 there will be around a 50% reduction of the total tariff. This will be a good move which would contribute to reduce the cost of living as well but we are not sure about the implementation due to the different indications.

The government should take policy decisions to increase exports. As an example according to the Economic Transformation Act established by the previous government export of goods and services as a percentage of GDP in 2025 should be 25% and in 2040 it should be 60%. The reality in 2025 was just 19%. This figure in 2000 was 39%.

According to the Economic Transformation Act, Economic Commission Zones SL, Office for International Trade, National Productivity Commission, and Sri Lanka Institute of Economics and International Trade should be established. These institutions directly linked to the international trade and investments.

The government halted the operation of this Act and does not work to achieve the targets established other than IMF targets. At present there is no programme to transform the economy. If they think there are amendments needed those should be established and the Act should be implemented.

In addition to that the government does not act swiftly to restructure the SOEs. There was a step forward to restructure the CEB but further actions are delayed. The government announced that there will be a Bill to give the guidelines to restructure the SOEs and actions should be taken faster.

Asian Development Bank recently suggested that Economic Agreement with India should be revisited in order to increase the exports to India. The ambassador of Japan recently requested the government to expedite the work towards proposed economic corridor connecting India, Japan and Sri Lanka  for which there is a Memorandum of Cooperation signed by Japan and Sri Lanka in February 2026.  The government should take this type of initiatives in order to promote exports. It cannot be done by just holding seminars.

Few months ago, India signed a Free Trade Agreement with the EU which was called the mother of all FTAs considering the value covered by it. Prior to that India entered into a trade agreement with the UK as well. Vietnam of which the President is in Sri Lanka now, is having 19 free Trade Agreements.

Protectionist policies of the government and its supporters acts as a hinderance for the pro trade policies. Ganeshan Wignaraja, a prominent economist, recently warned  that if the reforms are not carried out it is possible that the country  should have to go for another agreement with the IMF.

The government may not face a financial crisis if the government implement the policies of the IMF. However, if the growth rate is hampered it may affect the repayment of debt.

There is another important point why a rapid high economic growth is needed. As a result of the inflationary condition in 2022 cost of goods and services increased and subsequently the price level has not reduced. As a result, a considerable number of the population has fallen below the poverty level. They can be lifted above the level by having a rapid economic growth and allowing the benefits of the growth filtered down to the people. It seems to be that the government does not have a proper understanding of this.

The government should come out of its confusion and move towards the correct direction in order to ease this serious situation.