Sri Lanka’s Third Budget: Revenue, Spending and Deficit Explained

COLOMBO, November 14, 2026 – Sri Lanka’s 2027 Budget projects Rs. 6.18 trillion in revenue and grants against expenditure of Rs. 7.67 trillion, leaving a Rs. 1.49 trillion deficit. A separate Rs. 260 billion reconstruction allocation could push spending to Rs. 7.93 trillion and widen the deficit to Rs. 1.75 trillion, despite the government’s commitment to fiscal discipline and economic recovery.

---

President Anura Kumara Dissanayake presented his administration’s third Budget to Parliament on November 12, outlining expenditure priorities intended to support economic growth, public investment, social welfare and the recovery of infrastructure damaged by Cyclone Ditwah.

The financial estimates reveal a country that has made progress in restoring government revenue since the economic crisis of 2022 but continues to face considerable pressure from debt servicing, public expenditure and external economic risks.

Interest payments alone are projected to reach Rs. 2.643 trillion in 2027, absorbing approximately 43% of government revenue before grants.

The government’s proposed public investment programme amounts to Rs. 1.75 trillion under the original Budget, rising to Rs. 2 trillion when the supplementary reconstruction allocation is included.

Although Sri Lanka is expected to record a primary budget surplus, its overall deficit is projected to increase from Rs. 745 billion in 2025 to Rs. 1.493 trillion in 2027, excluding the additional reconstruction expenditure.

The figures illustrate the difficult balance facing the administration: maintaining sufficient revenue to meet fiscal commitments while providing relief, rebuilding infrastructure and financing long-term development.

Revenue and Expenditure: The Budget’s Central Figures

According to the Ministry of Finance’s Budget estimates, government revenue and grants are expected to reach Rs. 6.180 trillion in 2027.

Total expenditure under the original Budget amounts to Rs. 7.673 trillion, producing a deficit of Rs. 1.493 trillion, equivalent to approximately 3.8% of Gross Domestic Product (GDP).

The supplementary estimate of Rs. 260 billion for Cyclone Ditwah reconstruction changes that calculation.

When included, expenditure increases to Rs. 7.933 trillion, while the overall deficit rises to Rs. 1.753 trillion, or approximately 4.5% of GDP.

The reconstruction allocation is intended to support the completion of work associated with the damage caused by the cyclone.

Government estimates show that the primary surplus, which excludes interest payments, will reach Rs. 1.150 trillion under the original Budget.

With the supplementary reconstruction allocation, the primary surplus falls to Rs. 890 billion, equivalent to 2.3% of GDP.

These distinctions are important because a government can record a primary surplus while still borrowing to meet its overall expenditure commitments, including interest on existing debt.

The fiscal projections suggest that Sri Lanka remains dependent on careful expenditure management and continued revenue collection to sustain its recovery.

Consumption Taxes Remain the Largest Revenue Source

A breakdown of the government’s expected income demonstrates the substantial importance of taxes imposed on goods and services.

Of the Rs. 6.180 trillion forecast in revenue and grants, approximately Rs. 3.592 trillion is expected from taxes on goods and services.

This represents more than 58% of the total.

Income taxes are projected to generate Rs. 1.341 trillion, while taxes on external trade are expected to contribute Rs. 754 billion.

Non-tax revenue is estimated at Rs. 463 billion, with grants providing a further Rs. 30 billion.

These figures show that the government continues to depend heavily on taxation linked to domestic consumption and commercial activity.

Unlike taxes imposed directly on income, consumption-related taxes can influence prices paid by households and businesses.

The economic consequences depend on the tax structure, the goods and services affected, exemptions and the ability of businesses to pass additional costs to customers.

Sri Lanka’s challenge is therefore not simply to maximise tax collections, but to develop a revenue system capable of financing public services without unnecessarily discouraging economic activity or worsening household financial pressures.

The government has identified improvements in tax administration, digitalisation and compliance as part of its medium-term revenue strategy.

Nevertheless, the figures demonstrate that broadening the productive economy and improving revenue collection remain important to sustaining government finances.

Interest Payments Consume More Than a Third of Expenditure

The largest individual expenditure category in Budget 2027 is interest on government debt.

The Treasury expects to spend Rs. 2.643 trillion on interest payments, representing approximately 34.4% of total expenditure under the original Budget.

Public investment accounts for Rs. 1.750 trillion, while subsidies and transfers are allocated Rs. 1.472 trillion.

