By: Staff Writer
August 10, Colombo (LNW): Sri Lanka has exceeded key fiscal benchmarks under its International Monetary Fund (IMF) program for June 2025, with robust tax revenue and restrained spending driving a much larger-than-expected primary budget surplus. However, analysts caution that recent monetary policy moves could undermine the country’s ability to sustain reserve accumulation and meet future targets.
Record Primary Surplus
The central government’s primary balance — revenue minus expenditure excluding interest payments — reached a surplus of Rs. 859 billion by June, far surpassing the IMF’s target of Rs. 130 billion. Such a large surplus reflects both strong tax collections and lower-than-expected capital spending.
While a primary surplus is rare in economies with low inflation and interest rates, in IMF-backed stabilization programs it becomes necessary as interest costs rise sharply following monetary tightening to restore currency stability. In Sri Lanka’s case, the adjustment has largely come from curbing non-interest spending, an area directly controlled by the government.
Observers note that past external debt problems partly stemmed from non-priority capital projects, such as large-scale government buildings, which contributed little to economic resilience. Moving forward, critical infrastructure maintenance — particularly rural roads — and investment in the electricity grid to handle renewable energy integration remain key priorities.
Strong Revenue Performance
Tax revenue up to June totaled Rs. 2,152 billion, well above the Rs. 1,650 billion IMF floor. The next test will be tougher: the September target is Rs. 2,750 billion, and the year-end goal is Rs. 4,350 billion.
A significant share of Sri Lanka’s fiscal intake comes from taxes on imported vehicles, which carry levies of over 200–300 percent. However, when the central bank lowers interest rates while injecting liquidity, import controls often restrict vehicle inflows to protect the balance of payments. This can erode revenue and force further monetary expansion, creating what some critics describe as a “cascading policy error” — higher deficits, more money printing, and renewed exchange rate pressures.
Reserve Risks and Monetary Policy
While Sri Lanka outperformed its March reserve accumulation target, part of the reported gross reserves stem from dollar-rupee swaps — short-term arrangements that create contingent liabilities and do not count toward IMF reserve metrics. Without a cap on the central bank’s domestic assets in the revised program, some analysts warn of a risk of missing reserve targets, especially if debt repayment needs rise.
Recent history has shown that premature rate cuts, particularly during strong credit growth and slow reserve build-up, have preceded currency instability — as in 2012, 2015–16, 2018, and 2019–22. Critics argue that maintaining a higher interest rate “buffer” is essential to sustain reserve accumulation under a stable exchange rate, even if it temporarily restrains growth.
For now, Sri Lanka’s fiscal overperformance provides a cushion in its IMF program. But with tougher revenue targets ahead and monetary easing already under way, policymakers face the challenge of balancing growth ambitions with the discipline needed to safeguard reserves and ensure debt sustainability.
