By Asoka S. Seneviratne –

“The True Measure of Any Society Can Be Found in How It Treats Its Most Vulnerable Members” – Mahatma Gandhi

In view of the ongoing economic crisis, compounded by external shocks arising from the Middle East conflict, the government headed by President Anura Kumara Dissanayake has introduced a comprehensive Rs. 100 billion relief package aimed at cushioning the impact on households, producers, and key economic sectors. This three-month emergency spending plan represents a significant and targeted policy intervention designed to balance urgent social protection needs with the imperatives of macroeconomic stability.

Of the total allocation, approximately Rs. 60 billion has been earmarked for fuel subsidies, underscoring the central role of energy costs in shaping inflationary pressures and household welfare. The government has committed to providing a diesel subsidy of up to Rs. 100 per liter and a petrol subsidy of up to Rs. 20 per liter, with an estimated fiscal cost of Rs. 20 billion per month, amounting to Rs. 60 billion over the three-month period. In addition, targeted support has been extended to the fisheries sector, where standard fishing vessels will receive an extra Rs. 50 per liter subsidy, translating to approximately Rs. 31,250 per vessel per month, while multi-day vessels will receive a fuel allowance of Rs. 150,000 per voyage.

The agricultural sector has also received substantial attention within the relief framework. Fertilizer prices will be maintained at Rs. 10,200 per bag, despite prevailing market prices of approximately Rs. 13,500, with the government absorbing a subsidy of around Rs. 3,000 per bag at a total cost of Rs. 1.7 billion. In parallel, fertilizer subsidies have been increased from Rs. 25,000 to Rs. 30,000, while subsidies for other crops have risen from Rs. 15,000 to Rs. 18,000. Tea smallholders are to receive an additional Rs. 5,000 per bag, at an estimated fiscal cost of Rs. 6.5 billion, further reinforcing income support within the plantation sector.

Social protection measures under the Aswesuma programme have been significantly expanded to address rising cost-of-living pressures. Monthly payments have been increased from Rs. 17,500 to Rs. 25,000, from Rs. 10,000 to Rs. 15,000, and from Rs. 5,000 to Rs. 7,500, with an additional fiscal cost of approximately Rs. 8.5 billion. These measures are complemented by electricity subsidies, with Rs. 5 billion per month allocated to support households consuming below 90 units, resulting in a total allocation of Rs. 15 billion over three months. Overall, electricity-related losses are estimated at Rs. 32 billion, of which the government will absorb Rs. 15 billion, while part of the remaining burden is expected to be recovered through supplier-side adjustments.

These relief measures are being implemented against a backdrop of significant external and domestic pressures. The increase in global fuel prices alone has imposed an additional burden of approximately $1.5 billion on the economy, while tourism earnings have weakened, with arrivals declining to around 150,000 compared to an expected 300,000, thereby reducing foreign exchange inflows. Despite these challenges, the government has reiterated its commitment to maintaining macroeconomic stability, with interest rates targeted at around 10 percent and inflation below 5 percent.

Within this context, the Rs. 100 billion relief package is presented as a carefully calibrated intervention within existing fiscal limits. However, it also raises a fundamental policy question: can such a substantial expansion of welfare and subsidies be sustained within the constraints of Sri Lanka’s IMF-supported reform program without undermining fiscal consolidation and stability gains? This article examines the implications of these measures for household welfare, fiscal performance, and the broader trajectory of economic recovery.

Welfare and Wellbeing: Strengthening Households at the Micro Level

The scale and structure of the Rs. The 100 billion relief package suggests that its most immediate and visible impact will be at the household level. The combination of fuel subsidies, enhanced Aswesuma transfers, electricity support, and sector-specific assistance directly targets the cost-of-living pressures that have intensified in recent months. In particular, the increase in monthly welfare payments—from Rs. 5,000 to Rs. 7,500, Rs. 10,000 to Rs. 15,000, and Rs. 17,500 to Rs. 25,000—represents a meaningful adjustment in real terms, especially when viewed against inflationary pressures driven by energy costs.

