Features
2025 Budget: Challenges, hopes and concerns
Credit Rating Improvement and What It Means
Fitch Ratings recently upgraded Sri Lanka’s credit rating, moving it from a risky “Restricted Default” (RD) to a “CCC+” rating. This shows that the country’s financial situation is improving, though it still faces a high risk of default. The government aims to increase its revenue, especially through trade taxes and income tax, but experts warn that the success of these plans is uncertain, particularly when it comes to lifting restrictions on imports.
Economic Democracy and Market Regulation
The government claims that this budget is based on the idea of “economic democracy,” aiming to balance market forces with government control. While it promises fairer distribution of wealth, critics argue that it still relies on market-driven policies that may not bring the desired changes. The budget seems to follow similar strategies to past administrations, despite the government’s claim of pursuing a new direction.
The current government, led by a Marxist-influenced party, has shifted its approach by aligning with global economic institutions like the International Monetary Fund (IMF). This represents a departure from its previous, more radical stance. The government’s vision focuses on rural development, support for small businesses, and an export-driven economy, continuing strategies from previous administrations rather than implementing drastic changes.
Stability and Continuity in Policy
One of the more positive aspects of the budget is its consistency with the fiscal policies of the past government. Sri Lanka’s economy has suffered from sudden policy changes in the past, often triggered by political transitions. By maintaining a steady course, the current government seeks to ensure stability in the recovery process, despite criticisms from political opponents.
Sri Lanka continues to face significant financial challenges, including a large budget deficit. The government’s spending in 2025 is expected to exceed its revenue by about LKR 2.2 trillion, leading to a deficit of around 6.7% of GDP. To cover this gap, the government plans to borrow both locally and internationally. However, debt repayment remains a major concern, with billions needed to settle existing obligations.
Tax Revenue and Public Spending Issues
Sri Lanka’s tax collection remains critically low, which worsens the country’s financial troubles. Tax evasion, exemptions, and inefficient administration make it hard to collect sufficient revenue. The government has raised VAT to 18% to boost income, but this could increase inflation, further harming families’ ability to afford basic goods. Additionally, corruption in public institutions continues to drain state resources, preventing effective use of funds for national development.
The Auditor General’s Department recently uncovered financial irregularities in several ministries, reinforcing concerns over systemic corruption.
Sectoral Allocations, Budget Inequities and Falures
Despite claims of prioritizing social welfare, the government’s budget allocation for key sectors remains insufficient. For example, while the government allocated LKR 500 million to improve 379 childcare centers nationwide, this amount pales in comparison to regional standards. In neighboring Bangladesh, the government spends around USD 60 per child annually, while Sri Lanka spends less than USD 25. It’s unclear whether this allocation represents an increase in funding or just a reshuffling of existing resources.
One of the biggest criticisms of the budget is its failure to address the high cost of essential goods, going against promises made during the election. Prices for basic items like rice and coconut are still high, due to supply chain issues, rising fuel costs, and tax policies. The absence of targeted subsidies or price controls has led to growing public dissatisfaction.
Public sector salary adjustments are also a point of contention. The government plans to introduce salary increases in three phases, with the full benefits expected by 2027. However, much of this increase was already granted in previous years through allowances, meaning the adjustment is more about restructuring existing funds than providing real pay increases. This slow approach raises concerns about whether employees’ purchasing power will improve, especially with inflation still a pressing issue.
The government has also urged the private sector to raise wages, but past experiences suggest that private companies often resist such requests. Without formal agreements or laws to enforce wage hikes, there is uncertainty over whether employees will see real wage growth that matches the rising cost of living.
Neglecting Vulnerable Workers and Obstinate Behaviour
Another group left out of the budget’s plans is casual and contract workers, who were expecting improvements in job security and wages, particularly those earning below LKR 1,800 per day. Despite promises made during the election, these workers have not seen any significant changes, which raises doubts about the government’s commitment to improving labor rights and income equality.
The government’s handling of private sector wage increases has also been criticized for a lack of transparency. In a televised discussion, A government representative became visibly agitated when questioned about the date of the agreement with employers, displaying obstinate behavior and refusing to answer the opposition MP’s inquiry.
Review of the Banking Sector’s Role in Govt. Revenue and Economic Growth
The banking sector helps generate national revenue through taxes such as corporate income tax, value-added tax (VAT), and financial transaction levies. However, the claim that it contributed 10% to government revenue in 2024 needs to be understood in context. Past figures have shown fluctuations in financial sector taxes, influenced by economic conditions and fiscal policies. The government’s growing reliance on the banking sector for tax revenue could signal financial stress, and this situation warrants further analysis to understand its long-term sustainability.
While the Sri Lanka Bankers Association (SLBA) emphasizes banks’ support for implementing the government’s budget proposals, their ability to do so effectively depends on broader economic conditions, regulations, and financial stability. Sri Lanka has faced persistent economic issues like high public debt and inflation, which could hamper the ability of banks to help implement fiscal policies effectively. The real impact of the banking sector in driving economic growth remains uncertain, especially given factors like currency instability and a lack of foreign investment.
Digitization and Financial Transparency
The proposal to introduce Point-of-Sale (POS) machines at VAT-registered businesses aligns with global trends in digital financial integration. This move is expected to improve transparency, reduce tax evasion, and increase banking efficiency. Research has shown that digital payments can boost financial inclusion and reduce informal economic activities. However, Sri Lanka faces challenges such as limited digital infrastructure, cybersecurity concerns, and resistance from businesses that still prefer cash transactions.
More digital services could strengthen anti-money laundering (AML) controls, improve transaction monitoring, and reduce cyber threats. However, shifting to a fully digital banking system requires substantial investments in technology, regulatory alignment, and digital literacy among consumers.
Support for SMEs and Development Banking Initiatives
The creation of a Credit Guarantee Institute for SMEs is a significant step. Research shows that credit guarantees can reduce lending risks and improve SME access to financing. However, past state-managed financial programs in Sri Lanka have been inefficient, often involving politicized lending practices.
For these new initiatives to succeed, they will need transparent governance, careful credit risk management, and strong regulations….
Conclusion
Sri Lanka’s banking sector is crucial for economic stability and revenue generation, but the increasing fiscal demands and the push for digital transformation present both significant opportunities and risks. Policymakers need to avoid over-taxation that could stifle credit expansion and investment while addressing digital finance challenges like cybersecurity and infrastructure gaps. The 2025 budget underscores the nation’s vulnerable fiscal situation, where efforts for economic stabilization are hampered by public debt, corruption, and welfare constraints. Achieving sustainability requires comprehensive tax reforms, better public expenditure management, and stronger anti-corruption measures. Without these reforms, Sri Lanka faces prolonged economic hardship, rising inequalities, and diminishing trust in governance. The budget also reflects a blend of ideological transformation and economic pragmatism, with policies largely aligning with past approaches. Fitch Ratings’ cautious optimism signals the potential for recovery, contingent on successful policy implementation. Ultimately, policy continuity is seen as Sri Lanka’s best bet for navigating fiscal uncertainty and achieving economic stability.
(The writer, a senior Chartered Accountant and professional banker, is Professor at SLIIT University, Malabe. He is also the author of the “Doing Social Research and Publishing Results”, a Springer publication (Singapore), and “Samaja Gaveshakaya (in Sinhala). The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of the institution he works for. He can be contacted at saliya.a@slit.lk and www.researcher.com)