• Weak external demand could create a fiscal gap due to reliance on export-driven growth
• Export underperformance risks lower tax revenue and exchange rate pressure

Sri Lanka’s meeting of budgetary targets in 2025 highly depends on the island nation’s performance in the export sector as a weak external demand would create a fiscal gap, the Committee on Public Finance (COPF) said.

The report of the COPF presented yesterday (25) at Parliament on the appropriation bill for the financial year 2025 said that the 2025 budget assumes a strong export performance to drive economic growth and generate tax revenue.

“However, if external demand weakens due to slower global economic growth, Sri Lanka’s key export sectors- such as apparel, industrial goods, and agricultural commodities- may face revenue declines,” the COPF said.

It said that based on Ministry of Finance projections presented to the COPF alongside the appropriation bill, the 2025 budget assumes 3% real GDP growth, with nominal GDP increasing from Rs. 30 trillion in 2024 to Rs. 33 trillion in 2025.

However, the GDP growth projection presented in the budget speech was 5% which significantly differs from the real growth assumption presented with the appropriation bill.

It added that exports are expected to grow from $ 16 billion to $ 19 billion, as per Export Development Board (EDB) projections, white annual average exchange rate, assumed at Rs. 295 per US dollar in 2024, could depreciate to assume Rs. 305 per US dollar in 2025, increasing the rupee value of exports but also raising import costs and inflationary pressures.

“With exports contributing 29.5% of GDP growth at Rs. 295 per US dollar (assuming exchange rate remains stable in 2025) and 35.83% of GDP growth at Rs 305 per US dollar (assuming exchange rate depreciates in 2025), economic expansion in 2025 is highly dependent on external trade performance,” COPF said.

Therefore, COPF said that a contraction in exports would lead to lower corporate tax collections, as firms generate lower profits, and reduced VAT revenue, as export-related transactions decline.

Given that a significant portion of Sri Lanka’s revenue is derived from trade-related taxes, any shortfall in export earnings would also create a fiscal gap, requiring either higher domestic taxation, expenditure cuts, or increased borrowing to maintain fiscal targets.

“If export underperformance leads to lower foreign exchange inflows, it could also put pressure on the exchange rate, making imports more expensive and potentially raising inflation,” the report by COPF said, adding that in turn, it could dampen domestic demand and impact indirect tax collections, further weakening government revenue streams.