By Lionel Bopage –

Dr. Lionel Bopage

Sri Lanka’s 2025 budget, presented by President Anura Kumara Dissanayake, aims to drive economic recovery and fiscal consolidation following a severe financial crisis. The budget targets a deficit of 6.7% of GDP, slightly above the International Monetary Fund’s (IMF) preferred 5.2% for 2025. To achieve this, the government plans to increase revenue to 15.1% of GDP, up from 11.4% in 2023, through measures such as raising the corporate income tax rate for cigarette, liquor, and gaming businesses from 40% to 45%, and removing exemptions on export services, applying a 15% tax instead.

The budget also emphasises equitable economic distribution, infrastructure development, and support for local industries, while adhering to IMF parameters.

The 2025 budget carries significant socio-economic and political implications for individuals and businesses alike. It serves as an annual financial blueprint, addressing both short-term and long-term needs within Sri Lankan society. However, only a few expected this budget to deliver immediate miracles or initiate a radical economic transformation. The prevailing domestic and global conditions do not support such revolutionary measures, which would require a highly committed and self-sacrificing population willing to endure the associated hardships.

Historical Parallels and Global Economic Uncertainties

Historical experiences provide valuable lessons. Cuba, for example, has endured over six decades of economic restrictions and sanctions imposed by the United States, demonstrating the complex challenges a country faces under such circumstances. Though not comparable with Cuba in terms of economic policies and political ideology, Sri Lanka must consider its geopolitical realities, particularly its close proximity to India and strategic ties with China. With uncertainties looming over the US economy and global financial markets, Sri Lanka must navigate its fiscal path carefully to mitigate potential economic shocks.

Budget Constraints and Austerity Measures

The overwhelming electoral mandate for the NPP was a reflection of the high hopes of the electorate. A budget, in essence, is the allocation of resources across ministries in alignment with the government’s economic vision. However, the fiscal space for manoeuvring remains limited due to the austerity measures tied to the IMF-backed debt restructuring deal enacted by the previous administration. Consequently, revenue redistribution remains a challenge.

Despite these constraints, the government has indicated a willingness to renegotiate certain aspects of the IMF deal while maintaining the agreed-upon debt sustainability framework. Nevertheless, the implementation of government programs still relies on mechanisms established by previous administrations, many of which have proven inefficient. While corruption and waste have seen a reduction at the political level, the same cannot yet be said of bureaucratic structures and the networks responsible for policy execution. Addressing these inefficiencies and redesigning governance mechanisms remain critical tasks for ensuring economic and social justice.

An Economy in Transition

The budget appears ambitious, yet many stakeholders may feel it falls short of expectations. Salary increments have been deemed insufficient by politicians, bureaucrats, and trade unions. Even those who supported the NPP’s rise to power are demanding greater concessions. Political voices further left have called for systemic economic reforms.

This budget positions Sri Lanka on a transitional path, focusing on fiscal stability while enhancing agricultural, manufacturing, and service-sector efficiencies. It also aims to curb corruption, wastage, and resource mismanagement. While opposition parties criticize it as an IMF-driven budget favouring the elite, others acknowledge its substantial emphasis on social welfare and infrastructure. The government must clarify how it intends to bridge the gap between revenue and expenditure and how small and medium enterprises (SMEs) will be integrated into the digital and technology-driven economic transformation.

The administration defends the budget as progressive, emphasising increased social spending, higher public sector salaries, pensions, and social assistance programs. Infrastructure development—covering road networks, water projects, and urban development—also features prominently. The government plans to offset these expenditures through increased taxation on vehicle imports, digital services, and the corporate sector.

Economic and Military Spending: Priorities and Challenges

The budget outlines a medium-term fiscal and economic reform strategy, targeting a 36.5% rise in revenue from trade taxes and a 13.1% increase in income tax revenues. Vehicle imports are expected to contribute to this growth, although they may also exert pressure on foreign exchange reserves. The government is exploring additional policy frameworks to sustain revenue growth, while also expanding Sri Lanka’s network of Free Trade Agreements (FTAs) and prioritizing export-oriented investments.

A noteworthy aspect of the budget is its continued emphasis on military expenditure. Sri Lanka remains one of the most militarized countries per capita, with Rs 437 billion allocated to defense in 2025—a Rs 12 billion increase from 2024. Salary increments for military personnel range between 27% and 33%, surpassing allocations for regional development, including the North, East, and Malaiyaha regions.

While the Northern Province remains underdeveloped, this budget includes Rs 100 million for upgrading the Jaffna Library, Rs 200 million for regional libraries, Rs 5 billion for rural road rehabilitation, Rs 1 billion for constructing the Vadduvakal Bridge in Mullaitivu, and Rs 1.5 billion for resettlement and housing. Additionally, Rs 7.58 billion has been earmarked for the Malaiyaha community, focusing on infrastructure, housing, vocational training, and education.

IMF Compliance and Fiscal Considerations

The budget aligns largely with IMF-set targets, including achieving a 2.3% primary account surplus. Revenue is projected at 15.1% of GDP, while expenditure stands at 21.8% of GDP. The budget deficit target is 6.7%, slightly exceeding the IMF’s recommended 5.2%. This deviation reflects increased public capital expenditure, salary adjustments, and social welfare programs.

Moody’s Ratings indicates that Sri Lanka’s debt affordability remains weak, with a narrow revenue base. A projected 5% annual economic growth rate depends on adequate support for SMEs and key economic sectors. However, low capital expenditure may hinder long-term growth, and unresolved debt reduction concerns could affect the country’s credit profile and borrowing capacity in the face of global economic disruptions.

Conclusion: Balancing Growth, Stability, and Fiscal Responsibility

A robust economy requires policies that encourage business activity while regulating monopolistic tendencies. The 2025 budget lacks clarity on how revenue will be mobilised to support social welfare expenditures. With a substantial fiscal deficit, questions remain on whether the government can sustain spending without deepening economic vulnerabilities.

Sri Lanka is expected to resume debt repayments by 2028. The success of this timeline depends on sustained fiscal consolidation and revenue generation. While meeting IMF targets is essential for improving credit ratings and securing future loans, long-term economic stability will require enhanced technological adoption, improved public sector efficiency, and anti-corruption measures.

The proposed salary hikes must translate into better public service delivery to justify their fiscal burden. If mismanaged, they risk being perceived as political handouts rather than productivity incentives. Moreover, without strategic investments in education, healthcare, and infrastructure, social welfare programs may merely function as temporary relief rather than sustainable economic solutions.

Ultimately, the success of the 2025 budget will depend on the government’s ability to navigate economic challenges while fostering long-term growth, innovation, and fiscal discipline. Only a well-executed strategy will ensure that Sri Lanka progresses toward economic stability and prosperity for all its citizens