Balancing Growth and Burdens: The Economic Challenges Ahead for Sri Lanka – By Nadeeka – eLanka
Sri Lanka’s economy is in a fragile recovery phase. After years of severe crisis, the country has begun to post growth again, but the challenges remain immense. Balancing the urgent need for sustainable growth with the burdens of debt, fiscal reforms, and social pressures will define the nation’s economic path over the coming years.
Signs of Recovery
Sri Lanka returned to positive growth in 2024 after sharp contractions in earlier years. According to the World Bank, growth in 2024 was the strongest in several years, supported by improving agricultural output, stronger tourism receipts, and a gradual return of investor confidence. The economy is expected to continue expanding in 2025, though at a more moderate pace.
The Asian Development Bank (ADB) projects steady but modest growth for 2025, while the government has set higher targets for 2026. Analysts note that achieving stronger growth will depend on timely policy implementation, efficient public spending, and the stability of global conditions.
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Fiscal Pressures
One of Sri Lanka’s greatest burdens remains its public debt and fiscal deficit. Years of high borrowing, combined with revenue shortfalls, pushed the country into crisis. The government has since entered into an IMF-backed programme, which requires strict fiscal consolidation and structural reforms.
Spending delays have created difficulties. For example, in 2025 the national budget was passed later than usual, leading to slow disbursement of funds for capital projects. Reports indicate that much of the allocated expenditure had not been implemented by mid-year, dampening growth momentum and frustrating businesses waiting on government contracts.
The Property Tax Proposal
A significant reform now on the horizon is the introduction of a nationwide property tax. This measure, agreed under the IMF programme, is scheduled to take effect in 2027. Preparations are already underway, including digitising property valuation records and creating a comprehensive database of sales prices and rents.
The aim of the tax is to broaden the revenue base in a progressive way, ensuring that those with higher-value holdings contribute more. However, questions remain about implementation: whether the tax will be fairly administered, whether local or central government should manage it, and how exemptions will be designed. For the reform to succeed, the data systems and administrative capacity must be in place well before the planned rollout.
Structural Challenges
Beyond fiscal policy, Sri Lanka faces broader structural issues that weigh heavily on the economy:
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State-owned enterprises (SOEs): Many public enterprises continue to operate at a loss, creating pressure on the budget and crowding out private investment. Reform is politically sensitive but increasingly unavoidable.
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Weak tax compliance: Sri Lanka has one of the lowest tax-to-GDP ratios in Asia. Improving collection and reducing evasion is vital for creating space for investment in health, education, and infrastructure.
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Investor confidence: While sectors like tourism and apparel exports are recovering, attracting sustained foreign investment requires predictable policy, transparent regulation, and improved ease of doing business.
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Social pressures: Even as inflation has come down from the peaks of the crisis, households still feel the weight of higher living costs. Ensuring that fiscal reforms do not disproportionately hurt vulnerable groups is a key challenge.
The Balancing Act Ahead
Sri Lanka’s policymakers must strike a careful balance between austerity and growth. On the one hand, debt restructuring and fiscal consolidation are unavoidable. On the other hand, cutting too deeply or raising taxes too quickly risks slowing growth and hurting ordinary citizens.
Experts suggest a few guiding principles:
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Efficiency in public spending – focusing on projects that generate long-term returns, rather than politically motivated expenditures.
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Phased reforms – such as introducing the property tax gradually, with exemptions and clear communication to build public trust.
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Strengthened social protection – ensuring that subsidy reforms and tax increases are accompanied by targeted support for low-income households.
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Institutional reform – increasing transparency, tackling corruption, and improving state enterprise management.
Conclusion
Sri Lanka’s future depends on how well it can balance growth with burden-sharing. The country has shown resilience, moving from deep crisis to recovery within a short period. But the road ahead is steep: debt pressures, global uncertainties, and domestic reform fatigue all weigh on the outlook.
If the government can maintain discipline while protecting vulnerable groups, attract investment, and implement reforms such as the property tax fairly and efficiently, Sri Lanka has the potential to turn its fragile recovery into long-term prosperity. The next two years will be decisive in shaping whether this balance can be achieved.
