By: Staff Writer
January 13, Colombo (LNW): Sri Lanka’s largest-ever post-disaster recovery package has reopened a critical debate on how the country should finance reconstruction without worsening its already fragile debt position. Economic research organisation Verité Research has urged the Government to prioritise non-debt financing options including foreign grants and temporary solidarity taxes to fund the Rs. 500 billion supplementary allocation approved for Cyclone Ditwah recovery.
In a newly released analysis titled “Rs. 500 billion Supplementary Allocation for Cyclone Ditwah Recovery Narrows Fiscal Space,” Verité warns that additional borrowing would significantly strain fiscal space at a time when debt sustainability remains a central concern under Sri Lanka’s IMF-backed reform programme.
Parliament approved the supplementary allocation on 19 December 2025, marking the largest such spending package in recent history. The funds are earmarked for infrastructure rehabilitation amounting to Rs. 250 billion, business and livelihood revival at Rs. 150 billion, and direct relief and housing support of Rs. 100 billion. Of the total, Rs. 150 billion represents recurrent expenditure, while Rs. 350 billion is allocated for capital projects.
Verité notes that Sri Lanka has historically relied on foreign grants during major disasters. Following the 2004 tsunami, the country received grants equivalent to approximately $1.18 billion in today’s prices—roughly Rs. 360 billion at current exchange rates. According to the think tank, mobilising similar grant-based assistance remains one of the least distortionary ways to finance recovery without increasing debt.
On the domestic front, the report highlights revenue-enhancing measures that do not involve new borrowing. One key recommendation is improving tax collection from underutilised sources. Verité points out that Sri Lanka has committed to inflation-linked cigarette excise increases under its IMF programme, yet prices have not been adjusted in line with the indexation mechanism introduced in 2024.
The think tank also draws attention to international precedents for temporary solidarity taxes during extraordinary fiscal stress. Countries such as Japan, Australia, Portugal and the United States have imposed time-bound surcharges on high-income earners and exceptional corporate profits. An IMF special study cited in the report identifies these measures as effective tools to mobilise resources from higher-income groups who are comparatively insulated from crisis impacts.
However, Verité stresses that any such measures must be clearly temporary. Sri Lanka’s past failure to sunset “temporary” taxes—such as the Nation Building Tax and the Social Security Contribution Levy—has eroded policy credibility, the report argues. Raising withholding tax rates is also proposed as an efficient way to boost revenue collection at source.
With the supplementary budget pushing total Government spending in 2026 to Rs. 7,557 billion and widening the deficit to 6.5% of GDP, Verité concludes that non-debt financing is not merely preferable, but essential to preserving fiscal stability during recovery.
