It is fair to say that Sri Lanka has defied economic expectations in the 2020s. Following its historic pre-emptive sovereign default in April 2022, Sri Lanka experienced its worst economic crisis since independence.[1] Then the country fell into a vicious cycle of a deep contraction, spiralling inflation, rising income poverty, and public protests over shortages and rising prices. But, compared with many in the developing world, the country’s debt-induced contraction and inflation spiral was remarkably short-lived.[2] Fast forwarding to November 2025, the economy grew by 4.8% in the first half of 2025, and inflation was down to about 2% even as poverty remains stubbornly high. The improvement is due to a combination of Indian emergency aid, a tough 17th $2.9 billion IMF programme, and decisive policies by the government of Sri Lanka, including the Central Bank of Sri Lanka.
A new administration led by President Anura Kumara Dissanayake since late 2024 deserves credit for adopting a pragmatic approach and continuing with the IMF programme. This is a major departure for his left-wing political alliance, the National Peoples Power (NPP), which campaigned to renegotiate terms under the IMF programme to include more welfare measures. With Sri Lanka mid-way through its current IMF programme, the pressing public policy question is this: will this time be different, and might Sri Lanka avoid having to seek an 18th IMF loan in the future by transforming its economy?
The 2026 national budget presented by Dissanayake, who also holds the portfolio of Finance Minister, to Parliament on November 7, offers some clues. This year, the chosen budget theme is “Steady and Strong: Committing to Fiscal Discipline for a Resilient Economy.”[3] The budget broadly aligns with the IMF programme’s[4] path of revenue-based fiscal consolidation by aiming for a primary surplus of 2.5% of GDP, a total government revenue goal of 15.4% of GDP, and a deficit of 5.1% of GDP for 2026. However, the growth target of about 7% in 2026 in the budget seems a tad ambitious considering the lower IMF growth projection of 3.1%, the country’s historic growth rates, and global economic shocks. At the same time, because of the government’s success in raising the tax-to-GDP ratio to an estimated 13.5% in 2024[5] from 8.2% in 2022 through widening the tax base and revenue administration reforms, the budget has also provided some relief to the NPP’s political base. Noteworthy measures include allocations to build new houses for low-income families, investment in irrigation infrastructure vital for agricultural development, raising salaries for public servants, creating 75,000 new public sector jobs, and importing double cabs. What are these? Vehicles for MPs.
The budget also announced three important measures to support growth and a resilient economy. These were exactly the priorities identified in the independent growth study conducted in 2025 under the auspices of ODI Global and the Centre for Poverty Analysis, Sri Lanka.[6] First, there is the appointment of an expert committee to examine existing Free Trade Agreements (FTAs) and investigate new ones. This is a welcome, overdue move in a small economy like Sri Lanka. Improved market access, better trade facilitation, and simpler investment rules in FTAs can make the country more attractive to export-oriented foreign direct investment (FDI) and unleash the powerful forces of technology transfer and trade-led growth.
In this vein, Sri Lanka needs to urgently operationalise its concluded FTAs[7] with Singapore and Thailand, close long-standing negotiations for a comprehensive trade deal with India, and resume stalled negotiations with China. It also needs to build trade negotiations capacity for trade agreements that promote integration into global supply chains and digital trade, which have driven the spectacular success of East Asia and India.
Second, measures to strengthen the digitalisation and modernisation of public administration. About $98 million was allocated to the Sri Lanka Unique Digital Identity project, the e-Grama Niladhari platform, and the Digital Economy Advancement Programme. These will support the creation of a centralised and secure digital framework to facilitate efficient communication and service coordination across government agencies. There are plans to expand electronic procurement and payment systems to improve fiscal management as well as tax revenue administration by upgrading the Revenue Administration Management Information System (RAMIS). Digitisation is key to improving the efficiency, transparency, and accessibility of public services, leading to a more inclusive and productive society. This transformation will optimise government operations, reduce costs, and stimulate economic growth by providing better services and more opportunities for citizens, particularly for SMEs. Digitisation will also align Sri Lanka’s economy with its larger neighbour. The success of India’s model is there to see.
Third, amendments to the Colombo Port City law. The Colombo Port City[8] is a 269-hectare land reclamation project designed to expand the Colombo commercial centre. It was financed by an initial Chinese investment of $1.4 billion with the ambition of becoming an international financial, business, and leisure hub with a special economic zone framework. However, there was a risk of it becoming a white elephant, with little actual inward FDI due to regulatory uncertainty and fragmented authority across state agencies.[9] Successive governments delayed putting into place a conducive, legal, and regulatory framework. In this vein, the budget mentioned amending the Strategic Development Projects Act and the Colombo Port City Economic Commission Act to boost Foreign Direct Investment (FDI). Such a measure will support Sri Lanka’s productive economy and align its direction with its trade, FDI, and SME policies.
