Sri Lanka’s fiscal recovery has entered a new phase, with policymakers increasingly questioning whether an economy driven by higher tax collection can deliver sustainable long-term growth.
The issue was highlighted during a recent meeting of the Parliamentary Committee on Public Finance (CoPF), where Treasury officials outlined the next stage of the IMF-supported reform programme. While acknowledging the success of revenue mobilisation since the 2022 economic crisis, officials conceded that Sri Lanka must gradually reduce its reliance on taxation as a contributor to economic growth.
CoPF Chairman Dr. Harsha de Silva raised concerns over the composition of recent GDP growth, noting that taxes have become one of the largest contributors under the production-based national accounting framework.
He questioned whether economic growth could be considered sustainable when a significant share of expansion stems from increased government tax revenue rather than higher production, private investment and business activity.
Treasury officials responded that the current situation reflects the extraordinary fiscal measures adopted following the 2022 economic crisis. Tax revenue increased sharply as the Government sought to restore public finances, with taxes less subsidies rising from around 4–5% of GDP before the crisis to approximately 12.4%.
However, they stressed that taxation cannot remain the foundation of Sri Lanka’s long-term economic model.
According to Treasury officials, the next phase of the IMF reform programme, expected to accelerate towards 2027, will focus on creating conditions for stronger growth in manufacturing, construction and services. Structural reforms are intended to ensure that investment, productivity and private sector expansion eventually replace taxation as the primary drivers of economic growth.
Sri Lanka has recorded notable fiscal improvements under the reform programme. Public debt declined to 98.3% of GDP in 2025 and is projected to fall further to 86.7% by 2032. The budget deficit has narrowed to 2.3% of GDP, while the primary budget surplus reached 5.4%.
Despite these gains, lawmakers cautioned that structural challenges remain. During the CoPF discussions, MP Ravi Karunanayake argued that the current tax system places a heavier burden on small and medium-sized businesses while allowing larger corporations to absorb higher tax costs more easily, potentially widening economic inequality.
Treasury officials indicated that the forthcoming Medium-Term Revenue Strategy will play a key role in determining whether Sri Lanka can transition from emergency fiscal consolidation to sustainable economic growth.
The discussions also highlighted growing fiscal risks beyond taxation and debt management. According to the latest Fiscal Risk Statement, climate change and natural disasters have emerged as significant threats to public finances, requiring future budgets to allocate greater resources for disaster preparedness, climate resilience and risk management.
The IMF-supported reform programme is now entering what officials describe as a transition phase. While the initial stage focused on stabilising the economy through stronger revenue collection and fiscal discipline, the next phase is expected to test whether policy reforms can generate growth led by businesses, investment, exports and productivity rather than taxation alone.
Economic observers have also argued that Sri Lanka has yet to fully leverage several sectors with significant foreign exchange earning potential, particularly high-value tourism. They point to luxury wellness tourism, heritage travel, premium wildlife experiences, marine tourism and boutique hospitality as areas that remain under-promoted in key international markets despite their appeal to high-spending European travellers.
Analysts note that the country’s challenge is no longer simply increasing tourist arrivals but attracting visitors with greater spending power to maximise tourism earnings.
With Sri Lanka still needing to generate more than USD 2 billion in tourism revenue during the second half of 2026 to meet its revised annual target, industry experts say policymakers will need to intensify international marketing campaigns, strengthen destination branding and rebuild the country’s visibility in high-value source markets if tourism is to make a stronger contribution to economic growth and foreign exchange earnings.