Sri Lanka's economic trajectory has been shaped by a complex interplay of policy promises and their subsequent implementation. Over the years, successive Governments have pledged to stabilise the economy, promote sustainable growth, and enhance the wellbeing of citizens. However, the gap between political rhetoric and actual economic performance has often been a point of contention.
The current administration, under President Anura Kumara Dissanayake, has embarked on a series of economic reforms aimed at addressing the structural weaknesses of the economy while fulfilling key electoral promises.
The economic crisis of 2022, which led to Sri Lanka's first-ever sovereign debt default, underscored the fragility of the nation's economic foundations. Severe foreign exchange shortages, skyrocketing inflation, and widespread public unrest forced the Government to seek external financial assistance. In response, a United States Dollars ($) 2.9 billion bailout package from the International Monetary Fund (IMF) was secured in 2023, setting the stage for a broad set of economic policy adjustments. While this move was deemed necessary, it has also led to tough fiscal and structural reforms that have significantly impacted various sectors of the economy.
Econ. stabilisation efforts
The economic crisis of 2022 brought Sri Lanka to the brink of collapse, necessitating immediate policy interventions. The IMF bailout agreement in 2023 was a critical first step towards economic stabilisation, providing the country with much-needed foreign exchange reserves to restore essential imports such as fuel, medicine, and food supplies. Under the agreement, Sri Lanka committed to a range of reforms, including fiscal consolidation, revenue mobilisation, and financial sector strengthening. These measures were intended to create a more resilient economic framework that could withstand future shocks while addressing long standing inefficiencies in public finance management.
The Central Bank of Sri Lanka (CBSL) Act, No. 16 of 2023, was a key reform introduced under the economic stabilisation programme, aimed at strengthening monetary and financial stability in the aftermath of the crisis. The Act significantly enhanced the independence of the CBSL by reducing Government influence over monetary policy decisions and formally establishing price stability as its primary objective. This shift ensured that inflation control remained central to economic policy-making, complementing broader fiscal consolidation efforts. The Act also introduced a new governance framework, revising the appointment process for the CBSL Governor and the Monetary Board members to enhance transparency and accountability. Furthermore, it imposed stricter fiscal discipline measures, prohibiting the CBSL from financing budget deficits – a practice that had previously contributed to macroeconomic instability. By reinforcing regulatory oversight and promoting a rules-based approach to the monetary policy, the Act played a critical role in restoring investor confidence and supporting Sri Lanka’s long-term economic recovery.
By last year (2024), economic indicators began showing signs of recovery, with gross domestic product growth reaching 4.4%, exceeding initial projections. Inflation, which had peaked at over 70% in mid-2022, gradually declined due to tighter monetary policies implemented by the CBSL. The adoption of a flexible exchange rate and improvements in export earnings also contributed to greater financial stability. However, despite these improvements, the recovery remained fragile, with high levels of public debt and persistent socio-economic challenges threatening to derail progress if the structural reforms were not sustained.
While the Government has managed to stabilise the economy to some extent, challenges remain in ensuring that economic gains translate into improved living standards for ordinary citizens. Many Sri Lankans continue to struggle with high costs of living, unemployment, and reduced purchasing power. The success of the stabilisation efforts will depend on the Government’s ability to maintain fiscal discipline while implementing policies that promote inclusive economic growth and social welfare.
Fiscal policies and budgetary measures
One of the Government's primary fiscal policy goals has been to reduce the budget deficit, which stood at unsustainable levels in previous years. In 2024, the fiscal deficit was projected at Rs. 2.85 trillion, or 9.1% of the GDP, with the total tax revenue estimated at Rs. 4.1 trillion. To achieve this target, the Government implemented a series of tax reforms, including higher value-added tax rates, improved tax collection mechanisms, and efforts to expand the tax base. These measures aimed to increase Government revenue while ensuring fiscal responsibility and compliance with IMF-mandated targets.
In addition to increasing revenue, the Government also introduced expenditure control measures to manage public spending more effectively. Non-essential Government expenses were reduced, and efforts were made to streamline State-owned enterprises SOEs to enhance their efficiency and reduce financial losses. The public sector wage bill, which had been a significant contributor to budgetary strain, was reassessed, with proposals for restructuring certain Government departments to optimise resources and eliminate redundancies.
