By: Staff Writer
May 19, Colombo (LNW): Sri Lanka’s budget deficit narrowed in the first quarter of 2025, falling to 234.5 billion rupees from 281.3 billion rupees a year earlier, according to Central Bank data. While this marks an improvement in fiscal discipline, current expenditures—especially on public sector wages and subsidies—continued to outpace revenue growth.
Government revenue rose 17% year-on-year to 1,066 billion rupees as of March, driven primarily by an 18% increase in tax collections, which reached 985.9 billion rupees. A standout contributor was the financial VAT—a tax applied on value addition in financial services, not directly invoiced to customers—soaring over 400% to 40.4 billion rupees. This jump reflects higher wage bills in the banking sector, following both a currency crisis and staff losses due to increased income taxes.
Current spending (excluding interest) climbed 21% to 587 billion rupees, just ahead of a full public sector salary increment slated for April. Public salary payments alone rose from 168 billion to 182 billion rupees, while subsidies grew significantly from 53 billion to 82 billion rupees. These include rice subsidies to farmers—despite retail prices remaining 30–50% higher than regional benchmarks—and fuel subsidies for fishermen.
Despite these pressures, the current account deficit (revenue minus current expenditure) slightly improved, reducing from 169.3 billion to 153.5 billion rupees. However, critics argue that under the IMF-backed program, fiscal consolidation focuses excessively on taxation rather than expenditure reforms. This revenue-based approach has drawn scrutiny for its heavy burden on productive sectors and savers.
One notable change was the partial relaxation of the vehicle import ban, initially imposed during the 2020 currency crisis triggered by aggressive monetary easing. Although vehicles now face steep import taxes, excise revenue from them surged to 17 billion rupees from 7.8 billion the previous year. Industry sources report a softening of dealer markups as vehicle inflows stabilize.
Capital and net lending expenditures dropped to 82.1 billion rupees from 113.2 billion, though actual capital spending could be higher due to repayments from state-owned enterprises. The government anticipates an increase in capital investments once bilateral loans, particularly from Japan, resume after debt restructuring.
Interest payments edged up 5.8% to 597.2 billion rupees. However, confidence in the economy is gradually improving, aided by tighter monetary policy and a stable exchange rate. Interest rates have begun to decline, supported by shrinking budget deficits, though renewed private credit growth may offset these gains.
For the full year 2025, the budget deficit is forecast at 2.2 trillion rupees—higher than last year’s 2.04 trillion—largely due to rising salary obligations. Most of this will be financed through domestic borrowing, continuing the government’s effort to reduce external debt exposure.
