Sri Lanka budget deficit is expected to rise by 1.4 percent in 2026, reaching 6.5 percent of GDP, as the government allocates additional funds for Cyclone Ditwah relief and recovery, a Finance Ministry report shows.
Sri Lanka budget deficit set to increase amid Cyclone Ditwah recovery spending
Sri Lanka budget deficit is projected to increase in 2026 due to extraordinary spending related to Cyclone Ditwah, reflecting the government’s efforts to mitigate the impact of natural disasters on communities and infrastructure. According to a recent Finance Ministry document, the deficit is set to climb 1.4 percent, reaching 6.5 percent of gross domestic product.
Capital expenditure is expected to rise by 1 percent of GDP, from 4.0 percent in the original budget to 5.0 percent, while recurrent spending will grow from 16.5 percent to 16.9 percent of GDP. The Treasury has earmarked an additional 500 billion rupees for cyclone-related relief and reconstruction projects, highlighting the fiscal response to the disaster’s aftermath.
Sri Lanka’s budget and debt metrics had shown improvement under International Monetary Fund (IMF) programs and the broadly deflationary monetary policy of the Central Bank. However, recent currency depreciation and policy tensions have exposed vulnerabilities in the operating framework, raising concerns among economists about fiscal sustainability.
Despite record current account surpluses and budget improvements, the Sri Lankan rupee depreciated sharply in 2025, prompting scrutiny over exchange rate management. Analysts caution that unless the government addresses monetary-fiscal anchor conflicts, the country could face heightened inflationary pressures and a risk of another debt crisis, similar to its first external default.
Historically, currency depreciation can inflate government debt and erode the finances of state-owned enterprises, particularly in electricity and power sectors. These dynamics often compel tariff increases or generate losses that are eventually borne by taxpayers, adding complexity to fiscal planning. Economists note that classical measures of core inflation may not fully capture rising commodity prices, which remain central to cost-of-living pressures.
For 2026, the government has proposed a budget with measured increases in both current and capital expenditures. Tax revenues are projected to rise 4 percent to 4,910 billion rupees, remaining largely unchanged after factoring in Ditwah-related spending. Current spending had been expected to grow just 3 percent prior to the cyclone, but post-disaster allocations have adjusted these projections upward.
Treasury Secretary Harshana Suriyapperuma emphasized a strategic approach to gradually reduce recurrent expenditures while boosting capital investment. By prioritizing infrastructure and growth-oriented projects, the government aims to support recovery, stimulate the economy, and maintain fiscal stability.
The budget strategy reflects a delicate balancing act between managing immediate disaster relief, sustaining economic growth, and controlling inflationary pressures. While capital allocations have been increased to support reconstruction and long-term development, careful oversight of recurrent spending remains critical to avoid fiscal slippage.
Macro-fiscal observers highlight that budget deficits are inherently fluid, influenced by inflation, social demands, and subsidy requirements. The Sri Lankan experience demonstrates the challenges of maintaining fiscal discipline amid natural disasters and external shocks, emphasizing the importance of coordinated monetary and fiscal policies.
Overall, the 2026 budget underscores the government’s intent to restore fiscal stability while addressing urgent humanitarian needs. By strategically managing expenditures and investing in capital projects, Sri Lanka seeks to strengthen resilience, support employment, and lay the groundwork for sustainable economic growth.