By: Staff Writer
October 30, Colombo (LNW): Sri Lanka’s fiscal outlook has shown remarkable improvement this year, with the country’s budget deficit shrinking by more than half during the first nine months of 2025 — a clear indication of recovering state finances following years of crisis and austerity. According to the Finance Ministry’s latest Fiscal Review Report, the deficit dropped 54.5% year-on-year to Rs. 441.4 billion from Rs. 970 billion recorded in the same period of 2024.
This significant progress was primarily driven by stronger revenue collection and tighter fiscal controls. Total government revenue rose by 31% year-on-year to Rs. 3.83 trillion, supported by better tax enforcement, rising imports, and improved business activity. The primary account recorded a surplus of Rs. 1.4 trillion, more than double last year’s figure, reflecting the government’s ability to cover recurrent expenses from its own income without resorting to new borrowing.
Tax revenue remained the backbone of fiscal gains. Income tax receipts rose 12% to Rs. 831 billion, while Value Added Tax (VAT) collections climbed 31% to Rs. 1.24 trillion, indicating a steady revival of consumption and imports. Customs duties contributed Rs. 1.7 trillion — nearly half of all tax income — achieving 80% of its annual target, while the Inland Revenue Department generated Rs. 1.64 trillion, or 75% of its yearly goal. Excise revenue also jumped, reaching Rs. 552 billion, almost double the previous year, supported by higher levies on alcohol, tobacco, and vehicles.
However, expenditure pressures remain a concern. Total government spending increased by 10% to Rs. 4.3 trillion, driven mainly by recurrent costs such as public sector salaries, pensions, and welfare payments. Interest payments rose 8.6% to Rs. 1.9 trillion, reflecting the heavy debt burden still weighing on the economy. Capital expenditure and net lending, in contrast, fell slightly by 2% to Rs. 455 billion, underscoring limited space for infrastructure and development projects amid fiscal constraints.
The International Monetary Fund (IMF), in its recent review, commended the government’s progress in stabilizing public finances but emphasized that long-term sustainability will depend on continued structural and fiscal reforms. The release of the next tranche under Sri Lanka’s $3 billion Extended Fund Facility (EFF) will depend on Parliament approving a 2026 Budget aligned with IMF targets for debt sustainability and fiscal discipline.
The IMF urged Colombo to enhance tax compliance, broaden the tax base, and minimize revenue leakages to sustain its recovery. It also highlighted the need for stronger governance in state-owned enterprises and transparent public financial management to prevent future fiscal slippages.
Economists warn that while the narrowing deficit signals a step toward stability, the government must avoid complacency. Without consistent reform momentum and efficient spending, Sri Lanka risks undermining the hard-won fiscal gains that are crucial to restoring investor confidence and economic growth.
