Sri Lanka has taken significant steps to stabilize its economy, implementing a fiscal adjustment of nearly 8 percent of GDP over three years. This effort stands out internationally, being sharper and faster than similar fiscal adjustments in over 330 cases across 123 countries since 1980, according to a new World Bank review released today.
The World Bank’s "Sri Lanka Public Finance Review: Towards a Balanced Fiscal Adjustment" notes that while recent fiscal measures restored economic stability, they have also created challenges for households through increased indirect taxes and reduced real public-sector wages. The report states that these actions slowed growth due to lower public investment. The World Bank suggests that the next phase should focus on raising revenues in ways that support both economic growth and fairness, as well as improving how government funds are spent.
According to the review, Sri Lanka could increase its revenue by up to 2 percent of GDP by 2029 without negatively affecting growth or equity. It also says that more effective targeting and management of public spending could lead to better outcomes within existing budget constraints.
The report recommends several strategies:
- Raising revenue more fairly and efficiently by shifting toward direct taxes such as a minimum corporate income tax, and digitizing tax administration for greater ease and transparency.
- Spending smarter rather than simply cutting or increasing overall expenditure, with an emphasis on using current funds more efficiently.
- Improving public sector wage management by protecting frontline services, simplifying pay structures, and modernizing payment systems.
- Reprioritizing capital investments to address infrastructure gaps, accelerate ongoing projects, and strengthen project selection and maintenance.
- Enhancing social protection through better targeting of assistance, expanding the social registry, and transitioning from universal subsidies to more focused support for those most in need.
“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.”
The review concludes that Sri Lanka can shape future reforms to build long-term fiscal resilience by strengthening connections between planning and budgeting, improving accountability, and focusing on measurable performance outcomes. These steps aim to deliver improved services, foster inclusive growth, and protect vulnerable populations.
The Public Finance Review (PFR) is a core diagnostic tool used by the World Bank every five years in member countries. It provides a comprehensive assessment of public finances—including fiscal policy, revenues, and spending—and the latest edition was prepared with input from Sri Lanka’s Ministry of Finance alongside targeted technical assistance.