By Harsha Gunasena –

Former President Ranil Wickremesinghe claimed at a launch of a book titled Shouldering Two Wars written by Ranjith Siyambalapitiya, that it would be another war to start repaying debts in 2028, and it will be the real problem facing the country although it is not discussed within or outside the Parliament. Explaining further he said in 2028 our foreign reserves should be at the level of USD 15 billion according to the agreement with the IMF. At present we have USD 6 billion and it should be increased to the level of USD 10 billion by the end of the year. He further explained that when he was the President the mission was the fiscal stability which was achieved, but in order to facilitate the repayment of public debt the economy should be expanded. With the view to achieve this objective he enacted the Economic Transformation Act. Area covered by this Act was not within the mandate of the IMF.

The targets agreed with the IMF under the EFF programme were more or less achieved by the previous government as well as the present government. The then government proposed to the IMF a programme based on increasing the income of the government. It was accepted. The intention of the agreement was fiscal stability, which is being achieved. The present government neglects taking appropriate and timely steps which promotes economic development. The intention of this article to discuss the ways of the said neglection first, and then to discuss the repercussions thereof.

How the government neglects the economic development

In the IMF country report No. 26/111 issued in May 2026, it was stated that the reforms can lift real GDP by 4 ppts in the short term and 8 ppts in the long term. Although some steps were taken in the line of trade liberalization and digitalization, large gaps are still persistent. Reduction of tariff is being done in a roundabout way in staggered basis and the country needs quicker results in digitalization.

The previous government after achieving the targets of fiscal stabilization enacted the Economic Transformation Act aimed at economic development. The focus was export development and investment promotion. A country like Sri Lanka which failed to pay for the essential imports due the scarcity of foreign exchange should give priority to export development as a contributor of the economic growth. Export development should be based on a solid action plan rather than on a mere document.

According to this Act, the Economic Commission of Sri Lanka will be established replacing the Board of Investments (BOI) to oversee the investment climate, approve strategic projects, and formulate investment policies; Investment Zones Sri Lanka (Zones SL) will be established tasked with operating, expanding, and managing designated investment zones across the country; Invest Sri Lanka will be established under the Economic Commission to specifically market the country and pitch investment opportunities to foreign and local investors; Office for International Trade will be established to handle international trade policy, coordinate trade agreements, and boost export growth, working alongside a newly mandated Ambassador for International Trade; National Productivity Commission will be established to drive structural competitiveness, efficiency, and productivity improvements across domestic commercial and public sectors; and Sri Lanka Institute of Economics and International Trade will be established as an educational and research body intended to build institutional capacity, data analysis, and trade knowledge.

The present government suspended the implementation of this Act. If the government do not agree to certain points an amendment should have been presented in the parliament.

The English version of the election manifesto titled, A thriving nation A beautiful life, was a summarized one. In the Sinhala version in page 106 it was stated that in order to increase the foreign market share through export diversification, existing trade agreements will be revised and actively pursue the formation of new ones.  We cannot see any development in this area. Japanese envoy to Sri Lanka recently made an open request from the Sri Lankan authorities to expedite the work of the agreed economic corridor among India, Japan and Sri Lanka. This shows the frustration of the government of Japan over the issue. High Commissioner of India also made a similar open request from Sri Lanka to move fast on the negotiations to move the trade agreement between the two countries to the next level.

According to Economic Transformation Act, in 2030 the exports of the country should be 40% of the GDP. Export Development Board (EDB) has forecasted USD 36 billion exports in 2030 based on their economic development programme. These two targets are in line but the target of the EDB is just a target and there is no underlying programme to achieve it. Therefore, there are less chances for it to be successful.

The following was stated in page 108 of the Sinhala version of the Election Manifesto in relation to the State-Owned Enterprise (SOE)s. “The course of action to be taken regarding each institution will be determined  by considering strategic importance, economic growth potential, the capacity to stimulate an economy focused on production, the impact on financial stability, and relevance to national security.”

The government should be commended for naming 33 institutions to be closed down or restructured. However, identification is not enough and action is needed. The promised Public Commercial Business Management Act is not presented yet. It is also commendable the disintegration of the CEB. However, the final transfer plan should come into effect in March 2027.

It seems to be that the policy of the government, in respect of Sri Lankan Airlines is more considerate of political interests rather than with national interests considering the composition of the initial board members including the Chairman, their business affiliations and what happened after their appointments. This institution was allocated massive Rs. 20 billion in the first budget of the government. By examining the balance sheet of this institution, it is clear that the institution cannot be continued without any capital infusion. Since the government does not have the capacity to do that, privatization is the solution. Former President Mahinda Rajapaksa also has taken a position similar to this government about Sri Lankan Airlines.

Just because there are few companies which generate profits, the losses of many these types of companies are hidden. The President declared at the election rallies and at related discussions that the government will keep only the entities with strategic importance. To his benefit he did not define what strategic means. We can understand that even the SOEs which earn profits do not operate with full potential by comparing Sri Lanka Telecom with Dialog and Insurance Corporation with Ceylinco Insurance.

On the other hand, if these entities are privatized in full or partially the state can transfer the wealth acquired from the private sector by force over the decades back to them and get their contribution to the national development. I think that there will be a quick change in the banking sector if up to 50% stake of Bank of Ceylon and Peoples Bank is privatized. These funds can be used in the debt management in which area the country may face difficulties in time to come.

