Higher Revenue Collection, Controlled Spending, and Fiscal Reform Drive Budget Improvement Despite Structural Challenges
Sri Lanka’s public finances showed significant improvement in the first five months of 2025, with strong tax revenue growth, a shrinking budget deficit, and a higher primary surplus—all amid cautious monetary policy and a transitioning political landscape.
Sri Lanka recorded a 20% increase in government revenues, reaching 1,940 billion rupees in the five months to May 2025, with tax revenues alone climbing 21% to 1,804 billion rupees, according to Kapila Senanayake, Director General of Fiscal Policy.
Despite higher current spending, which rose 17% to 1,024 billion rupees—largely due to increased public sector salaries—expenditure growth remained broadly in line with rising revenues. However, concerns remain over the size and efficiency of the public workforce, including around 100,000 “development officers” with limited roles, outnumbering frontline professionals like doctors and nurses.
Capital expenditure stood at 175 billion rupees, slightly down from 193 billion rupees in the same period last year. Officials attribute the decline to the interim budget that followed the change in administration earlier this year, which delayed the resumption of infrastructure projects pending bilateral debt restructuring and new tenders.
Sri Lanka’s economy grew 4.8% in Q1 2025, supported by monetary stability, though the Central Bank’s recent late-cycle interest rate cut—influenced by past inflation data—has sparked criticism. Analysts warn it could undermine foreign reserve collection and the country’s debt repayment capacity.
The overall budget deficit dropped sharply to 237 billion rupees by May, a 35% reduction year-on-year. The current account deficit (revenue minus current spending) also fell significantly to 56 billion rupees from 176 billion rupees last year, indicating a more sustainable fiscal position.
Meanwhile, private sector credit surged by 133 billion rupees in May, suggesting growing economic confidence. Still, caution remains over potential fiscal and monetary policy mismatches that could reignite external vulnerabilities.