Sri Lanka continues to grapple with a persistent budget deficit, an issue that has long plagued successive governments due to inadequate financial management.
The country now appears set to fall short of its 2024 budget revenue targets, further emphasizing its heavy reliance on borrowing to bridge fiscal gaps. Recent assessments from the Ministry of Finance, coupled with projections from the International Monetary Fund (IMF), present a concerning outlook for the nation’s fiscal health.
The 2024 Budget outlined an ambitious goal of boosting revenue by 42% compared to the previous year.
Despite some revenue growth, the IMF predicts a 14% shortfall in the projected figures. Government reports indicate a substantial rise in expenditure, with a significant portion—66%—allocated to interest payments on the country’s debt.
In response to these financial challenges, the government enacted the Public Financial Management Act, No. 44 of 2024, and the Parliamentary Budget Office Act, No. 6 of 2023. These laws aim to improve the management of public finances, yet the estimated budget deficit for 2024 remains at 7.6%, while the tax-to-GDP ratio is expected to hover around 12.1%.
One of the major concerns for the government is the shortfall in tax revenue, particularly from the Inland Revenue Department (IRD).
Sri Lanka Customs, the Excise Department, and the IRD were tasked with collectively generating Rs. 4,127 billion in 2024, with the IRD alone expected to contribute Rs. 2,024 billion. However, by the end of the first nine months (January to September), the department had collected only Rs. 1,498 billion, falling short by Rs. 75 billion.
This raises concerns about whether the IRD will be able to meet its target by the end of the year. Sources within the Ministry of Finance have expressed doubts, suggesting that the Rs. 2,024 billion goal may be out of reach, despite efforts to encourage taxpayers to meet their obligations.
This shortfall in tax collection has broader implications for Sri Lanka’s fiscal trajectory. The government had committed to achieving a revenue target of 13.2% of GDP as part of its agreement with the IMF. However, internal projections suggest the revenue-to-GDP ratio could dip below 12%, which may prompt future tax increases and further reliance on treasury bills to cover the deficit.
Sri Lanka is also facing a widening external resource gap, which is expected to reach US$5.018 billion by 2025. To mitigate this, the IMF has agreed to provide $663 million through its extended credit facility, along with an additional $700 million, according to data from the Ministry of Finance.
