Sri Lanka posts record fiscal improvement amid Middle East risks as the country recorded one of its strongest fiscal performances in decades, supported by rising tax revenue, improved fiscal discipline and ongoing economic reforms, according to the Central Bank.
Sri Lanka posts record fiscal improvement amid Middle East risks despite external pressures
Presenting the Central Bank’s Annual Economic Review 2025 at a recent lecture organised by the Centre for Banking Studies, Central Bank Economic Research Department Director Dr. L. R. C. Pathberiya said the government achieved a primary surplus for the third consecutive year, reaching 5.4 percent of GDP in 2025.
He also revealed that the current account balance recorded a surplus of 0.7 percent of GDP for the first time since 1987, while the overall budget deficit narrowed sharply to 2.3 percent of GDP from 6.8 percent in the previous year. The latest figure marks Sri Lanka’s lowest fiscal deficit since 1956.
“Fiscal consolidation is progressing well. However, sustained fiscal discipline is critical to ensure continued progress and the achievement of medium to long-term fiscal targets,” Pathberiya stated during the presentation.
Government revenue recorded strong growth during the year, increasing by 35.2 percent year-on-year. Tax income also improved significantly, rising from 8.2 percent of GDP in 2022 to 16.6 percent of GDP in 2025, reflecting stronger tax administration and broader compliance measures introduced under ongoing reform programs.
Among the largest contributors to state revenue growth were vehicle-related taxes following the relaxation of import restrictions. According to Pathberiya, taxes linked to vehicle imports generated approximately Rs. 900 billion, accounting for nearly 18 percent of total tax revenue last year.
Vehicle imports also surged sharply during the year. Expenditure on personal and commercial vehicle imports reached approximately US$ 2 billion in 2025, accounting for 9.5 percent of Sri Lanka’s total imports.
“This was the third-highest annual vehicle import value recorded in history after 2015 and 2018,” Pathberiya noted.
The Central Bank official further pointed out that Sri Lanka’s tax base continued to expand, with the number of registered income taxpayers increasing from 1.1 million in 2024 to 1.3 million by the end of 2025. Analysts view the increase as a sign of improving tax compliance and enhanced revenue collection mechanisms implemented under fiscal reform initiatives.
Sri Lanka’s debt burden also showed signs of gradual improvement. Central government debt declined to 91.6 percent of GDP from 95.5 percent in 2024, indicating modest progress in debt sustainability amid ongoing restructuring efforts and fiscal consolidation measures.
The latest fiscal performance reflects a notable turnaround for Sri Lanka following the severe economic crisis that triggered sovereign debt default, inflationary pressures and foreign exchange shortages in recent years. Improved revenue generation, controlled expenditure and international financial support have contributed to stabilising macroeconomic conditions.
However, despite the positive fiscal indicators, Pathberiya warned that Sri Lanka’s economic outlook remains vulnerable to external risks, particularly escalating geopolitical tensions in the Middle East.
He cautioned that prolonged instability in the region could weaken global economic activity, disrupt disinflation trends and place additional pressure on energy prices, thereby affecting Sri Lanka’s fiscal and external stability.
“Prolonged geopolitical instability could disrupt global disinflation trends and weaken Sri Lanka’s external stability,” he said.
Sri Lanka has already experienced some impact from rising global fuel prices. Inflation rose to 5.4 percent last month, driven largely by higher fuel costs linked to the Middle East conflict, according to the Central Bank.
Economists note that Sri Lanka remains highly sensitive to global energy price fluctuations due to its reliance on imported fuel and external financing conditions. Higher oil prices could widen import costs, pressure the exchange rate and increase fiscal burdens through energy-related expenditure.
Pathberiya stressed that strengthening fiscal buffers, improving external sector resilience and accelerating structural reforms would remain critical as Sri Lanka navigates a more volatile global environment.
He added that improving competitiveness, maintaining fiscal discipline and sustaining reform momentum would be essential to preserving economic stability and supporting long-term growth prospects amid rising global uncertainty.