In the final analysis, this is a budget that stays the course for Sri Lanka’s upward growth trajectory and may do additional good in terms of supporting growth through FTAs, digitisation, and attracting FDI into the Colombo Port City. This budget continues IMF-style economic stabilisation from the crippling economic crisis and puts some markers for reforms. These are all very important achievements, certainly in the light of how quickly Sri Lanka is emerging from the crisis.
However, a cautious policy approach alone may not be fit for purpose. Significant debt repayments (capital) are due in 2028, and there are concerns as to whether the build-up of foreign reserves will be sufficient. The world economy is in an unpredictable phase beset by messy geopolitics, trade policy uncertainty, and volatile capital flows. A bolder set of ‘big bang’ reforms and growth policies,[10] e.g., around deeper trade reforms, financial innovation, and sectoral productive economy. is needed to put Sri Lanka on a truly transformative path to 2030 and avoid further IMF programmes.
This article was first published in the Daily Financial Times
Ganeshan Wignaraja is the Professorial Fellow for Economics & Trade at Gateway House and a Visiting Fellow at ODI Global, London.
Dirk Willem te Velde is a Principal Research Fellow and Director of the International Economic Development Group at ODI Global.
References:
[1] SarkarN, and SarkarN. “What Can We Learn From Sri Lanka’s Debt Default? – South Asia@LSE.” South Asia@LSE – (blog), October 16, 2023. https://blogs.lse.ac.uk/southasia/2023/10/16/what-can-we-learn-from-sri-lankas-debt-default/.
[2] Abayasekara, Ashanthi, Sirimal Abeyratne, Derrick Abudu, Chandranath Amarasekara, Ravinatha Aryasinha, Yohannes Ayele, Yunnan Chen, and Indrajit Coomaraswamy. Sri Lanka: From Debt Default to Transformative Growth. Edited by Ganeshan Wignaraja and Dirk Willem Te Velde. Second Edition, 2025.
[3] “Ministry of Finance – Sri Lanka,” n.d. https://www.treasury.gov.lk/web/budget-speeches/section/2026.
[4] International Monetary Fund, “IMF Executive Board Approves under the New EFF Arrangement for Sri Lanka,” Press Release PR23/79, March 20, 2023, https://www.imf.org/en/news/articles/2023/03/20/pr2379-imf-executive-board-approves-under-the-new-eff-arrangement-for-sri-lanka.
[5] International Monetary Fund, “Press Briefing Transcript on the IMF Board Completion of Sri Lanka’s 4th Review for the EFF,” July 3, 2025, https://www.imf.org/en/news/articles/2025/07/03/070325-press-briefing-transcript-on-the-imf-board-completion-of-sri-lankas-4th-review-for-the-eff.
[6] ODI Global and Centre for Poverty Analysis (CEPA), Sustaining transformative growth in Sri Lanka 2025–2030 (Report of an Independent Growth Study Group, London: ODI Global, 2025), https://odi.org/en/publications/sustaining-transformative-growth-in-sri-lanka-odi-cepa-growth-study-report/
[7] Ganeshan Wignaraja and Dirk Willem te Velde, eds., Sri Lanka: From Debt Default to Transformative Growth, Second Edition (London: ODI Global, 2025), https://odi.org/en/publications/sri-lanka-from-debt-default-to-transformative-growth-second-edition/.
[8] Lakshman Kadirgamar Institute of International Relations and Strategic Studies, Port City SEZ – A Catalyst for Modern Services in Sri Lanka (Colombo: Lakshman Kadirgamar Institute of International Relations and Strategic Studies, 2020), https://lki.lk/wp-content/uploads/2020/06/2020R-Port-City-SEZ-22.05.20.pdf.
[9] U.S. Department of State, “Sri Lanka,” in 2025 Investment Climate Statements (Washington, D.C.: U.S. Department of State, 2025), https://www.state.gov/reports/2025-investment-climate-statements/sri-lanka.
[10] Ganeshan Wignaraja and Dirk Willem te Velde, eds., Sri Lanka: From Debt Default to Transformative Growth, Second Edition (London: ODI Global, 2025), https://odi.org/en/publications/sri-lanka-from-debt-default-to-transformative-growth-second-edition/.