Sri Lanka has long been recognised for its strategic location, rich cultural heritage, and natural beauty. However, despite its potential, the country has faced significant economic challenges, including slow growth, high debt levels, and persistent structural imbalances.
All these led to trap resources, in agriculture, industry and services; in low productive sector/activities. To achieve sustainable high growth, Sri Lanka must undertake comprehensive and radical policy reforms that address these challenges and create a conducive environment for long-term development.
In particular, such reforms should be able to accelerate structural change in the economy thereby moving from lower-middle income status to high-income economy. Budget 2025 has mentioned about reforms ranging from public sector to drafting key legislations governing international trade and investment protection.
Fiscal management and debt sustainability
One of the most pressing issues facing Sri Lanka is its fiscal management and debt sustainability. The country has been grappling with high levels of public debt, which have constrained its ability to invest in critical infrastructure and social services. Reforms and initiatives should aim at;
Fiscal consolidation: The Government must implement measures to reduce the budget deficit through a combination of revenue enhancement and expenditure rationalisation. This could include broadening the tax base, improving tax administration, and reducing wasteful expenditures. Budget 2025 reports a deficit of 6.7 percent of GDP though IMF sets target of 5.2 percent. Still higher deficit indicates that there will be a sizable delay in fiscal consolidation.
Debt Restructuring: Sri Lanka needs to engage in debt restructuring to alleviate the burden of high-interest payments. This could involve renegotiating terms with creditors, extending maturities, and seeking concessional financing from international financial institutions. In 2024, Public Debt Management Act was approved by the parliament and it is imperative that the government implement it in its full scope.
Public Financial Management: Strengthening public financial management systems is crucial for ensuring transparency, accountability, and efficiency in the use of public resources. This includes improving budget planning, execution, and monitoring.
Public Finance Responsibility Act of 2003 was repeatedly amended by successive governments to accommodate high deficit. Sri Lanka witnessed the repercussion of such violation in 2022. Hence, it is paramount importance that the Government uphold public finance discipline and transparency.
Trade and investment liberalisation
Sri Lanka’s economy has traditionally been reliant on a few key sectors, such as apparel, tea, and tourism. While these sectors have contributed significantly to economic growth, they are vulnerable to external shocks.
To achieve sustainable high growth, Sri Lanka must diversify its economy and integrate more deeply into global value chains. Budget 2025 stated that Sri Lanka aims at entering into trade and investment agreements with strategically important partners and broaden the existing trade agreements.
In recent years, Sri Lanka expressed her willingness to enter into bi-lateral and regional trade agreements. Nevertheless, some of such attempts were delayed or abandoned due to heavy pressure exerted by various groups.
These reforms include:
Trade liberalisation: Sri Lanka should pursue further trade liberalisation by reducing tariffs and non-tariff barriers, simplifying customs procedures, and enhancing trade facilitation measures. This would make the country more attractive to foreign investors and boost exports. The budget 2025 stated that the government plans to draw up an export development strategy for the period of 2025-29 and aimed at increasing export revenue to US$ 36 billion by 2030.
Investment climate reforms: Improving the investment climate is crucial for attracting both domestic and foreign investment. This includes streamlining business regulations, protecting property rights, and ensuring the rule of law.
Export diversification: The Government should promote export diversification by supporting the development of new industries, such as information technology, pharmaceuticals, and renewable energy. This would reduce the economy’s reliance on a few sectors and enhance resilience to external shocks.
Governance and institutional reforms
The Government is strongly committed to good governance and zero tolerance towards corruption and bribes. Good governance and strong institutions are fundamental for sustainable development. However, Sri Lanka has faced challenges related to corruption, political instability, and weak institutions, which have hindered economic progress.
Anti-corruption measures: The Government must strengthen anti-corruption measures by enhancing transparency, accountability, and oversight. This could include setting up an independent anti-corruption agency, proposed under the new Act, implementing whistleblower protection laws, and promoting open data initiatives.
Public sector reforms: Reforming the public sector is essential for improving service delivery and reducing inefficiencies. This could involve merit-based recruitment, performance-based incentives, and the use of technology to streamline processes. The president, as the finance minister, noted that the government already set up a committee to look into entire public sector.
It is quite clear, comparing neighbouring countries, the size of the public sector is quite large in Sri Lanka. Hence, it is important to downsize the public sector along with Government’s digitalisation drive.
Judicial reforms: Strengthening the judiciary is crucial for ensuring the rule of law and protecting property rights. This includes enhancing the independence, integrity, and efficiency of the judicial system.
Human capital is a critical driver of economic growth and development. However, Sri Lanka’s education system faces challenges related to quality, relevance, and access, which have limited its contribution to economic development.
It is imperative that the government pay attention to following areas:
Education quality: The government should focus on improving the quality of education by investing in teacher training, updating curricula, and enhancing school infrastructure. This would ensure that students acquire the skills needed for the modern economy.
Skills development: Sri Lanka needs to prioritise skills development by aligning education and training programs with labor market needs. This could involve expanding vocational training, promoting STEM (science, technology, engineering, and mathematics) education, and fostering partnerships between educational institutions and the private sector.
Access to education: Ensuring access to education for all segments of the population, including marginalised groups, is crucial for inclusive growth. This could involve expanding scholarships, improving transportation to schools, and addressing barriers to education for girls and children with disabilities.
Environmental sustainability and climate resilience
Sri Lanka is highly vulnerable to the impacts of climate change, including rising sea levels, extreme weather events, and changing rainfall patterns. These challenges pose significant risks to the country’s agriculture, infrastructure, and overall economic stability.
Focus should be given to following areas:
Climate adaptation: The Government should prioritise climate adaptation measures, such as building resilient infrastructure, promoting sustainable agriculture, and enhancing disaster preparedness. This would reduce the vulnerability of communities and sectors to climate-related risks.
Environmental protection: Strengthening environmental protection is crucial for preserving Sri Lanka’s natural resources and biodiversity. This could involve enforcing environmental regulations, promoting sustainable land use practices, and investing in conservation efforts.
Renewable energy: Transitioning to renewable energy sources, such as solar, wind, and hydropower, is essential for reducing greenhouse gas emissions and enhancing energy security. This could involve incentivising renewable energy investments, improving grid infrastructure, and promoting energy efficiency.
In conclusion, policy reforms are crucial for achieving sustainable high growth in Sri Lanka. By addressing fiscal management, trade and investment, governance, education, and environmental sustainability, the country can overcome its current challenges and unlock its full potential. These reforms require strong political will, effective implementation, and the active participation of all stakeholders, including the government, private sector, civil society, and international partners. The Government has a clear two-third majority in the parliament and, hence, the government must be bold enough to undertake radical reforms to transform the economy from a low productive economy to a high productive economy. With the right policies in place, Sri Lanka can achieve sustainable high growth, improve the living standards of its people, and secure a prosperous future for generations to come.
