By Asoka S. Seneviratne –

“Fiscal transparency is not just good economics—it is good governance.”

On June 30, 2025, Minister of Labour and Economic Development Dr. Anil Jayantha Fernando announced the Fiscal Strategy Statement (FSS) for 2026 in Parliament under Section 11.3 of the Public Finance Act No. 44 of 2024, relating to public finance management. This was the first time such a statement was presented in Parliament’s history. The announcement was made on behalf of the Minister of Finance, Anura Kumara Dissanayake, the president. It should be noted that the FSS is a legally required instrument under Section 11 of Sri Lanka’s Public Finance Management Act No. 44 of 2024. It outlines the government’s medium-term fiscal goals and policy plans and must be submitted to Parliament by June 30 each year. This development marks a significant milestone in parliamentary proceedings and sets a precedent for meaningful reform. It is a positive step that reflects a renewed commitment to transparency, accountability, and strengthening democratic institutions. Such progress not only indicates a maturing political culture but also signals a crucial shift toward more responsive and responsible governance. This policy brief explores (i) the theoretical foundations, (ii) practical implications, and (iii) strategic uses of the FSS in public finance.

1. Why the Fiscal Strategy Statement Matters

Sri Lanka is at a crucial point in its economic history, having overcome its first sovereign debt default in 2022. The country is now executing a comprehensive reform plan to (i) stabilize public finances, (ii) rebuild macroeconomic trust, and (iii) meet its international commitments. In this context, the Fiscal Strategy Statement (FSS) serves not just as a legal obligation but also as a strategic governance tool that promotes responsible economic management.

The FSS acts as the government’s financial guide, mapping out a plan for budget decisions over the medium term (usually 3 to 5 years). It details the government’s revenue, spending, and borrowing strategies in line with national priorities and macroeconomic factors. This helps prevent fiscal slippage and ensures that short-term policy measures align with long-term debt sustainability goals. This is particularly crucial for countries like Sri Lanka, which must carefully balance budgetary consolidation with economic recovery.

Moreover, the FSS plays a vital role in advancing fiscal transparency and accountability. It allows Parliament, civil society, and the public to evaluate the government’s budget plans and hold policymakers responsible for meeting their stated objectives. When prepared and presented on time and credibly—as required under Section 11.3 of the Public Finance Management Act No. 44 of 2024—it enhances public trust and investor confidence.

In times of economic uncertainty, a well-structured Fiscal Strategy Statement acts as a signal of policy discipline and institutional maturity, both domestically and to international partners. It helps rebuild confidence among investors, credit rating agencies, and development partners, all of whom closely monitor a country’s fiscal stance. Ultimately, the FSS provides the foundation for sound fiscal governance, essential for achieving sustainable growth, reducing poverty, and building resilience against future shocks.

2. Theoretical Foundations of the Fiscal Strategy Statement (FSS)

The Fiscal Strategy Statement (FSS) is based on key theories and principles of modern public finance. It offers the conceptual foundation that guides fiscal planning and management in a disciplined, transparent manner, and aligns with long-term national goals. The following theoretical principles support the development and function of the FSS.

a) Fiscal Sustainability

At its core, the FSS is built on the principle of fiscal sustainability—that governments must manage their public finances to keep debt levels sustainable over the long term. This principle is based on intertemporal budget constraint theory, which emphasizes that current fiscal choices should not restrict the financial options available to future generations. As a result, the FSS establishes measurable fiscal goals—such as deficit limits and debt-to-GDP ratios—that aim to prevent excessive spending, reduce fiscal risks, and ensure intergenerational equity.

b) Medium-Term Fiscal Framework (MTFF)

Annual budgets, while essential, are inherently limited in scope. They provide a one-year view of the government’s revenue and expenditure plans but are often constrained by short-term political and economic pressures. As a result, they may not reflect the strategic needs of long-term development or debt sustainability. To address this limitation, the Fiscal Strategy Statement (FSS) adopts a Medium-Term Fiscal Framework (MTFF)—a planning tool that typically spans three to five years. This framework enables governments to go beyond the annual cycle and engage in more forward-looking fiscal planning.

The MTFF is grounded in principles of strategic public financial management. It allows policymakers to align fiscal policy with broader macroeconomic objectives, such as economic growth, inflation control, and debt reduction. It also helps governments plan for demographic changes, such as population ageing or youth unemployment, by linking medium-term spending and revenue targets with evolving societal needs. For instance, a country expecting a surge in school-age children can adjust education budgets over several years, rather than reacting annually.

Importantly, the MTFF enhances the predictability and credibility of fiscal policy. When stakeholders—citizens, investors, and development partners—can see a clear fiscal path over several years, it reduces uncertainty and fosters greater trust in public institutions. The MTFF also strengthens the prioritization of public spending, as it forces governments to make deliberate trade-offs and allocate resources to areas with the highest long-term returns, such as infrastructure, healthcare, and education.

