Connect with us

Opinion

Fiscal discipline, institutional accountability, and contemporary governance challenges

Published

on

Central Bank of Sri Lanka / Ministry of Finance

Sri Lanka is currently facing a complex set of interrelated economic, social, and governance challenges that cannot be attributed to a single policy failure or institutional weakness. Rather, these challenges reflect deeper structural issues that have evolved over time and now manifest as systemic constraints on economic stability and effective governance.

The key issues at the centre the current debate include fiscal discipline, the role of the Central Bank and the Ministry of Finance, governance challenges, the experience of public administration, and the capacity for effective policy implementation.

This short paper aims to lay the foundation for this discussion by initiating a focused and structured dialogue on these critical issues.

Fiscal Discipline: Current Status and Core Challenges

Fiscal discipline refers to the government’s ability to maintain a balance between its revenue and expenditure. It is a fundamental requirement for macroeconomic stability. However, an assessment of Sri Lanka’s current situation indicates that this balance remains significantly weakened.

Over the past three decades, government revenue as a share of GDP has steadily declined. From approximately 18–20 percent in the 1990s, it fell to nearly 9 percent in the early 2020s. While recent tax reforms have contributed to a gradual recovery, government expenditure has remained persistently high at around 20–25 percent of GDP. This imbalance has resulted in sustained budget deficits and a significant accumulation of public debt.

Within this context, constrained revenue growth and structural weaknesses in expenditure management have emerged as key factors shaping the country’s long-term fiscal outlook.

In 2024, tax revenue increased to 12.4 percent of GDP, up from 9.9 percent in 2023, and is projected to reach 14.8 percent in 2025. While this reflects a positive trend, it remains insufficient to ensure fiscal sustainability.

Expanding the tax base, strengthening tax compliance, and rationalising tax exemptions remain critical priorities. However, these efforts are constrained by structural factors, including the large size of the informal economy, weak income reporting mechanisms, and low levels of formalsation among small and medium-sized enterprises.

In addition, the heavy reliance on indirect taxation represents a structural imbalance. Currently, around 70–75 percent of total tax revenue is derived from indirect taxes, while direct taxes account for only about 25–30 percent. Among these, Value Added Tax (VAT) contributes a disproportionately large share, whereas income and corporate taxes remain relatively limited. Such a structure has implications not only for revenue stability but also for income distribution.

Tax administration continues to face operational challenges, including limited administrative capacity, technological constraints, weak enforcement, and persistent issues of tax evasion and avoidance.

Therefore, despite recent improvements in revenue performance, deeper structural reforms in the tax system are essential—particularly increasing the share of direct taxation and broadening the overall tax base.

The expenditure side presents equally significant challenges. According to the 2025 budget, government expenditure is estimated at around 21.8 percent of GDP, while revenue stands at approximately 15.1 percent. This reflects a substantial and persistent fiscal gap, the closure of which requires difficult and often politically sensitive policy choices, including borrowing, revenue enhancement, or expenditure rationalisation.

A particularly pressing concern is debt servicing. According to the World Bank, nearly half of government revenue between 2024 and 2027 may be absorbed by interest payments. This represents a significant fiscal risk. If a large share of public revenue is allocated to debt servicing, the fiscal space available for education, healthcare, social protection, and productive investment becomes severely constrained.

Public debt management therefore remains highly vulnerable. Although debt restructuring efforts have been undertaken, their long-term success depends critically on sustained fiscal discipline. Without this, debt sustainability risks re-emerging as a major macroeconomic concern.

The financial performance of state-owned enterprises further compounds these challenges. In 2024, 52 major state institutions reported combined losses exceeding LKR 150 billion. Key entities such as the Ceylon Electricity Board, Ceylon Petroleum Corporation, SriLankan Airlines, and the Sri Lanka Transport Board continue to exert pressure on public finances. Notably, in the first half of 2025 alone, the Ceylon Electricity Board recorded a loss of LKR 13.2 billion.

