Sri Lanka extends its strongest IMF-backed fiscal recovery in decades with a current account surplus in 2025, driven by rising tax revenues and tighter spending, yet deep structural weaknesses and debt pressures continue to challenge long-term stability.
Sri Lanka has recorded a current account surplus in its budget in 2025, continuing a run of fiscal improvements that began in 2023 under an IMF-supported reform program, according to central bank data. While widely portrayed as a historic turnaround, the country has in fact recorded primary surpluses in earlier years including 1992, 1993 and 2017. What makes the current phase significant is not that it is the first in decades, but that it represents the most sustained and structurally driven surplus period since 1987 under close IMF supervision and policy discipline.
The central bank maintained a firm stance on limiting expenditure by keeping inflation relatively low, although the inflation target was missed and the currency showed some depreciation toward the latter part of the year. This reflects a broader attempt to stabilize the economy while balancing competing pressures from growth, inflation and exchange rate movements within the IMF reform framework.
Tax revenues surged by 36 percent to 5,049 billion rupees in 2025, supported in part by the resumption of taxes on vehicle imports. These imports had previously been restricted due to foreign exchange shortages that emerged following inflationary rate cuts in 2020. The recovery in revenue highlights the importance of IMF-driven tax reforms, improved administration and policy consistency in strengthening fiscal outcomes.
The blocking of highly taxed imports, particularly vehicles, has historically reduced government revenue and weakened fiscal performance, especially when foreign exchange shortages are triggered by loose monetary policy decisions. The reopening of these revenue channels in 2025 played a key role in strengthening government finances under the ongoing IMF program.
In 2025, current government spending declined by 2 percent to 5,232 billion rupees, reflecting tighter fiscal discipline. As a result of rising revenues and reduced current expenditure, Sri Lanka recorded a current account surplus in the budget of 217 billion rupees.
Although Sri Lanka last reported a similar current account surplus in 1987, primary surpluses have occurred intermittently since then. Historical data shows that such surpluses were recorded in 1954, 1955, 1992, 1993, 2017 and again from 2023 onwards. These instances have been rare and often short-lived, underscoring the structural nature of the country’s fiscal imbalance.
The early surpluses in the 1950s were achieved under conditions of disciplined spending and relatively stable monetary management. The surpluses in the early 1990s emerged during a phase of economic liberalization but were not sustained. Similarly, the 2017 surplus, achieved under an IMF-supported program, was driven by tax increases and fiscal tightening but quickly reversed due to policy slippages and external shocks.
The current phase beginning in 2023 stands apart from these earlier episodes. It represents the most sustained fiscal correction in Sri Lanka’s history, driven by aggressive revenue mobilization, tax reforms and stricter control of government spending under IMF oversight. Unlike previous surplus years, which were isolated events, the period from 2023 to 2025 reflects consistency, enforcement and policy continuity.
Revenue growth has been a central driver of this shift, with tax income exceeding 5 trillion rupees in 2025. Measures such as VAT adjustments, the reintroduction of import taxes and improvements in tax collection have contributed to this increase. This marks a transition from a borrowing-driven fiscal model to one that is increasingly supported by domestic revenue under IMF conditionality.
At the same time, expenditure discipline has played a crucial role. Current spending has been contained, reversing a long-standing trend of unchecked expenditure growth. This combination of rising revenues and controlled spending has enabled the return to a current account surplus.
For the first time since 1987, part of the government’s capital expenditure is now being financed through tax revenue rather than borrowing. This represents a structural improvement in fiscal management, reducing reliance on debt and signaling a shift toward more sustainable public finance practices under IMF-guided reforms.
Monetary depreciation and uncontrollable spending
In 2025, Sri Lanka’s interest costs were reported at 2,500 billion rupees, down from 2,690 billion in 2024 and below the budgeted 2,950 billion rupees, helping to contain current expenditure. Despite this reduction, interest payments remain a major burden that prevents the country from achieving an overall budget surplus.
Sri Lanka’s fiscal challenges are closely linked to its monetary history. Inflation and interest rate pressures have persisted since the early 1980s, when policy changes enabled greater currency depreciation. Over time, this has made fiscal management more difficult by increasing both expenditure and debt servicing costs.
Inflation continues to drive up current spending, including wages and interest payments, limiting the government’s ability to maintain balanced budgets. Many countries experienced similar difficulties after moving away from more rigid monetary systems, losing the ability to sustain consistent budget surpluses.
Some taxes finance capital spending for the first time in nearly 4 decades
In 2025, Sri Lanka’s capital expenditure rose to 998 billion rupees, up from 790 billion rupees in 2024, reflecting a renewed focus on development and investment. The overall budget deficit declined sharply to 744.9 billion rupees in 2025 from 2,039 billion rupees the previous year, indicating improved fiscal management.
With a current account surplus of 217 billion rupees, part of this capital expenditure has been financed through tax revenue for the first time in decades. This reduces dependence on borrowing and marks a shift toward more sustainable financing of public investment.
In previous years, government spending often focused on short-term stimulus measures aimed at boosting growth without sufficient consideration of long-term returns. The current approach suggests a greater emphasis on prioritizing projects that deliver lasting economic benefits.
Debt to GDP down to 91-pct
In 2025, central government domestic debt rose to 18,675 billion rupees from 11,319 billion rupees, while foreign debt increased to 11,319 billion rupees from 10,429 billion rupees. Despite this rise in nominal debt, the debt to GDP ratio declined to 91.6 percent from 96.1 percent, indicating some improvement in debt sustainability.
However, these gains remain fragile. The Sri Lankan rupee has depreciated to around 315 against the US dollar by March, raising concerns about external stability and the risk of reversing IMF-backed fiscal progress.
Currency depreciation increases the burden of foreign debt while reducing purchasing power, limiting consumption and constraining economic growth. Critics argue that monetary policy decisions play a dominant role in determining exchange rates, despite claims that they are purely market-driven.
They also point out that inflation-driven depreciation has historically contributed to economic instability and social pressures. While policymakers bear the political consequences of rising living costs, monetary authorities have often avoided similar accountability.
Sri Lanka’s currency has depreciated significantly over time, undermining confidence in both fiscal and monetary policy frameworks.
Undermining prudent fiscal policy with monetary depreciation
In 2018, policy actions such as currency swaps and rate adjustments contributed to further depreciation even as energy prices rose, placing additional strain on state enterprises. In 2026, similar trends have continued, with monetary expansion and foreign exchange interventions weakening the rupee despite calls to maintain currency stability.
Depreciation continues to increase foreign debt burdens and sustain high interest rates, limiting economic recovery. In contrast, several East Asian and Gulf economies have maintained currency stability, contributing to stronger economic performance.
Unlike these economies, countries with inflation-prone monetary systems often amplify external shocks through currency weakening. In Sri Lanka, structural issues within monetary governance have also constrained access to foreign currency, increasing reliance on external borrowing.
There have been growing calls for reforms to limit the discretionary powers of monetary authorities and introduce stronger safeguards to prevent future crises. As responsibility for repaying international obligations increasingly falls on the Treasury, the need for disciplined and transparent policy frameworks has become more urgent.
Ultimately, Sri Lanka’s current account surplus in 2025 reflects a significant and sustained IMF-backed fiscal correction rather than a one-time achievement. The country is now generating enough revenue to manage its day-to-day operations, but the burden of past debt continues to weigh heavily on its long-term economic stability.
