By W.A. Wijewardena –

Dr. W.A Wijewardena

AKD, man of the Match

President Anura Kumara Dissanayake or AKD, in a marathon Budget speech taking more than four and a half hours to finish, presented his second Budget for 2026 in Parliament last week.[1] Though it is an exhausting exercise, throughout the Budget speech, there was the usual calm composure which he maintains when addressing the public countering the occasional catcalls of opposition members with well-articulated humour treating everyone with a savouring appetiser. It was a conventional Budget speech that talked about the achievement of his Government during its first year, strategic objectives of the Budget, macroeconomic outlook in the next few years, growth to be generated by the private sector participation and investments, growth drivers like tourism, modernisation and digitalisation, strengthening of research and development or R & D, Clean Sri Lanka program, Government services to different sectors, revenue proposals, and changes in Budgetary management systems.

The mission of his Government, according to AKD, has been to modernise the economic and political structure, create a people-centred governance, establish the rule of law and order, strengthen governance, and bring the economic achievements to the people living at the grassroot level. The last mission implying inclusiveness in wealth sharing is an important goal since the economic policy which his Government follows has been framed by IMF and other international donors, commonly known as neoliberal economic policies, is weak in inclusive economic growth.

Conversion of a hardcore leftist to neoliberalism

Before the Presidential election of 2024, AKD was classified by me as an anti-neoliberal presidential candidate based on his promise to expand the Government sector, commonly known as dirigiste or statist policies practised by the old Soviet Union in the first seven decades of its rule.[2] The incumbent President Ranil Wickremesinghe or RW had appealed to the people that they should not elect AKD as President because his policy of statism will lead to economic anarchy, long queues for essential items, and isolation of Sri Lanka from the rest of the world, which the country could not afford at that time. But AKD after being elected as President made a 180-degree turn-around and expressed his commitment to continue with the IMF’s neoliberal policy program not by choice but as a necessity.[3] Neoliberal economic policies were presented as a policy package for the emerging economies in late 1970s and early 1980s by three Washington DC based institutions, namely, IMF, World Bank, and the US Treasury. This common location of the powerful advocates of the policy led the British economist John Williamson to coin the term Washington Consensus in 1989 to describe this policy package.[4]

Following the dead Washington Consensus

Williamson had identified ten broad policies advocated under the Washington Consensus and for easy reference, branded them as Ten Commandments, a biblical good behaviour menu known to everybody. They are fiscal discipline, redirection of public expenditure toward neglected fields of high economic returns, broadening tax bases, allowing markets to determine interest rates and exchange rates, liberalising trade, allowing free foreign direct investments, privatising state businesses, removing costly regulations, and protection of property rights. Though neoliberal policy system had a natural death in the early 2000s, the IMF and the World Bank continued to recommend them to countries which sought their assistance.

The loan covenants in the present IMF support to Sri Lanka in the form of an Extended Fund Facility or EFF and the additional prescriptive measures suggested mostly contain the principles of these neoliberal policies. Therefore, by agreeing to follow the IMF program supported by the World Bank, Asian Development Bank, Western nations and other countries supporting them, AKD has converted himself to the core principles of neoliberal economic policy prescriptions overnight. His Budget for 2026 is devoted to these policies. This is a salutary change for a hardcore leftist like AKD throughout his political career.

Though I expected AKD to shed these hardcore policies which were codified into law by the outgoing President Ranil Wickremesinghe in the form a binding legislation called Economic Transformation Act or ETA[5], his first-year performance and the Budget 2026 show that he is following them much more forcefully than his predecessor. This led me to visualise that it is RW who is in the driving seat of AKD Government but with a difference with respect to their approach to eradicate bribery and corruption.[6] This is a salutary development because it ensures the continuity in economic policies thereby delivering certainty to prospective investors.

IMF’s readymade policy package

Economic recovery and the restoration of normalcy to key macroeconomic sectors is a process that was started in April 2022 with the suspension of selected foreign debt by Sri Lanka. The necessary policy package for adoption was delivered to Sri Lanka by the IMF along with EFF that it approved for the country in March 2023. It included completion of foreign commercial debt restructuring, resolving the Budgetary issues by increasing the revenue base, seeking after a surplus in the primary account of the Budget, making the central bank independent of the Government, as key policy measures. This obviated the necessity for Sri Lankan policymakers to design their own policies like Mahathir Mohammad of Malaysia after the country was badly hit by the East Asian Financial Crisis of 1997-8.[7] This was a bonus for Sri Lankans and both RW and AKD had savoured that bonus to an extreme extent. Therefore, by the time AKD had taken the baton of power in September 2024, the process had been partly completed by his predecessor, RW. Even today, AKD does not have an independent policy package for the macroeconomy except what has been prescribed by the IMF under EFF.

Limits of IMF policy package

This policy package has its own limitations because it stabilises only the nominal side of the economy, namely, general price level and the consequential near zero inflation rate, interest rates, exchange rate, balance of payments, and Government’s prudent Budgetary requirements. These nominal achievements which are imaginary and not real are necessary for the country to develop its real sector that produces real goods and services, say, rice, coconuts, apparels and so on, for improving the welfare, prosperity, richness, and wealth of the people. Both the central bank and IMF which are charged with the stabilisation of the nominal sector of the economy have accomplished their task well. It is now the responsibility of the AKD Government to deliver prosperity through boosting the real sector of the economy. This has been only partly addressed by AKD in Budget 2026.

No early complacence

AKD has been complacent about the current macroeconomic numbers like the growth in the real economy, official foreign reserves, Government revenue to GDP ratio and the prospect of attaining a surplus in the primary account of the Budget. In my view, it is an unwarranted complacency because these numbers are either inflated or subject to reversal due to the existing vulnerabilities in the economy. Let me explain why it is so.

