Sri Lanka’s 2025 budget marks a return to true parliamentary control, ensuring full disclosure of government spending and limiting discretionary executive allocations, according to Labour Minister and Deputy Minister of Economic Development Anil Jayantha.
In previous administrations, large sums were earmarked as ‘contingent’ allocations, allowing governments to spend without prior parliamentary approval. This practice, institutionalized under the Rajapaksa regimes, turned budget approval into a symbolic exercise rather than a process of genuine financial oversight. Activists who challenged the practice in court also failed to curtail it.
Under the new Public Finance Management Law, the government has introduced a ‘Budget Reserve’ to handle unforeseen expenditures, replacing the earlier ‘contingencies’ fund. Minister Jayantha emphasized that effective budgeting requires accurate expense projections and minimal unplanned spending.
Tighter Fiscal Discipline
“In a responsible budget, unexpected expenditure should be minimized,” Jayantha noted, highlighting past misuse of contingency funds. In 2024, allocations included LKR 200 billion for recurrent expenses and LKR 100 billion for capital projects. However, following IMF discussions, the new fiscal framework has limited discretionary spending to 2% of primary expenditure.
For 2025, out of LKR 4,285 billion in primary spending, the government could have allocated LKR 85 billion for contingencies. However, adhering to fiscal discipline, the budget reserve has been capped at LKR 38 billion.
The total government expenditure for 2025 stands at LKR 7,190 billion, financed through LKR 4,990 billion in tax, non-tax revenues, and grants. The overall budget deficit is estimated at LKR 2,200 billion, or 6.7% of GDP.
Avoiding Inflationary Financing
Jayantha assured that the deficit would not be financed through inflationary means such as excessive money printing. Instead, the government plans to raise LKR 2,125 billion through domestic sources, with an additional USD 75 million in foreign financing. Loan repayments for the year amount to LKR 1,600 billion, while bond discounts contribute another LKR 200 billion to financing needs.
Sri Lanka successfully reduced its deficit in 2024 while maintaining low inflation, largely due to prudent central bank policies. However, analysts warn that the 2025 inflation target of 5% could pose risks to economic stability.
Impact of Inflation on Governance
Quoting economist Ludwig von Mises, Jayantha highlighted the link between inflation and governance, emphasizing that democratic control is rooted in budgetary oversight. Unlike past governments that relied on inflationary spending, Sri Lanka’s 2025 budget aims for fiscal transparency and accountability.
Historically, macroeconomic policies in Sri Lanka, especially during the 1980s and beyond, created budgetary challenges. Unchecked monetary expansion led to balance of payments crises, wage stagnation, and eventual stabilization crises. Analysts note that past inflationary cycles benefited asset holders while eroding the purchasing power of workers.
Following the end of the civil war in 2009, repeated currency crises due to expansionary monetary policies led to sovereign default in 2022. However, in 2024, the central bank’s conservative approach resulted in monetary stability, offering hope for more sustainable fiscal management in the years ahead.