In the Sri Lankan context, the MTFF embedded within the FSS is particularly crucial as the country seeks to rebuild confidence after the 2022 debt default. It can ensure that recovery efforts are not only fiscally responsible but also strategically aligned with inclusive and sustainable development goals:

c) Transparency and Accountability

The FSS also plays a critical role in fostering transparency and reinforcing democratic accountability. Its requirement for formal presentation and debate in Parliament operationalizes the principal-agent theory, wherein elected representatives (agents) are held accountable by the citizens (principals) for the management of public resources. Through public disclosure of fiscal objectives and strategies, the FSS promotes informed debate, limits opportunistic fiscal behavior, and strengthens the legitimacy of fiscal policy choices.

d) Credibility and Market Confidence

A well-designed and consistently implemented FSS contributes significantly to the credibility of government fiscal policy. Credibility, in turn, is a central tenet in macroeconomic theory, particularly in models of rational expectations and time-consistent policy. When fiscal targets are perceived as realistic and binding, they reduce uncertainty and signal discipline to investors, both domestic and international. This enhances market confidence and can result in improved sovereign credit ratings, lower borrowing costs, and greater investor willingness to finance development priorities.

e) Policy Coherence

Finally, the FSS ensures policy coherence by integrating fiscal strategy with broader economic and structural reform agendas. It serves as a coordination mechanism to align fiscal policy with monetary policy, trade reforms, and sectoral development strategies. This reflects the systems thinking approach in public policy, which emphasizes the interdependence of policy domains. By ensuring that fiscal decisions support and do not contradict other macroeconomic objectives, the FSS enhances the overall effectiveness of government policy.

3. Legal Framework: Section 11.3 of the PFMA

Legal Framework: Section 11.3 of the Public Financial Management Act No. 44 of 2024

Section 11.3 of the Public Financial Management Act No. 44 of 2024 provides a clear statutory requirement for fiscal transparency. It states:

“Upon obtaining Cabinet approval, the fiscal strategy statement shall be announced by the Minister of Finance in Parliament on or before June 30 of each year.”

This provision serves as a critical institutional anchor in Sri Lanka’s evolving public finance framework. By mandating a fixed deadline for the release of the Fiscal Strategy Statement (FSS), the law ensures that fiscal policy is not delayed, politicized, or withheld from public scrutiny. It codifies a predictable and transparent annual cycle, compelling the Ministry of Finance to present medium-term fiscal targets, policy assumptions, and development priorities well ahead of the annual budget.

The importance of this requirement cannot be overstated. It introduces discipline into the fiscal calendar, allowing Parliament, oversight bodies, civil society, and financial markets to engage meaningfully with the government’s economic agenda. Timely publication of the FSS under this section also provides a benchmark for accountability, as deviations from projections can later be assessed and explained.

Moreover, Section 11.3 strengthens Sri Lanka’s commitment to open budgeting and aligns with global standards on fiscal governance promoted by institutions such as the IMF and World Bank. By institutionalizing regular disclosure of forward-looking fiscal information, the Act enhances budget credibility, improves investor confidence, and supports better decision-making across all sectors of government.

In 2025, for the first time, this requirement was fully operationalized when the Fiscal Strategy Statement was tabled in Parliament by June 30. This marked a significant milestone in Sri Lanka’s journey toward a more accountable and rules-based fiscal regime.

4. Strategic Benefits of the FSS

5. Policy Recommendations

To ensure that the Fiscal Strategy Statement (FSS) fulfills its intended purpose as a cornerstone of public financial management, several strategic reforms are necessary. These recommendations aim to strengthen the credibility, transparency, and effectiveness of the FSS and embed it more firmly into Sri Lanka’s fiscal governance framework:

a. Ensure Timely Publication

Strict adherence to the June 30 deadline, as required under Section 11.3 of the Public Finance Management Act No. 44 of 2024, is essential. Delays or inconsistencies in publication weaken public confidence and reduce the FSS’s impact on budget planning. Timely disclosure:

* Enhances government credibility.

* Allows sufficient time for public and parliamentary scrutiny before the budget process begins.

* Sends a strong signal to investors and international partners regarding Sri Lanka’s commitment to fiscal transparency and policy discipline.

b. Improve Public Accessibility

The FSS should be published in plain, non-technical language to make it accessible to non-specialists, including civil society, journalists, and concerned citizens. Additionally, it must be translated into Sinhala and Tamil, the national languages of Sri Lanka, to ensure nationwide engagement and understanding. Public accessibility:

* Empowers citizens to evaluate fiscal policy choices.

* Enhances participatory governance.

* Strengthens the public’s role in holding policymakers accountable.

c. Link the FSS to Budget Execution

The FSS should not function in isolation from the annual budget. Instead, its fiscal targets, assumptions, and priorities should directly inform the annual budget proposals submitted later in the year. Ministries and departments must be required to align their budget submissions with the medium-term fiscal goals outlined in the FSS. This integration:

* Ensures policy coherence.

* Avoids ad hoc or politically motivated spending.

* Helps maintain budgetary discipline by aligning policy intentions with resource allocations.

d. Institutionalize Independent Review

To strengthen the technical credibility of the FSS, Sri Lanka should establish an independent Fiscal Council, as recommended by global best practices and institutions like the IMF and World Bank. This non-partisan body would:

* Assess the realism of macroeconomic forecasts and fiscal targets.

* Evaluate compliance with budgetary rules and principles.

* Provide independent analysis to Parliament and the public.

Such oversight enhances transparency and trust in fiscal governance, particularly in a post-crisis recovery environment where fiscal credibility is crucial.

It is worth noting that adopting these reforms would significantly enhance the effectiveness of the Fiscal Strategy Statement. It would transition the FSS from a procedural obligation into a powerful instrument for economic planning, public accountability, and long-term fiscal sustainability.

6. Conclusion

The Fiscal Strategy Statement is more than just a procedural formality—it is the cornerstone of sound public finance in Sri Lanka. As the nation works on economic recovery, the FSS must be enhanced as a strategic, transparent, and accountable tool for fiscal planning. It can help guarantee that public resources are used effectively, debts are managed responsibly, and policies stay aligned with long-term development goals.

*The writer, among many, served as the Special Advisor to 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), asoka.seneviratne@gmail.com