By: Staff Writer
September 14, Colombo (LNW): Sri Lanka’s public finances showed a marked turnaround in the first half of 2025, with higher revenues and a sharply reduced deficit boosting hopes of meeting year-end fiscal targets.
Yet, analysts warn that the recovery rests on a fragile base, heavily dependent on volatile import duties and overshadowed by steep debt servicing costs.
According to the Finance Ministry’s Fiscal Review Report for January–June, government revenue rose 24.7 percent year-on-year to Rs. 2.3 trillion, while the budget deficit narrowed by 32.3 percent to Rs. 405.6 billion, compared with Rs. 598.9 billion during the same period in 2024.
Officials expressed confidence that the government is on course to limit the deficit to 6.5 percent of GDP by year-end, a key target under fiscal consolidation.
Much of the revenue surge, however, stemmed from a one-off boost in excise duty on motor vehicles, which climbed to Rs. 129.1 billion following the relaxation of import restrictions earlier this year.
Economists cautioned that such windfalls make fiscal performance vulnerable to swings in import demand, exchange rate volatility, and policy changes.
The International Monetary Fund (IMF) has also stressed the need for broader, more sustainable tax reforms to reduce reliance on unpredictable revenue streams.
Beyond vehicle duties, other tax categories performed relatively well. Income tax collections increased by 9.2 percent to Rs. 489 billion, while VAT receipts jumped 27.6 percent to Rs. 876 billion, including Rs. 354 billion from imports.
The Special Commodity Levy soared 70.5 percent to Rs. 77.6 billion. Both the Inland Revenue Department and Customs reported stronger compliance and enforcement, helping them achieve a large share of their half-year targets.
Yet the structure of revenue growth remains skewed towards trade-related duties, keeping the country’s tax base narrow and highly sensitive to external conditions.
On the expenditure side, pressures remain persistent. Government spending expanded by 10.9 percent to Rs. 2.7 trillion, driven by a 13 percent rise in recurrent expenditure to Rs. 2.5 trillion. Debt servicing continues to weigh heavily, with interest payments alone consuming Rs. 1.2 trillion in the six-month period.
Meanwhile, capital expenditure and net lending contracted by 8.6 percent to Rs. 224 billion—a reduction that helps contain the deficit in the short term but risks undermining long-term economic growth by cutting back on infrastructure and development projects.
Sri Lanka’s mid-year fiscal performance highlights tangible progress in deficit reduction, but it also underscores the delicate balance policymakers face.
While headline numbers point to recovery, the country’s dependence on volatile import-related taxes, coupled with soaring debt obligations and underfunded investment, threatens to erode the foundations of fiscal stability.