This expanded support improves household consumption smoothing, allowing families to maintain basic living standards despite income shocks. The fuel subsidies, although broad-based, indirectly reduce transportation and food distribution costs, thereby easing price pressures on essential goods. Similarly, electricity subsidies targeted at low-usage households provide critical protection to the most vulnerable segments, preventing energy poverty.

Importantly, these measures extend beyond immediate relief. By stabilizing incomes in agriculture and fisheries—through fertilizer subsidies and fuel support—the government is attempting to protect productive capacity and prevent supply-side disruptions. This has significant implications for food security and rural livelihoods. In this sense, welfare and production support are intertwined, reinforcing both social protection and economic continuity.

The Rs. 100 Billion Question: Fiscal Implications and Budgetary Pressures

While the relief package is justified on social and economic grounds, its fiscal implications are substantial and require careful consideration. The allocation of Rs. 100 billion over a three-month period, with Rs. 60 billion dedicated to fuel subsidies alone, represents a significant expansion of public expenditure at a time when fiscal consolidation remains a central policy objective.

The recurring nature of several components—particularly fuel and electricity subsidies—raises concerns about fiscal sustainability. For instance, the estimated Rs. 20 billion monthly cost of fuel subsidies, combined with Rs. 5 billion per month for electricity support, creates a recurring fiscal commitment that could extend beyond the initial three-month horizon if external conditions persist.

Moreover, the broader macroeconomic context intensifies these concerns. The additional $1.5 billion burden from higher fuel import costs, coupled with weaker tourism inflows, constrains fiscal space and external balances simultaneously. Even if the package is described as being “within spending limits,” the opportunity cost of such expenditure must be acknowledged, particularly in terms of foregone investment in growth-enhancing sectors.

Therefore, the key issue is not merely the size of the package, but its duration, financing, and targeting efficiency. Without clear exit strategies and offsetting fiscal measures, there is a risk that temporary relief could evolve into a structural fiscal burden.

IMF Program Constraints: Can Stability Gains Be Maintained?

Sri Lanka’s IMF-supported reform program imposes a clear framework within which fiscal and monetary policies must operate. The commitment to achieving a primary surplus, restoring debt sustainability, and maintaining low inflation limits the scope for sustained expansionary fiscal measures.

Within this framework, the Rs. The 100 billion relief package represents a carefully calibrated but potentially fragile balance. On the one hand, it addresses urgent socio-economic needs and helps maintain political and social stability, which are essential for reform continuity. On the other hand, it introduces fiscal risks that could undermine program targets if not properly managed.

The government’s stated intention to maintain interest rates around 10 percent and inflation below 5 percent further complicates this balancing act. Subsidies, particularly on fuel, can temporarily suppress inflation, but they may also distort price signals and delay necessary adjustments. If external shocks persist beyond the three-month horizon, maintaining these targets without additional fiscal strain will become increasingly difficult.

Thus, the sustainability of current stability gains depends on whether these measures remain temporary, targeted, and complemented by strong revenue performance. Any deviation from this path could weaken confidence in the reform program and delay economic recovery.

Addressing the Trade-Off: Policy Solutions for Balance and Sustainability

The central policy challenge is to reconcile immediate relief with long-term fiscal sustainability. This requires a shift from broad-based subsidies toward more targeted and efficient mechanisms of support. The current reliance on quasi-universal fuel subsidies, justified by the absence of precise targeting systems, highlights a structural weakness that must be urgently addressed.

Strengthening beneficiary identification systems, particularly through the Aswesuma framework, offers a pathway toward more targeted interventions. Digitalization and real-time data integration can significantly reduce leakages and improve the efficiency of welfare delivery. Over time, this would allow the government to phase out broad subsidies and replace them with direct, targeted transfers.