Taken together, the challenge of fiscal discipline is not isolated. It reflects a broader structural imbalance arising from weak revenue performance, ineffective expenditure control, high debt burdens, rising debt servicing obligations, and persistent losses in state-owned enterprises.

Accordingly, addressing these challenges requires more than incremental adjustments. It calls for a comprehensive and sustained restructuring of public financial management to restore long-term fiscal stability.

The Central Bank and the Ministry of Finance: Roles and Performance

Against this fiscal backdrop, the role and effectiveness of key economic institutions become critically important. The Central Bank and the Ministry of Finance are the two principal institutions responsible for macroeconomic management in Sri Lanka. The Central Bank is tasked with maintaining price stability and financial system stability through monetary policy, while the Ministry of Finance is responsible for the design and implementation of fiscal policy.

In recent years, the Central Bank has adopted a tight monetary policy stance to contain inflation. This represents a necessary and positive adjustment. However, a key concern lies in the clarity, consistency, and credibility of policy communication. When markets, investors, and the public do not receive clear and predictable signals regarding the future direction of policy, an uncertain environment emerges. Under such conditions, investment decisions are often delayed, market volatility increases, and overall economic confidence weakens.

With regard to the Ministry of Finance, the central issue is the gap between policy intent and effective implementation. While targets have been set to increase tax revenue, progress in broadening the tax base and strengthening compliance remains limited. This reflects not only technical challenges but also deeper institutional constraints.

Another critical area is the reform of state-owned enterprises. Although policy intentions and reform frameworks have been articulated, implementation has been slow and uneven. This delay imposes an additional burden on fiscal discipline, as continued losses in these institutions ultimately translate into increased public expenditure and fiscal pressure.

At the same time, the International Monetary Fund has emphasised, particularly in the context of the 2026 budget, the need for stronger revenue mobilization, disciplined expenditure management, improved tax compliance, and enhanced public financial management. These recommendations reinforce the urgency of institutional strengthening.

It would be overly simplistic to conclude that these institutions have entirely failed in their mandates. However, it is evident that they have not yet achieved the expected levels of efficiency, coordination, and transparency required under current economic conditions.

A key structural weakness lies in the limited coordination between monetary and fiscal policy. When these two policy domains are not aligned, their outcomes can be mutually undermining. For example, while the Central Bank may pursue tight monetary policy to control inflation, expansionary fiscal policies or excessive government spending can offset these efforts.

Going forward, strengthening institutional effectiveness requires more than clarifying mandates. It demands improved policy coordination, stronger implementation capacity, and more transparent and credible communication. These elements are essential to restoring confidence among markets, investors, and the public.

Governance Challenges and the Experience Gap: Reality and Limits

Beyond institutional performance, governance capacity itself remains a central concern. One of the most prominent criticisms directed at the current administration is the perceived lack of experience in public governance. This concern cannot be entirely dismissed. A governing team with limited experience may face significant challenges in managing the complexity of the state apparatus, fiscal risks, international commitments, and institutional processes.

However, it is insufficient to interpret this issue solely as an individual limitation. It must also be understood as a systemic challenge. In the presence of a strong advisory framework, data-driven decision-making processes, and effective coordination within a professional public service, the impact of limited experience can be mitigated to a considerable extent.

Conversely, when such institutional mechanisms are weak, the absence of experience can have more pronounced consequences. These may include delays in decision-making, misalignment of policy priorities, and increased policy instability. In such an environment, governance becomes more uncertain, and institutional trust tends to erode.

Therefore, the issue cannot be adequately captured by simply referring to a “lack of experience.” The more fundamental challenge lies in the interaction between limited experience, institutional weaknesses, and deficiencies in decision-making frameworks.

This perspective is reinforced by an observation shared in response to this discussion:

“The appointment of underqualified individuals and political appointees to senior positions in the Treasury and the Ministry of Finance can significantly contribute to such challenges. In the past, many of these roles were held by experienced senior public servants and capable economists, who possessed a deep understanding of public financial policy and governance.