Economic growth is not the responsibility of the Central Bank and not the focus of the IMF. It is the responsibility of the government.  Recently in several occasions The Governor of the Central Bank emphasized that the economic growth is not the responsibility of the Central Bank. The reading between the lines which was not expressed was that the government was not doing well in the area of economic growth.

We have so far discussed the actions for economic development which are neglected by the government. We can now discuss the possible repercussions we all should face if these actions are not taken. These repercussions are twofold,  one is the impact on debt repayment and the other is the impact on the living standards of the common people.

Impact on debt repayment

We continued to repay debts to multilateral organizations such as World Bank and IMF even after the financial crisis. As Umesh Moramudali  pointed out at a recent Kathikava programme,  in 2024 we started paying the interest on Chinese bilateral debt and in 2025 we started  paying the interest on other bilateral debts. Restructured International Sovereign Bonds (ISB) repayments were started in 2026. In 2028 the repayment of the principal of bilateral loans will be commenced. There is a plan for all these and a shortfall is envisaged in 2027 and 2028. Hence it was planned to issue USD 1.5 billion ISBs each in 2027 and 2028. This was stated in the Table 6 of the report 26/111 issued in May 2026 by the IMF.

These debts are repaid not out of foreign reserves but out of the dollars in the market. For that there should be dollars in the market. After the financial crisis, as we had an excess in the fiscal account after deducting expenses other than interest from the income, we had an excess in the foreign account after deducting import expenses from the export income, tourism income and foreign remittances.  From January to July in this year there was a deficit in the foreign account. The main reason was that the impact of the Middle East war and this shows how vulnerable our economy is. If it is assumed that foreign account  will be positive in time to come there will be dollars in the market and rupees to buy the dollars.

The issue is that these funds may not be sufficient if there are local and foreign uncertainties such as projected El Nino condition and prolonged war in Middle East. Both conditions are going to be a near reality.

We could not build up foreign reserves as per the agreement with the IMF. In 2025 expected level of net reserves was USD 8.5 billion whereas we had only USD 6.8 billion gross reserves. It was gross since some of the reserves cannot be used as and when the need arises. Net reserves balance should be USD 10.8 billion in 2026, USD 14.2 billion in 2027 and USD 15.8 billion in 2028. Not having sufficient foreign reserves also would contribute to the depreciation of Rupee.

At the level projected in the IMF agreement we will be safe and we will be able to get a good grade from the Rating Agencies. When the grade is better the interest rate to be paid for the bonds will be less. (It was envisaged to borrow USD 3 billion)

Fitch Rating Agency has given the CCC grade to us and we were at B grade when we issued the last ISB. Therefore, we should have at least B grade in order to get a better interest rate when the ISBs are issued. According to the present situation we can neither increase the reserves to the expected level nor get a better grade from the rating agencies. This is the issue.

In case our foreign trade increased we could have increased the foreign reserves and the ability to pay debts. In any case reserves should  have been increased to cover the higher imports.

This is the drawback of not getting the foreign trade increased. Due to unexpected reason situation could be moved to dangerous levels.

Impact on the living standards of common people

In the Election Manifesto of the NPP the following was stated in page 101.

“Despite various arguments claiming that inflation has been brought under control, the reality is that the prices of goods and services have risen to levels that the public cannot afford. Real incomes have fallen to the point where people are unable to meet their basic needs.”

At that time although the inflation was controlled the increased price level remained.

This government has not taken any steps to lift the living standard of the people who have fallen below the poverty line. As promised in the Election Manifesto they have not brought down the VAT percentage to zero of the essential food items and other things. However the income tax was reduced although the reduction was less than the promised. Although we initially agreed with the IMF that the VAT rate would be 15%, the previous government increased it to 18% level. This government did not take any step to reduce it. If not VAT at least Social Security Contribution Levy should have been removed since it has a cascading effect. Removal of this would have contributed to lowering the cost of living of the masses. However, the government is delaying the implementation of property tax which is agreed with the IMF. Delaying of this will benefit the rich.

At the same time due to the depreciation of the rupee price of the imported goods are going up. In 2025 the Central Bank purchased USD 2 billion from the market. This also was contributed to the depreciation of the rupee. Therefore, this government has no consideration towards the poor. Their focus is the middle class.

The long-term plan to lift the living standard of the people who have fallen below the poverty line should be the economic development of the country which we have discussed previously.

Conclusion

On the one hand as we discussed Sri Lanka is gradually deviating from the path of economic development. On the other hand the government is trying to keep the power by addressing a section of the people who thought that punishing the group who are responsible for misappropriation of public funds was better than the economic development of the country. No one will object punishing those who were responsible for wrong acts other than the wrongdoers themselves. However, this process is getting narrowed to taking political revenge due to the liberal approach of the government about the serious lapses of the members of the government.

We are a well-established democracy. We have missed the bus to the economic prosperity in several occasions. The government is moving towards a totalitarian regime at present with the 22 amendment to the constitution. I say this since so far, all the objections to it were disregarded by the government at the legislative level and by the Supreme Court at the procedural level. The next crisis we face may have a combination of these two aspects.