Salaries and wages are expected to cost Rs. 1.410 trillion, with Rs. 409 billion allocated for other goods and services.

A further net adjustment of negative Rs. 11 billion is recorded under other expenditure items.

When the supplementary reconstruction provisions are included, public investment increases to Rs. 2 trillion and subsidies and transfers rise to Rs. 1.482 trillion.

The expenditure figures underline the influence of accumulated public debt on the government’s financial decisions.

Although interest payments have become a smaller share of government revenue than during the 2022 crisis, they continue to absorb resources that could otherwise be directed towards public investment, education, healthcare and other services.

Debt servicing is therefore one of the principal constraints on Sri Lanka’s ability to finance development without increasing its reliance on borrowing.

Budget Deficit Expands Between 2025 and 2027

Comparing the government’s financial performance over three years provides a clearer picture of the direction of fiscal policy.

In 2025, provisional revenue and grants amounted to Rs. 5.486 trillion, compared with total expenditure of Rs. 6.230 trillion.

The resulting deficit was approximately Rs. 745 billion.

For 2026, revised estimates place revenue and grants at Rs. 5.981 trillion against spending of Rs. 7.309 trillion, producing a deficit of Rs. 1.328 trillion.

The 2027 Budget projects revenue of Rs. 6.180 trillion and expenditure of Rs. 7.673 trillion, leaving a deficit of Rs. 1.493 trillion before supplementary reconstruction spending.

Across the three years, government revenue is projected to increase, but expenditure has risen more rapidly.

Tax revenue is expected to grow from Rs. 5.049 trillion in 2025 to Rs. 5.687 trillion in 2027.

Public investment is also projected to increase substantially, rising from Rs. 1.016 trillion in 2025 to Rs. 1.750 trillion in 2027.

Meanwhile, the primary surplus is expected to decline from Rs. 1.756 trillion in 2025 to Rs. 1.150 trillion in 2027, before accounting for the cyclone-related supplement.

This does not automatically mean the government is abandoning fiscal discipline.

The composition of expenditure, the reasons for additional spending and the capacity of the economy to finance that expenditure must also be considered.

Nevertheless, the widening overall deficit increases the importance of maintaining reliable revenue streams and managing future borrowing obligations.

Economic Recovery Continues Amid Inflation and External Risks

The Budget Speech also outlines several indicators that demonstrate Sri Lanka’s progress since the economic crisis.

The government reported economic growth of approximately 5% in 2025.

Growth during the first two quarters of 2026 was reported at 5.1% and 4.2%, respectively.

Inflation, however, remained a concern.

The rate cited for October 2026 was 8.3%, compared with 2.1% in December 2025.

Although moderate inflation is consistent with a functioning economy, rapid increases in prices can reduce household purchasing power, particularly when wages and other incomes fail to keep pace.

Sri Lanka’s public debt was reported at approximately 95% of GDP in 2025, down from around 114% in 2022.

Foreign reserves were reported to have exceeded US$7 billion by October 2026.

Worker remittances reached approximately US$8.1 billion in 2025, with the government expecting receipts to exceed US$9 billion in 2026.

These developments suggest that foreign exchange conditions have improved considerably.

However, the external current account moved into a reported deficit of approximately US$420 million during January to September 2026, compared with a surplus of US$1.853 billion during the corresponding period of the previous year.

That shift demonstrates how changes in imports, exports, energy prices and other external financial flows can affect the country’s balance of payments.

Sustaining economic stability will therefore require more than improving government revenue.

Sri Lanka must also strengthen foreign exchange earnings, productive investment and export competitiveness.

Foreign Debt Repayments Remain a Major Challenge

Sri Lanka’s scheduled foreign debt servicing obligations underline the continuing need for financial stability.

The Budget Speech identifies approximately US$3.707 billion in foreign debt service for 2025 and US$3.591 billion for 2026.

Repayments are projected to fall to US$2.986 billion in 2027 before increasing to US$3.574 billion in 2028.

The reduction anticipated in 2027 offers some relief, but the subsequent increase demonstrates that debt obligations remain substantial.

Foreign debt servicing must be financed through available foreign exchange resources, refinancing arrangements and other permitted financing mechanisms.

Consequently, the country must continue generating sufficient foreign currency through exports, tourism, remittances, investment and other economic activity.

The figures also illustrate why stronger foreign reserves and stable access to international financing remain central to Sri Lanka’s economic recovery.

Cyclone Ditwah Reconstruction Adds Rs. 260 Billion

One of the most important additional pressures on Budget 2027 is the reconstruction required following Cyclone Ditwah.