It is not sufficient to characterise such issues merely as a ‘cyber incident.’ They should also be understood as manifestations of deeper systemic gaps. Accordingly, the government must identify and decisively address these gaps. However, there is limited evidence of such preparedness at present.”

This view underscores the need to assess governance challenges not only at the level of individuals, but also at the institutional and systemic levels.

Accordingly, a sustainable long-term response requires strengthening professionalism within the public sector, ensuring greater transparency and meritocracy in appointments, and institutionalizing more structured and evidence-based decision-making processes.

Priority Reforms for Immediate Action

Addressing the challenges outlined above requires a set of coordinated and decisive reforms. These actions are not optional; they are essential to restoring fiscal stability and rebuilding public confidence.

First, public expenditure must be realigned based on clear strategic priorities. Resources should be redirected away from politically popular but low-impact spending toward areas that support economic growth, strengthen human capital, and enhance social protection.

Second, the tax system must be simplified, made more equitable, and significantly broadened. Rather than increasing the burden on a narrow base of existing taxpayers, policy efforts should focus on expanding the tax base, strengthening compliance, and improving the efficiency of tax administration.

Third, reforms of state-owned enterprises must be accelerated without delay. The continued reliance on public funds to sustain loss-making institutions is fiscally unsustainable. Comprehensive restructuring is required, including improvements in governance, pricing mechanisms, operational efficiency, and accountability frameworks.

Fourth, transparency must be strengthened as a core principle of public financial management. Timely and credible disclosure of fiscal data—including debt positions, the financial performance of state-owned enterprises, and progress on reform implementation—is essential to building trust and ensuring accountability.

Finally, accountability mechanisms must be reinforced. Clear responsibility must be assigned for policy decisions, and outcomes must be systematically monitored and evaluated. Sustainable improvements in governance depend on the consistent application of accountability.

In conclusion, Sri Lanka’s current economic and governance challenges cannot be attributed to a single cause. They reflect a broader systemic imbalance arising from weak fiscal discipline, institutional limitations, communication gaps, shortcomings in policy implementation, and constraints in governance capacity.

An economy is not merely a collection of numbers; it is fundamentally a system built on trust. Rebuilding that trust is not optional—it is essential. It requires immediate and credible action to strengthen fiscal discipline, institutional accountability, transparency, and policy consistency.

This remains the defining challenge facing the current administration.

by Prof. Ranjith Bandara



Continue Reading
Advertisement
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Opinion

A tariff deal with the US? Make haste slowly

Published

on

by Gomi Senadhira

Sri Lanka’s former ambassador to the United States Mahinda Samarasinghe is back in Sri Lanka lobbying for speedier finalisation of a new tariff deal with the United States. According to news reports, delivering the keynote address at the Sri Lanka Institute of Directors’ Annual Meeting last week, he stated, “I have recommended very strongly to the government that we need to conclude the agreement so that we can lock in the very favourable tariff rate that Sri Lanka has got up to now“.

I do not understand why the former ambassador is urging the government to expedite the finalisation of a new tariff deal or what is “the very favourable tariff rate” he refers to in his speech. However, given the ongoing terrible tariff turbulence in the United States and the fragile economic situation in Sri Lanka, I believe, this is not the right time to rush into finalising any trade agreement with the United States. I am also of the opinion that at this juncture Sri Lanka should maintain strategic patience and explore all available options.

Lessons from the countries that rushed for trade deals

To better comprehend this, let’s look at experiences of the countries that rushed to conclude tariff deals with the United States after President Donald Trump declared his “reciprocal tariffs” under the International Emergency Economic Powers Act (IEEPA) in April 2025. As Samarasinghe stated in his keynote, “The bottom line on all these negotiations was that every country that finally agreed to sign the agreement had to give either complete duty-free access for American exports into those markets, or near complete duty-free access.” In exchange for these tariff concessions and other market access commitments these countries managed to get the newly introduced country specific “reciprocal tariffs” reduced.

