MINISTRY OF FINANCE – SRI LANKA Fiscal Sector: Present Situation and Way Forward

Highlights

1. Government’s fiscal operations have played an important role in improving economic and social conditions in Sri Lanka over the years.

2. However, at present, dismal fiscal sector performance has caused many imbalances in the macroeconomy.

3. Exceptionally low tax revenue, rigid recurrent expenditure, a large budget deficit, accumulated and now unsustainable debt are the key concerns in the fiscal sector.

4. Deficit financing poses a critical challenge due to the shortfall of foreign financing following the loss of international capital market access.

5. The resulting rise in monetary financing has caused severe macroeconomic imbalances.

6. Hence, strong revenue-based fiscal consolidation measures are imperative to improve the fiscal performance in the near to medium term.

7. Sri Lanka should urgently undertake difficult, but much needed and far-reaching reforms to address the accumulated and persistent issues.

8. The time has come to put the “house in order” and revamp the Government’s fiscal operations to strengthen macroeconomic stability and facilitate economic growth in the medium to long term.

9. The Government’s decision to seek the assistance of the International Monetary Fund (IMF) will be a starting point and a catalyst to implement these critical reforms with the support of the citizens and other stakeholders.

10. Responsible and disciplined fiscal management has become more important than ever.

11. In this process, the country and its citizens will have to go through a period of difficulty.

12. A strong social protection network is required for the vulnerable and needy segments as reforms will be painful.

13. Failure to implement required policy reforms at this critical juncture will be very costly.

14. However, it will lay a strong foundation to create a modern and robust economy for the future generations to come.