Sri Lanka has achieved a remarkable fiscal turnaround in 2025, with its budget deficit shrinking by more than half during the first nine months of the year. The deficit declined by 54.5% year-on-year to Rs. 441.4 billion in January-September 2025, compared to Rs. 970 billion in the same period last year, marking a significant milestone in the country's economic recovery journey.
Primary Account Surplus Doubles
The most encouraging aspect of Sri Lanka's fiscal performance has been the dramatic improvement in its primary account balance. The primary account surplus doubled year-on-year to Rs. 1.4 trillion, demonstrating the government's enhanced ability to manage its finances excluding debt service obligations. This substantial surplus indicates that the country is generating sufficient revenue to cover its operational expenses while contributing meaningfully toward debt reduction.
The primary surplus is a critical indicator for debt sustainability, as it shows whether a government can service its debt obligations without borrowing additional funds. Sri Lanka's achievement in this area signals growing confidence in its fiscal management capabilities and provides a solid foundation for long-term economic stability.
Revenue Growth Drives Fiscal Improvement
The impressive deficit reduction has been primarily driven by robust revenue growth, with total government revenue increasing by 31% year-on-year to Rs. 3.83 trillion during the nine-month period. This substantial revenue expansion reflects both improved tax collection mechanisms and the positive impact of economic reforms implemented over the past year.
Value Added Tax (VAT) and import taxes have emerged as the leading contributors to this revenue surge. The enhanced performance of these tax categories demonstrates the effectiveness of Sri Lanka's tax policy reforms and the gradual recovery of economic activity following the country's recent financial crisis.
Customs Department Exceeds Expectations
The Sri Lanka Customs Department has delivered exceptional performance, collecting Rs. 1.7 trillion and achieving 80% of its annual target by September 2025. This achievement is particularly noteworthy given that three months remained in the fiscal year, suggesting the department is well-positioned to exceed its annual collection goals.
The strong customs revenue performance reflects several positive economic indicators, including increased import activity, improved compliance rates, and enhanced collection efficiency. This trend also suggests growing consumer confidence and business investment, both crucial elements for sustained economic recovery.
Controlled Expenditure Growth
While revenue surged by 31%, government expenditure increased by a more modest 10%, demonstrating disciplined fiscal management. This controlled spending approach has been instrumental in achieving the dramatic deficit reduction while maintaining essential public services and infrastructure investments.
The government's ability to maintain expenditure discipline while growing revenue streams showcases effective policy implementation and suggests a sustainable approach to fiscal consolidation. This balanced strategy helps ensure that deficit reduction doesn't come at the expense of critical public investments or social programs.
Economic Recovery Indicators
These fiscal improvements occur against the backdrop of Sri Lanka's broader economic recovery efforts following the severe financial crisis that peaked in 2022. The country's ability to generate substantial revenue growth while maintaining expenditure discipline indicates that structural reforms are beginning to yield positive results.
The performance also reflects improved business confidence, increased economic activity, and enhanced tax administration capabilities. These factors combined suggest that Sri Lanka's economy is stabilizing and moving toward sustainable growth patterns.
Implications for Debt Management
The substantial primary surplus of Rs. 1.4 trillion provides Sri Lanka with increased flexibility in managing its debt obligations. This surplus can be applied toward debt service and reduction, potentially improving the country's credit profile and reducing borrowing costs over time.
For international creditors and rating agencies, these fiscal improvements demonstrate Sri Lanka's commitment to financial responsibility and its capacity to honor debt obligations. This performance could facilitate future negotiations with creditors and potentially improve access to international capital markets.
Future Outlook
With three months remaining in 2025, Sri Lanka appears well-positioned to maintain its positive fiscal trajectory. The customs department's strong performance suggests continued revenue growth potential, while the government's expenditure discipline indicates sustainable fiscal management practices.
The dramatic improvement in fiscal metrics provides a solid foundation for continued economic recovery and positions Sri Lanka favorably for future growth. However, maintaining this momentum will require continued policy discipline, structural reforms, and careful management of both domestic and external economic challenges.
This fiscal turnaround represents a significant achievement for Sri Lanka's economic recovery program and demonstrates the country's resilience in overcoming financial adversity through effective policy implementation and disciplined fiscal management.