However, in February 2026, the Supreme Court of the United States (SCOTUS) struck down these “reciprocal tariffs” under the IEEPA. With that, the market access gains these countries received in exchange for complete duty-free access for American exports into their markets evaporated under U.S. domestic law. By moving too fast to conclude bilateral tariff agreements with the United States these countries are now bound to strict obligations whereas the benefits they bargained from the U.S. administration are not worth the paper those were written on.

Sri Lanka’s experience

In April 2025, President Trump declared his “reciprocal tariffs” and labelled Sri Lanka as the worst offender, imposing one of the highest additional duties at 44%. Since then, Ambassador Samarasinghe and other negotiators have managed to negotiate this down to 20%. I do not know what the deal was through which Sri Lanka managed to reduce the 44% tariff to 20% or what we gave in return for this “concession.” However, what we received in return has absolutely no value after the decision by the SCOTUS.

Current state of US tariffs

After the decision by SCOTUS, the U.S. administration introduced a temporary 10% additional tariff on all countries for 150 days. At the end of that period, this 10% tariff was replaced by a new “forced labor tariff ” of 10% to 12.5% on all trading partners under Section 301 of U.S. trade law. Twenty-five U.S. states and several small businesses have already filed lawsuits against these tariffs in U.S. courts. This new “forced labour tariff ” on Sri Lanka was first fixed at 12.5%. Later, after President Anura Kumara Dissanayake issued a gazette notice prohibiting the importation of goods produced using forced labour, it was reduced to 10%. That means Sri Lanka has already made a substantial commitment to receive this “tariff concession,” and I presume our negotiators understand the implications of this commitment.

Make haste slowly

After President Trump imposed 44% “reciprocal tariffs” on Sri Lanka, through an article published in The Island on 25th April 2026 (), I urged the government to engage immediately with the US administration on these tariffs. However, I also emphasised that the best way to move forward was to make haste slowly.

Two millennia ago, Augustus Caesar, the first emperor of Rome, frequently used the phrase, “make haste slowly”, because he detested rashness and haste in his military commanders. It was the recurring guiding maxim that he emphasised throughout his 40-year imperial rule. After 2000 years, this classical oxymoron remains a definitive golden rule for professional trade negotiators. More importantly it is the exact blueprint required when navigating turbulence in trade negotiations with the Trump administration.

The endgame – The most dangerous moment in trade negotiation

Samarasinghe has also stated the agreement is 90% complete. Any experienced trade negotiator should know that the final 10% contains high-stakes provisions and is the most dangerous moment in a trade negotiation. A single misplaced comma or ambiguous product description in a tariff schedule can cost millions through unintended loopholes. Rushing this last stretch to secure a deal can permanently expose Sri Lanka to sudden shifts in American trade policy, heavy compliance costs, or strict enforcement under Section 301 regarding supply-chain labour standards. Hence, this is the time for strategic patience.

(The writer can be reached at senadhiragomi@gmail.com)

Continue Reading

Opinion

Buddhist law and constitutional amendments

Published

on

Upon reading the article titled “Prof. Pieris says Buddha Dhamma recognized as source of law under Constitution” (Island, September 12, 2026), the classical Sinhala idiom “Yanne Koheda? Malle Pol” immediately comes to mind. The expression, translating literally to answering “I have coconuts in my bag” when asked “Where are you going?”, underscores a complete disconnect in logic. Because it is uncertain whether the article accurately represents the professor’s precise words, the following critique addresses the contents of the report rather than the speaker himself.

The central premise of the report concerns a statement delivered by the Chief Justice regarding a petition filed against the 22nd Amendment to the Constitution. According to the report, the Chief Justice’s observation that the determination would be made strictly on the basis of established law rather than Buddhist teachings was characterised as a “cavalier dismissal” of the Buddha Dhamma. This assertion carries a host of unexamined assumptions. Had the writer specified precisely which tenets of the Buddha Dhamma were violated, a direct legal or philosophical evaluation could take place. However, no specific Buddhist tenet or law was identified as having been transgressed, and for good reason: no such statutory legal framework exists within the Buddha’s teachings.