Sri Lanka: Slow-growth economy

Sri Lanka is a slow growth economy throughout its post-independence period. Its average economic growth rate has been around 4.5% and it could achieve this growth rate even if it does not do anything to promote economic growth. Hence, any growth around 4-5% is either zero or near zero growth for Sri Lanka. As I have explained in a previous article in this series, the present 5% growth is based on the low economic base in the comparable previous year on one side and the increase in the value added taxes net of commodity subsidies provided to people.[8] From a welfare point, economic expansion exceeding 9% year after year is one about which the country can be complacent. AKD expects that the real economic growth rate will advance to about 7% in the medium term but in my view, it is not sufficient for the country to deliver permanent prosperity to Sri Lankans.

Misleading foreign reserve numbers

He had also taken credit for the increase in the gross official reserves to a level above $ 6 billion recently. This is an achievement compared to the near zero gross reserve levels of the country in early 2022 prompting it to suspend the servicing of its commercial foreign debt. However, this current $ 6 billion level of gross official reserves is also misleading because it contains an unusable SWAP facility of about $ 1.3 billion extended by the Chinese Central Bank. This should not have been included in the country’s official reserves due to two reasons. One is that it is a Yuan facility and for Sri Lanka to use it for international payments, those Yuan balances should first be converted to a hard foreign currency like the US dollar or Euro. There is no ready market for Yuan in global financial markets. Therefore, it can be used to make payments to only China, but even Chinese loans are designated in dollars and, hence, Yuan should be first converted to dollars to use the SWAP money for repaying Chinese debt. The other is that there is a condition that Sri Lanka could use this facility only when its official foreign reserves reach a level where its reserves are sufficient to finance at least three months of future imports. Sri Lanka’s current foreign reserves net of this Yuan SWAP facility amounting to about $ 4.7 billion is below this level. The other consideration is that AKD should take complacence not about the country’s gross reserves but its net reserves. It is true that the country’s net reserves have been developed from a net-debtor position a few years back to a positive position today. But according to Central Bank data, its net foreign assets at end-September 2025 had amounted only to Rs 567 billion or $ 1.9 billion. This places Sri Lanka in a highly vulnerable position because its Central Bank has foreign liabilities amounting to about $ 2.8 billion.

Wrong pursuit of primary account surplus

The pursuit of a surplus in the primary account of the Budget satisfies the IMF, but not the Government or Sri Lankans. The primary balance is simply the difference between the gross revenue of the Government and its consumption expenditure known as the recurrent expenditure net of interest payments. The underlying rationale for the pursuit of a surplus in the primary balance is that it shows the discipline which the Government has attained in its discretionary payments since the payment of interest is a compulsory payment which cannot be reduced by it. Hence, to attain a surplus in the primary account, the Government should cut its discretionary consumption expenditure like payment of salaries or curtain its capital expenditure or a combination of both. Since the discretionary consumption expenditure is on the increase, the current surplus has been attained by curtailing the capital expenditure and the expansion of the tax revenue base of the Government. Both are negative contributors for the future economic growth. Lower capital expenditure reduces the expansion of the needed infrastructure facilities like roads, buildings, machinery etc. The expansion of the tax base reduces the real disposable income of people thereby negatively contributing to savings and through it, financing of investments. Unless foreign borrowings are effected, the country will fail to maintain the required levels of investment to facilitate it to attain the desired economic growth of about 9% to reach permanent prosperity. Hence, the Budget should pursue to attain a surplus in the revenue account which amounts to Government savings that helps the country to finance a part of its investments from local sources. This is not being attained with the continued deficit in the revenue account.

Digitalisation is necessary but not sufficient

In the Budget 2026, the main development strategy has been to digitalise the Sri Lanka economy. This is a must, and it provides the necessary support for the economy to develop its production base with improved productivity so that the country could improve its competitive margin compared with other competitors in the global market. In my view, it is necessary but not sufficient to develop the real sector in the economy to bring richness and wealth to people. If the economy grows slowly, all the attainments in the nominal sector become vulnerable. The Government will not be able to maintain its high tax revenue base of about 15% of GDP. It will not produce a surplus to repay the foreign debt once it becomes due. It will not be able to enhance the foreign exchange earnings to maintain a growing import bill. With limited imports on one side and slow growth in the economy on the other, the country will have to sacrifice the hard-earned stability on the price stability front. With that, the present stability in the exchange rate and low interest rates will be gone.

Need for a concrete real sector development plan

In my view, it is time for the AKD Government to come up with a concrete plan for the development of the real sector. It is a separate exercise, and the present Budget does not address that issue sufficiently.

References

[1] Available at: https://www.treasury.gov.lk/api/file/26909821-9080-498c-8111-8468d562b59b

[2]  https://www.colombotelegraph.com/index.php/voters-should-select-from-neoliberalism-modified-neoliberalism-or-anti-neoliberalism-on-21-september/

[3] https://www.colombotelegraph.com/index.php/akd-abandoning-neoliberalism-embracing-kautilyan-statism/

[4] https://www.piie.com/commentary/speeches-papers/short-history-washington-consensus

[5] https://www.colombotelegraph.com/index.php/woe-of-new-president-is-not-just-taking-baby-across-coir-suspension-bridge-but-complying-with-binding-targets-of-eta/

[6] https://www.colombotelegraph.com/index.php/first-year-of-akd-government-is-it-rw-in-driving-seat-with-a-difference/

[7] Ibid.

[8] Ibid

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com