Sri Lanka Can Move to a More Balanced Fiscal Policy, Says World Bank Public Finance Review

COLOMBO, September 9, 2025-Sri Lanka has made remarkable strides in stabilizing its economy, undertaking one of the largest fiscal adjustments in its history-equal to nearly 8 percent of GDP over three years. The adjustment was also sharper and faster by international standards - when compared with more than 330 similar efforts in 123 countries worldwide since 1980. A new World Bank review of Sri Lanka's public finances released today says the country is now well-positioned to focus on making public finances work better for all Sri Lankans.

The World Bank's Sri Lanka Public Finance Review: Towards a Balanced Fiscal Adjustment finds that while fiscal measures helped restore stability, they also put pressure on households through higher indirect taxes and reduced real public-sector wages, and slowed growth due to lower public investment. The next phase of fiscal calibration should prioritize raising revenues in ways that support growth and fairness, and improve the quality of government spending.

The review highlights that Sri Lanka could increase revenue by up to 2 percent of GDP by 2029 without undermining growth or equity. It also points out that better targeting and management of public spending can deliver improved outcomes within current budget limits.

The review recommends:

• Raising revenue more fairly and efficiently: shifting toward direct taxes, such as a minimum corporate income tax, and digitizing tax administration to make paying taxes easier and more transparent.
• Spending smarter, not more or less: the report stresses that it is not feasible to further cut or increase overall spending, but the best gains will come from using existing funds more efficiently to get better results.

• This includes:
  • Improving public sector wage management by protecting essential frontline services, simplifying pay structures, and modernizing systems through which public sector workers are paid.
  • Reprioritizing capital investments to close infrastructure gaps, completing ongoing projects faster, and strengthening project selection, management and maintenance.
  • Enhancing social protection by better targeting assistance, expanding the social registry, and moving from universal subsidies to more focused support for those who need it most.

"Now that Sri Lanka has largely stabilized its economy, the challenge is to get better results from every rupee collected and spent," said David Sislen, World Bank Division Director for Maldives, Nepal and Sri Lanka. "This means modernizing tax administration, focusing on direct taxes, and making sure public spending is both efficient and fair-especially for the most vulnerable."

Sri Lanka can design the next phase of its public finance reforms to build long-term fiscal resilience. Strengthening links between planning and budgeting, improving accountability, and focusing on measurable performance outcomes will help deliver better services, support inclusive growth, and protect the most vulnerable.

About the Public Finance Review

The Public Finance Review (PFR) is a core World Bank diagnostic conducted every five years in member countries. It provides a comprehensive assessment of public finances-covering fiscal policy, revenues, and spending. The latest Sri Lanka PFR was prepared in close collaboration with the Ministry of Finance and supported by targeted technical assistance in priority areas.