To understand the flaw in this argument, one must examine the constitutional context alongside the canonical meaning of the terms involved. Article 9 of the 1978 Constitution of Sri Lanka mandates that the Republic shall give Buddhism the foremost place and that it shall be the duty of the State to protect and foster the Buddha Sasana, while guaranteeing the fundamental rights of all religions under Articles 10 and 14(1)(e).

While “Buddhism” and “Buddha Dhamma” are frequently used as interchangeable terms in casual dialogue, they represent distinct concepts. “Buddhism” is an umbrella term coined by 19th-century Western scholars to classify the global institutionalised religion, incorporating its diverse sects, cultural traditions, rituals, and socio-political histories. Conversely, Sasana is the ancient term designating the structural framework established by the Buddha to preserve and transmit his teachings, comprising the monastic order (Sangha) and its supporting institutions.

In classical Theravada commentarial literature, the Sasana operates as a functional three-tiered structure. It encompasses Pariyatti Sasana, the preservation and study of sacred texts; Paṭipatti Sasana, the practical execution of the doctrine through ethical conduct and meditation; and Paṭivedha Sasana, the direct experiential realization of ultimate truth, or enlightenment. This structural breakdown raises fundamental questions about state capacity. While a state can readily support Pariyatti Sasana through academic institutions, textual preservation, and educational funding, it cannot legislate or enforce Paṭipatti or Paṭivedha. Practical engagement and spiritual realisation are inherently internal, first-person experiences. Expecting the state to codify or guarantee enlightenment is a conceptual impossibility.

Furthermore, the Buddha Dhamma refers specifically to the unconditioned truths of existence and the teachings imparted to realize them, including the Four Noble Truths, the Eightfold Path, and Dependent Origination. As the late Venerable Professor Kotagama Wachissara Thera observed, there is no rigid ideologue or “ism” in the core Dhamma. The teachings do not constitute a system of divine commandments or a legal statute enforced through reward and punishment. Rather, Buddhist ethics function as self-directed guidelines for psychological clarity and moral inquiry. Even the Vinaya Pitaka, which contains explicit rules of conduct, functions as an internal monastic code rather than a civil or criminal law intended for the laity.

Throughout the Pali Canon, guidance regarding governance focuses on the moral character of leadership and the social duties of statecraft rather than rigid legal codification. In discourses such as the Cakkavatti Sihanada Sutta (DN 26), the Buddha observes that social instability and crime cannot be eliminated solely through punitive measures, emphasising instead that states must provide economic opportunities, fair wages, and resource distribution to maintain societal balance. Crucially, in the Maha Parinibbana Sutta (DN 16), the Buddha explicitly highlights the importance of respecting established laws and traditions rather than enacting arbitrary regulations.

The natural laws articulated in the Dhamma, such as the law of cause and effect or the three characteristics of existence, govern all phenomena universally, regardless of legal statutes or personal belief. They are not human laws to be applied or suspended by a court of law. Therefore, characterizing the Chief Justice’s adherence to constitutional jurisprudence over religious doctrine as a “cavalier dismissal” lacks logical and textual foundation. Framing the judiciary’s adherence to legal precedent as an attack on the Dhamma distracts from fundamental constitutional principles and risks misguiding the public for political ends.

Geewananda
Gunawardana,
Ph.D.

Continue Reading

Opinion

Elementary, Dr. Watson!

Published

on

by Usvatte

My friend, Sena Thoradeniya, has summoned up energy to raise two questions about my observations in your newspaper on 14 September, 2026. They both referred to comments I made about President Dissanayake and Prime Minister Amarasuriya.

