Sri Lanka has made remarkable progress in stabilizing its economy, achieving a fiscal adjustment amounting to nearly 8% of GDP over the past three years, according to the World Bank. Sri Lanka Latest News
In a newly released review of Sri Lanka’s public finances, the World Bank notes that this is one of the sharpest and most rapid adjustments compared to similar efforts undertaken by 123 countries since 1980.
The executive summary published by the World Bank highlights:
Sri Lanka’s fiscal adjustment since 2021—nearly 8% of GDP—has been exceptionally large by both historical and international standards.
This adjustment has played a crucial role in stabilizing the economy, reducing fiscal imbalances, and restoring macroeconomic stability.
With macroeconomic stability now largely restored, Sri Lanka can consider adopting a more balanced fiscal strategy.
However, the review also acknowledges the costs of such rapid reforms. The sharp adjustment has adversely affected households through higher indirect taxes and significantly lower real public sector wages, while also slowing economic growth due to reduced public investment.
Looking ahead, the World Bank suggests that Sri Lanka carefully recalibrate fiscal policy to balance the need for strong fiscal buffers with the goals of growth, equity, and sustainability.
The Public Fiscal Review (PFR) further emphasizes that Sri Lanka’s fiscal path can remain sustainable and equitable if:
An additional 1.5–2.0% of GDP revenue is raised by 2029 without undermining growth and equity.
Spending efficiency and equity are improved within the existing spending envelope, as further spending cuts or increases are not feasible.
The PFR concludes that with these measures, Sri Lanka can pursue a fiscal strategy that is not only stable but also growth-friendly and socially inclusive.