The government has identified approximately US$3.4 billion, equivalent to around Rs. 1.022 trillion, in damage and economic losses associated with the disaster.

A supplementary estimate of Rs. 260 billion is proposed for reconstruction expenditure during 2027.

The allocation is separate from the original Budget estimates and is intended to support the completion of outstanding reconstruction activities.

The additional spending increases the projected fiscal deficit by Rs. 260 billion.

Although rebuilding damaged infrastructure can restore economic activity and improve living conditions, it also creates short-term financing pressures.

The government must therefore balance the urgency of reconstruction with its commitments to maintain fiscal stability and control public expenditure.

Energy Prices and Climate Risks Complicate Financial Planning

Sri Lanka also faces risks arising from international energy markets and climate conditions.

The Budget Speech refers to expenditure exceeding Rs. 147 billion to cushion the impact of higher energy costs and disruptions associated with conflict in the Middle East.

Fuel imports reportedly reached US$4.487 billion by September 2026, compared with US$4.042 billion for the comparative figure cited for 2025.

Energy prices affect electricity generation, transport, production and the overall cost of living.

Any further increase in international oil prices could place additional pressure on foreign exchange resources and household expenditure.

The government has also identified the possibility of El Niño conditions affecting agriculture, water availability and electricity generation during 2027.

A provision of Rs. 5 billion has been announced for advance preparedness.

These risks demonstrate why fiscal planning must account for external shocks as well as ordinary government expenditure.

Government Targets Growth Above 7% in the Medium Term

The administration has outlined a medium-term economic strategy intended to maintain fiscal stability while supporting faster economic expansion.

Its stated objective is to move towards sustainable economic growth of at least 7% over the medium term.

The principal fiscal targets include maintaining a primary surplus of approximately 2.3% of GDP and limiting the overall Budget deficit to less than 5% of GDP.

Government revenue is expected to remain at or above 16% of GDP over the medium term, with a longer-term ambition of increasing it towards 20%.

The administration also intends to maintain public investment above 4% of GDP from 2027.

Following the temporary increase in expenditure associated with reconstruction, primary expenditure is expected to return to approximately 13% of GDP from 2028.

These objectives are linked to the government’s medium-term fiscal framework and public financial management commitments.

However, meeting them will depend on revenue performance, investment outcomes, economic growth and the absence of major additional financial shocks.

The Treasury’s separate 2027 revenue assumptions anticipate economic growth of approximately 4% to 5% during the year itself, meaning the administration’s ambition of growth above 7% should be understood as a medium-term objective rather than its forecast for 2027.

The IMF Programme and Sri Lanka’s Next Economic Decisions

Sri Lanka’s existing International Monetary Fund programme is scheduled to conclude in March 2027.

The government has indicated that it is examining whether a further IMF-supported arrangement would be appropriate.

Such a decision would affect the country’s future economic policy framework, fiscal commitments and access to international financial support.

The administration has emphasised the importance of maintaining a sustainable debt path, strengthening revenue administration and improving public financial management.

Yet the long-term success of these policies will depend on whether fiscal stabilisation translates into improved productivity, investment, employment and living standards.

Sri Lanka has already demonstrated that recovering from an economic crisis requires difficult financial decisions.

The next challenge is ensuring that those decisions create the conditions for growth rather than merely managing existing financial obligations.

The Real Test of Budget 2027

The figures behind Budget 2027 reveal an economy that has recovered substantially from the financial instability of 2022 but remains vulnerable to debt obligations, external shocks and the rising cost of government expenditure.

Projected revenue of Rs. 6.18 trillion represents a considerable improvement compared with the country’s crisis years.

However, expenditure approaching Rs. 7.93 trillion, including supplementary reconstruction provisions, demonstrates that public financial requirements remain much larger than available annual revenue.

Interest payments continue to dominate the expenditure structure, while consumption-related taxes provide the majority of government income.

At the same time, the administration intends to increase public investment, rebuild cyclone-damaged infrastructure and pursue faster economic growth.

Those ambitions are not necessarily incompatible with fiscal discipline, but their success will depend on execution.

Investment must generate productive economic activity, public services must deliver measurable benefits, and revenue collection must be supported by sustained economic performance.

The Budget’s financial projections provide the framework for those objectives. What remains to be established is whether the country’s economic transformation can generate sufficient growth, foreign exchange earnings and public revenue to reduce the burden of debt while improving the lives of ordinary Sri Lankans.