At the same time, revenue collection must play a key role in supporting social spending. Improving tax compliance, expanding the tax base, and boosting administrative efficiency through the recently introduced QR payment system are crucial for creating fiscal space. Equally important is the need to readjust public spending, cut inefficiencies in state-owned enterprises, and eliminate non-essential expenses.

Ultimately, the objective should be to transform welfare from a reactive policy response into a proactive component of a broader development strategy.

Global Comparisons: Lessons from International Experience

Sri Lanka’s current approach reflects a common policy dilemma faced by many countries during periods of economic stress. International experience offers valuable lessons on how to manage this balance effectively. Countries such as Brazil and Indonesia have demonstrated that targeted cash transfer programs can achieve significant social outcomes while maintaining fiscal discipline.

India’s experience with direct benefit transfers illustrates the importance of digital infrastructure in improving efficiency and reducing leakages. These systems have enabled the government to replace costly and inefficient subsidies with more precise and transparent mechanisms.

New Zealand provides a contrasting but equally relevant example, where strong institutional frameworks and fiscal transparency ensure that welfare policies remain sustainable and aligned with broader economic objectives. The key lesson across these cases is that the effectiveness of welfare policy depends less on its scale and more on its design, targeting, and governance.

Welfare, Growth, and Inflation: Can Sri Lanka Achieve 5% Targets?

The interaction between welfare policy, economic growth, and inflation is complex but critical. The current relief package has the potential to support short-term growth by sustaining household consumption and preventing a contraction in demand. This is particularly important in a fragile recovery phase.

However, the inflationary implications must be carefully managed. While subsidies can temporarily suppress price increases, they may also create distortions if maintained for prolonged periods. The risk is that suppressed prices lead to higher fiscal costs and delayed adjustments, which could eventually result in sharper corrections.

Achieving the dual targets of 5 percent growth and 5 percent inflation therefore requires a coordinated policy approach. Supply-side measures, particularly in agriculture and energy, must complement demand-side support. At the same time, monetary policy must remain vigilant to ensure that inflation expectations remain anchored.

My utmost concern is that, if properly aligned, welfare policies can support both stability and growth. If not, they risk undermining the very objectives they seek to achieve.

Conclusion: From Crisis Response to Policy Transformation

In my view, Rs. 100 billion relief package represents a necessary and timely response to an extraordinary set of economic challenges. It reflects a clear recognition of the need to protect vulnerable populations while maintaining economic stability. However, its long-term success will depend on whether it remains a temporary intervention or evolves into a structural fiscal burden.

The path forward requires a transition from broad-based subsidies to targeted, efficient, and sustainable welfare mechanisms. Fiscal discipline must be preserved, not weakened, by social protection policies. At the same time, welfare must be integrated into a broader strategy of economic transformation, focusing on productivity, resilience, and inclusive growth. In short, the above is a serious concern.

Sri Lanka’s ability to navigate this transition will ultimately determine whether the current relief measures serve as a bridge to recovery or a detour from stability.

Summary

Sri Lanka’s Rs. 100 billion relief package provides critical support to households, farmers, and key sectors affected by rising costs and external shocks. While these measures significantly enhance short-term welfare and economic stability, they also introduce notable fiscal pressures within the constraints of the IMF program. The sustainability of these interventions depends on effective targeting, strong revenue mobilization, and clear exit strategies. International experience highlights the importance of efficiency and governance in welfare design.  I strongly assume that, if properly managed, Sri Lanka can leverage these measures to support its broader goals of achieving stable growth and low inflation, while avoiding long-term fiscal risks.

*The writer, among many, served as the Special Advisor to the Office of the President of Namibia from 2006 to 2012 and was a Senior Consultant with the UNDP for 20 years. He was a Senior Economist with the Central Bank of Sri Lanka (1972-1993). He can be reached via asoka.seneviratne@gmail.com