Sri Lanka has undertaken one of the largest fiscal adjustments in its history, amounting to nearly 8 percent of GDP over three years. According to a new World Bank review, this adjustment was sharper and faster than most similar efforts worldwide since 1980. While these measures helped restore economic stability, they also placed a burden on households through higher indirect taxes, reduced real public-sector wages, and slowed growth due to lower public investment. With stability largely achieved, Sri Lanka is now positioned to focus on making public finances more effective and inclusive.
The World Bank’s Sri Lanka Public Finance Review: Towards a Balanced Fiscal Adjustment stresses that the country should move toward raising revenues in ways that support both growth and fairness, while ensuring government spending delivers stronger results. The report notes that Sri Lanka has the potential to increase revenue by up to 2 percent of GDP by 2029 without undermining equity or economic growth. At the same time, better management and targeting of public spending can yield improved outcomes within existing budget limits.
The review emphasizes the importance of shifting toward direct taxes, such as a minimum corporate income tax, while modernizing and digitizing tax administration to enhance transparency and ease of compliance. On the spending side, it recommends smarter allocation rather than overall increases or cuts. This includes improving public sector wage management, reprioritizing capital investments to address infrastructure gaps, and enhancing social protection by focusing support on those most in need instead of universal subsidies.
World Bank officials highlight that Sri Lanka’s challenge now is to get better results from every rupee collected and spent. By modernizing tax systems, protecting essential services, and ensuring efficient and fair use of public funds, the country can strengthen its long-term fiscal resilience. Linking planning and budgeting more effectively, improving accountability, and focusing on measurable performance outcomes will be key to delivering better services, supporting inclusive growth, and safeguarding the most vulnerable in society.
