Sri Lanka’s fiscal outlook for 2026 appears to be entering a cooling phase, with revenue growth expected to slow sharply following an exceptional 2025 performance driven largely by vehicle import duties.
The warning comes from the Committee on Public Finance (COPF), which recently reviewed the draft report on the 2026 Appropriation Bill under the chairmanship of Dr. Harsha de Silva, MP.
According to the draft report prepared by the COPF’s technical team in line with Standing Order 121(5)(i) of Parliament the 2026 Budget has been formulated in compliance with the Public Financial Management (PFM) Act, the Public Debt Management (PDM) Act, and commitments under the International Monetary Fund (IMF) Extended Fund Facility (EFF).
The report cautions that, despite the record fiscal performance in 2025, a moderation in revenue growth is imminent due to the government’s anticipated restrictions and policy adjustments on vehicle imports.
The 2025 fiscal year saw total government revenue exceed projections by over Rs. 100 billion, largely owing to the one-off windfall from resumed vehicle imports.
Customs data indicate that vehicle import taxes alone contributed around Rs. 680 billion to state coffers, a dramatic increase from just Rs. 50 billion in 2024 when imports were tightly controlled.
This surge helped Sri Lanka Customs surpass its annual revenue target of Rs. 2.115 trillion, a historic high for the department and a key pillar in the government’s revenue recovery strategy.
However, the COPF report underscores that such windfalls are unsustainable, as the government does not intend to maintain the same level of vehicle imports in 2026.
This slowdown is expected to trim customs duties, excise taxes, and VAT collections, all of which are heavily dependent on import activity. Preliminary projections suggest that revenue growth, which expanded by nearly 40% in 2025, could fall to single-digit levels in 2026, posing a challenge to the Treasury’s fiscal consolidation plans.
Economists have warned that the anticipated decline could tighten the government’s fiscal space, complicating efforts to meet IMF targets for debt reduction and primary surplus maintenance.
With the 2026 Appropriation Bill expected to allocate significant funds toward debt servicing estimated at over Rs. 6 trillion, or nearly half of total expenditure the state may face pressure to either broaden its tax base or enhance non-tax revenue streams.
The COPF’s deliberations also included consultations with civil society representatives, who raised concerns about budget transparency, equitable sectoral allocations, and policy consistency.
Many argued that while the 2025 revenue uptick offered short-term relief, it failed to address deeper structural weaknesses in public finance, such as inefficiencies in tax administration and the absence of a coherent investment strategy.
Chairman Dr. Harsha de Silva stated that these observations would be formally conveyed to the Ministry of Finance for review.
He emphasized the need for “credible and sustainable revenue sources” rather than dependence on temporary import-related gains, calling for reforms in tax policy, public sector efficiency, and digital revenue tracking mechanisms.
As Sri Lanka braces for 2026, fiscal planners face a delicate balancing act sustaining growth, meeting IMF obligations, and maintaining social spending all amid a potential revenue downturn.
The decline in vehicle imports, while intended to stabilize foreign reserves, could expose the fragility of a revenue system still reliant on trade taxes rather than long-term, productivity-based growth.