Despite these efforts, the fiscal consolidation process has faced significant challenges. The increase in taxation has been met with resistance from businesses and the general public, as higher tax burdens have affected disposable incomes and overall economic activity. Furthermore, the need to maintain social welfare programmes and subsidies has placed additional strain on public finances. Balancing fiscal discipline with economic growth remains a key test for the Government as it seeks to navigate the path toward sustainable financial management.
Debt restructuring initiatives
The issue of debt sustainability has been central to Sri Lanka’s economic recovery strategy. Following the 2022 debt default, the Government embarked on a comprehensive debt restructuring programme aimed at renegotiating terms with international creditors, including India, China, and private bondholders. The primary objective of these negotiations has been to secure more favourable repayment terms, including extended maturities and reduced interest rates, to alleviate the country’s debt burden.
In 2024, Sri Lanka made significant progress in securing agreements with major creditors, paving the way for improved fiscal flexibility. The Government also launched domestic debt restructuring initiatives, targeting Treasury bondholders and State-owned financial institutions. These efforts were necessary to restore investor confidence and regain access to global financial markets, a crucial step for long-term economic stability. However, concerns remain about the social and economic costs of restructuring, particularly regarding pension funds and domestic banks that hold a significant portion of the country’s debt.
While the Government’s approach to debt restructuring has been largely pragmatic, challenges persist. Sri Lanka’s reliance on external financing remains high, and any delays in restructuring negotiations could lead to renewed financial instability. Additionally, the need for continued economic reforms, including enhanced revenue collection and expenditure rationalisation, will be critical to ensuring that the benefits of debt relief translate into tangible improvements in economic performance and public welfare.
Energy sector reforms
Energy sector reform has been a key focus of the Government’s economic strategy, given the critical role that energy security plays in overall economic stability. The Sri Lanka Electricity Act, No. 36 of 2024, introduced significant changes to the country’s electricity industry, including measures to promote renewable energy sources and attract foreign investment. These reforms were aimed at reducing the financial burden on the State-owned Ceylon Electricity Board while enhancing energy efficiency and sustainability.
One of the most notable developments in the energy sector has been the Government's engagement with India's Adani Group to lower the cost of wind energy projects. Given Sri Lanka's heavy reliance on imported fossil fuels, the shift towards renewable energy is expected to improve energy security and reduce foreign exchange outflows. However, concerns remain regarding the transparency and long-term viability of such agreements, as well as their impact on domestic energy producers.
Despite these reforms, Sri Lanka continues to face challenges in ensuring stable and affordable energy supplies. Frequent power outages and high electricity tariffs remain issues that affect businesses and consumers alike. To fully realise the benefits of energy sector reforms, the Government must ensure that regulatory frameworks are robust, investments in infrastructure are sustained, and the transition to renewable energy is managed effectively.
Conclusion
The Government of Sri Lanka has undertaken a series of bold economic reforms to address the country’s financial challenges and fulfil its policy commitments. While progress has been made in stabilising the economy, restructuring debt, reforming the energy sector, and improving fiscal management, significant hurdles remain. The success of these policies will depend on their effective implementation and the Government’s ability to balance economic discipline with social welfare.
Going forward, continued engagement with international financial institutions, strategic economic planning, and a commitment to transparency and accountability will be essential. Sri Lanka’s economic recovery is at a critical juncture, and the choices made today will determine the nation’s long-term trajectory. To ensure sustained progress, it is crucial to adopt apolitical, evidence-based policies that prioritise economic stability over short-term political considerations. Bridging the gap between promises and tangible outcomes will require sustained effort, policy innovation, and a commitment to inclusive and sustainable economic growth. By fostering a policy environment that is resilient to political shifts and driven by long-term national interests, Sri Lanka can build a stronger, more stable economy capable of withstanding future challenges.
(Thilakarathna is an attorney and lecturer at the Colombo University. Erathna is an economist)
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The views and opinions expressed in this article are those of the authors, and do not necessarily reflect those of this publication