Some key aspects of the 2025 Budget Speech

Inclusive growth is the overarching theme of the 2025 Budget Speech. To quote the President cum Finance Minister: “Growth for the sake of growth has little value to society unless it is a means to uplifting the lives of all members of society …. Mass struggles and last year’s election saw people asserting their political rights. What is necessary is for economic rights to be similarly asserted. This is the philosophy of this Budget.”

Budget in a Nutshell

The need to modernize the economy through adoption of digital technologies is emphasized. We are told that while the government will not tinker with ongoing IMF-supported policy reform agenda aimed at restoring macroeconomic stability and debt sustainability, it will strengthen social safety nets to protect the poorest and most vulnerable segments of society from the adverse economic impact of these reforms, namely a steep increase in the general price level in recent years. Concrete steps will be taken to increase tourism, exports of goods and services, and foreign direct investment inflows. Commercialization of agriculture will be promoted so as to improve food security. Education, health and infrastructure development will be given high priority in terms of resource allocation. The “Clean Sri Lanka Program” will tackle pressing cultural, environmental, and governance issues through the three main pillars of social development, environmental development, and ethical development. Measures will be introduced to revive the small and medium enterprise sector, which was crippled by the import ban of 2020 (the Covid-19 year). 2 industrial zones and 5 industrial parks will be set up in various parts of the island with a view to expanding the manufacturing base. Public sector salaries will be revised after a lapse of nearly ten years with payment of the minimum monthly basic salary increase of LKR 15,750 to be staggered over three years.

Fiscal Targets

The specific proposals, including the corresponding budgetary outlays, by and large are consistent with the overall thrust and tenor of the Speech. One wonders, however, whether the 2025 budget estimates are realistic. The primary balance target is 2.3% of GDP, as per the parameters outlined in the IMF loan agreement. Primary balance equals revenue plus grants minus non-interest spending. Sri Lanka did well to achieve a primary balance/GDP ratio of 2.2% in 2024. But to achieve the target of 2.3% in 2025, revenue plus grants must increase by around LKR 900 billion to offset a LKR 1 trillion increase in the expenditure estimate. Tax revenue increased by LKR 984 trillion in 2024. As to whether the revenue authorities can deliver a similar performance in 2025 remains to be seen.

Business Climate

What is not clear from the Budget Speech is the kind of business climate the current regime intends to create for stimulating rapid private sector development. This is of key importance, given that the private sector is the engine of growth. Since coming into power in late 2024, the government has been showing an inclination to control prices of various consumer goods. By distorting market forces, price controls invariably create acute shortages and black markets. It was the government’s misguided attempt to control the rice market that caused an acute shortage of rice in late 2024/early 2025. The result was widespread hunger and deprivation among the urban and rural poor.

Price controls and other protectionist measures such as permits, licenses, and high import tariffs do not produce inclusive growth. They have the opposite effect by depressing growth and widening income disparities. As the old saying goes, “The road to hell is paved with good intentions.”

By Seneka Abeyratne