I observed that President Dissanayake, having graduated in physics at Kelaniya, would be familiar with elementary calculus: differentiation and integration. It is a misapprehension to believe that one needs any knowledge of theoretical physics to be familiar with elementary calculus. Nor is it necessary that one needs to have published research for the same purpose. Those were the first lessons in calculus that our Mathematics Master and Principal, Mr. D. A. Devendra taught five of us in the first term 1952 at Hikkaduva Central School. Of the five, two still live and recall those lessons vividly. Dissanayake would surely have learnt them at his school in Anuradhapura. At Kelaniya his teachers probably included Dr. H. Somadasa, two years my junior at Hikkaduva, with a Ph.D. in number theory at Aberytswyth, Wales and Professor (physics) Charles Dahanayke, a renowned teacher of physics and my neighbour in Colombo. Dissanayake is unlikely to have been admitted to Physics at Kelaniya unless he had scored well in mathematics and physics with other subjects. Those elements of calculus have been learnt by millions of young men (and later women) since Isaac Newton and Gottfried Leibnitz. That Dissanayake from a school in Anuradhapura scored high enough to gain admission to Kelaniya to study physics is commendation enough for his intellectual capacity.

All of us know, some personally, the barriers to learning in places like Anuradhapura and Kuliyapitiya, compared to the facilities in Colombo, Galle. Jaffna and Kandy. I used that information to press the point that he was, in learning, entirely different from his predecessors and present competitors. One does not need to research in theoretical physics to know something as simple as the first lesson in calculus. Dirac made his momentous discovery sometime in the 1930s and by 1950 it must have been solidly in the teaching material in schools and universities. Dissanayake graduated in 1995 and, at least, must have heard of Dirac and the ‘God Particle’.

Paul Dirac was a legendary figure among graduate students when I was at Cambridge. He had written the shortest Fellowship and Ph.D. theses. He had had an interesting relationship with his father who was a French speaking Swiss and had insisted that he speaks French at table. Amrtya Sen, who was in 1965 a young Fellow of Trinity College and a teacher in the Economics and Politics Faculty at that time, had also written very short theses and not several volumes as many do.

I read about Higgs Boson in a wonderful book Inward Bound written by physicist Abraham Pais and, in The Science Times (Tuesdays) edited by Gina Kolata of the New York Times, and occasionally in Nature and other popular writings.

I was on the editorial board of Samskrti for some time. Amaradasa Virasinghe and Gananath Obeysekera had started that literary review in 1953 when I was in school and many of us read it avidly. Together with Susil Sirivardana, we decided to expand the scope of the journal to include social studies and science, which effort Sena knew well. The probable readership had increased manifold. In order to help prospective writers to pick up themes to write on, we held a popular lecture, one Saturday a month. I invited Dr. Harini Amarasuriya, then teaching at the Open University, Nawala, to speak to us on the scope and nature of sociology. She made a short fine introduction. That is where I learnt of August Compte. She was invited to a Seminar in Britain on the sociology of education, where I had strayed into from 1971. I did not read her paper, although she had promised to let me have it. I had good reason to respect her scholarship. It would be shocking had she not read Le`vy-Strauss. Many besides anthropologists read Le`vy-Strauss.

Sena stressed the obvious when he said that in public speeches made by these two politicians, there was no evidence of their expertise in physics and sociology. It would have been completely out of place to speak about elementary particles to a crowd in Beruvala or Anuradhapura. But one’s education, in subtle ways, informs the material and the ways that the material is presented in public speeches. Simply listen to Members of Parliament speak and you can guess roughly the level of education each had achieved: grade 2 in primary school or Quondam Professor of Law at Oxford.

I am sorry that Sena identified ‘an exaggerated parade of claims and sheer implausible boasts’ in what I wrote. It is entirely plausible, indeed certain, that an undergraduate in the Department of Physics in any university would be familiar with differentiation and integration.

An unprejudiced reading of my text will demonstrate that it contained no such claims and boasts. Mine was a pretty simple statement of the nature of differences between the present lot in government and the lots that were in power earlier. I related those differences to help understand the line up for and against the 22nd Amendment to the Constitution. and not to build false images of any politician, man or woman. I am too old to set out, even in the formidable company of Sena, on the ‘long march’ to Mao.

Continue Reading

Trending