By Ameer Ali –

Dr. Ameer Ali

Despite all criticisms levelled chiefly against the inexperience and dearth of talent within the AKD led NPP government, which was swept to power with an overwhelming mandate and without any bloodshed, that government with its unflinching commitment to pragmatic policies and clean governance has performed remarkably well not simply to arrest the economy’s descent towards stagnation and financial bankruptcy but by putting it on a stronger footing towards achieving higher growth in the future. That pragmatism has capitalist traits is not disputed. Even Lenin’s NEP accommodated the market economy as a temporary measure before launching his communist model.

However, in endorsing Sei Lanka’s achievements Capital Alliance Holdings (CAL), a market service provider, said the following in its 2025-6 annual report: “The period of 2025/26 stands as a compelling chapter in Sri Lanka’s economic history; one defined not by crisis but by the disciplined pursuit of stability and the careful cultivation of growth. The nation has demonstrated that even after a sovereign default, with the right combination of institutional commitment, international partnership and policy coherence, recovery is not only possible but achievable faster than many had anticipated”. According to the Chairman of CBSL even the debt to GDP ratio has declined although the extent of that decline sounds a bit exaggerated. To cap it all Fitch has raised the country’s Issuer Default Rating (IDR) from CCC+ to B-. So far so good, but the challenges that lie ahead are formidable and the most crucial one as CAL’s report points out is “the urgency of translating macroeconomic recovery into household-level welfare improvement”. Will the forthcoming budget tackle this dire need?

Meanwhile having acknowledged the progress made so far under the $3 billon EFF program, IMF’s Mission chief Evan Papageorgiou reminded the government that “the 2026 budget should be in line with program parameters to continue building fiscal space on the back of revenue measures and prudent spending execution, (which) requires sustained efforts to improve tax compliance, broaden the tax base and tackle revenue leakages by strengthening the tax exemption framework. Enhancing public financial management, avoiding the reemergence of expenditure arrears and prompting high quality and efficient public expenditure, including by addressing capital spending under-execution will contribute to safeguarding fiscal discipline and transparency”. Sadly, nowhere in the chief’s remarks was there any reference to measures that would improve household-level welfare. And most recently, the Treasury Secretary Dr. Harshana Suriyapperuma was commenting not on the 2026 but on the 2027 budget and said that it would “create (the) best environment for our fishermen, for our farmers, for our industries, businesses and service sectors to thrive”. Yet, the government strengthened by the achievements made so far has announced that it would exit the IMF program in 2027 and would not seek another on the same conditions.   

However, the nation’s poverty rate still hovers around 24 percent according to World Bank estimates. Poverty reduction remains the biggest challenge facing the NPP government, and poverty rate must be brought down not simply by raising aswesuma payment or by reducing a few cents in the prices of certain consumer items delivered through Sathosa, but by tackling the causes that led to the growth of poverty in the first place.

One indisputable fact about the economic recovery and growth experienced so far is that a substantial burden of the cost of that recovery had been born by the nation’s low-income earners. IMF’s recommendation to broaden the tax base which had resulted in 18% VAT plus the inflationary pressure on prices had hit the low-income groups and made poverty reduction almost impossible. The government’s mull over raising the income tax threshold from Rs. 150,000 to Rs. 200,000 in the forthcoming budget may provide some relief to low-income earners while the tax revenue lost thereby must be regained by changing the tax structure so that the super and upper income earners bear the greater share of the tax burden.

Tackling systemic poverty indirectly through narrowing the tax base and directly through rejuvenating the rural sector by resourcing its agricultural production base should take precedence in the forthcoming budget. Even if the government were to seek further assistance from IMF that assistance must be made conditional on measures aimed at poverty reduction through resourcing the rural economy. This would not only enhance the nation’s self-sufficiency in basic needs but also would stem the out flow of rural labour to urban areas which adds to urban poverty. In short, AKD’s system change with reference to the economy needs a gamperalaya to start with. Maintaining monetary stability, achieving fiscal balance, investing in infrastructure development, incentivising foreign investment, management of foreign debt to maintain Sri Lanka’s credibility in international financial markets had been the main objectives of the EFF financed IMF pathway. It is time for the AKD-NPP government to leave its own footprints to indigenize the economic model by prioritizing the issue of equity without abandoning the open economy paradigm. There are good lessons to learn in this regard from the economic experience of certain Southeast Asian countries such as Vietnam and Cambodia.

Yet, there are other challenges to overcome. For example, the supply constraints and inflationary impact of the two wars, one in Europe and the other in the Middle East, and protectionist trade policies advocated by an adventurist US President had shattered the growth prospects of practically every economy in the world. The cost-of-living crisis for example which Sri Lanka faces currently is part of an economic pandemic closely associated with these events. IMF’s economic policy steering and growth strategy have no solution to ease the pain. The entire global capitalist economic order is in a state of crisis. This makes systemic change more challenging at least in the short run for countries like Sri Lanka. Similarly, the rising threat of the El Nino effect or climate change could ruin decades of development and make economic growth even more difficult. Sri Lanka’s Ditwa this year is relatively minor when compared to what happened in Nepal recently. Decades of warning by scientists, climatologists and economists about the dangers of unidimensional economic models based on technological arrogance and profit motive was ignored. The same arrogance is now being displayed in relation to AI. These are formidable challenges to overcome in pursuit of the much-touted systemic change announced by the AKD-NPP duo. The remaining half of the NPP term of government should be an eventful period in this regard.