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2025 economic growth pace to moderate, while fiscal balances improve
View(s):By Kapila Bandara
Sri Lanka’s economic growth for this year has been estimated in low single digits, and forecasts vary ahead of the 2025 Budget tomorrow, while important fiscal balances have improved, narrowing the fiscal gap.
President Anura Kumara Dissanayake will roll out the National People’s Power Government’s maiden budget amid signs of recovery—5.2% growth in the first nine months of 2024—in an environment of multiple external headwinds, including evolving trade policy shifts, in particular, and a feeble global growth outlook.
Eager eyes will be trained on President Dissanayake’s macroeconomic priorities, including the fiscal roadmap and taxation policies.
In the Appropriations Bill, Rs 4.218 trillion has been allocated as non-debt servicing spending with Rs 1.320 trillion for capital expenditure, to be met from the Consolidated Fund. Government expenditure was set at Rs 4.617 trillion versus Rs 6.966 trillion in the previous government’s budget. The biggest chunk is for servicing the debt.
Recurrent and capital expenditure of the Ministry of Finance, Planning, and Economic Development has been significantly pared to Rs 714 billion (Rs 484.9 billion recurrent expenditure) from more than Rs. 1 trillion in 2024.
The budget deficit up to the third quarter of 2024 is at 3.3% of GDP, December data show.
There are expectations for reducing the reliance on debt financing and for widening revenue streams. The capital market, which lacks liquidity, has been clamouring for a bigger range of financial instruments such as infrastructure bonds and asset-backed securities.
In its February monetary policy report on Friday, the Central Bank of Sri Lanka (CBSL) predicted 2025 growth at a “moderate pace’’. In the medium term, “the economy is projected to operate below its full capacity’’.
Important fiscal balances, that is, the overall fiscal balance, current account balance, and primary balance, both in nominal terms and as a percentage of projected GDP, have improved up to November, CBSL says. The primary balance has a Rs. 927.8 billion surplus, while the overall fiscal deficit narrowed to Rs. 1.217 trillion.
The World Bank has revised up Sri Lanka’s growth by 1% since June to 3.5%. Growth will moderate to 3.1% in 2026, the bank says. Growth in per capita income “is expected to be weaker in 2025-2026 than in the decade preceding the coronavirus pandemic, implying a slower pace of poverty reduction’’.
As for the full year 2024, the CBSL predicts 4% plus growth after a 5% uptick in the first six months. Consumption spending, by far the biggest expenditure component, was Rs 6.971 trillion in the first nine months, as cited by the Department of Census and Statistics (DCS). This also reflects high prices still being paid by Sri Lankans.
CBSL had also predicted real GDP at “around 5% in 2024’’, “around’’ being the key word. The World Bank estimates 4.4% real GDP growth at market prices.
The DCS reported that fourth quarter growth came in at 5.5%.
Last week, the IMF said outcomes of reforms in Sri Lanka were “commendable’’.
Economic stabilisation prescriptions imposed on Sri Lanka’s 17th visit for IMF assistance, after years of fiscal and monetary recklessness, bouts of showcase growth fuelled by monetary and fiscal stimulus, and a credit card economy that triggered an implosion, have helped to steady an insolvent country.
Yet, Sri Lanka remains a lower middle-income economy, based on World Bank classification for the financial year 2025, or US$1,146-US$4,515 per capita income. Youth joblessness, 15-24 age group, is high—near 22%.
Sri Lanka is also awaiting the IMF’s Executive Board meeting in the coming weeks when the 23 November staff-level agreement on the third review is taken up.
IMF’s Gita Gopinath, the first deputy managing director, told the World Economic Forum that governments should ensure that fiscal policies are “growth friendly’’, while arguing for “sound fiscal frameworks’’ and support for the poor.
The Asian Development Bank expects 2025 growth momentum to “moderate’’ considering temporary disruptions in the election cycle and “normalising base effects from 2024’’.
The private sector business club, the Ceylon Chamber of Commerce, forecasts growth “to exceed 3% to 4%’’ in 2025 in a report, ‘Consolidating Stability; Fostering Sustainable Growth’ (Rs 10,000) this week. Only brief observations were made public. It takes a “cautiously optimistic’’ view. The forecast considers a “resurgence’’ in some sectors, including “digital services and renewable energy’’.
The chamber declares that tourism “has been a cornerstone of foreign exchange earnings’’. Rather, the US$6.575 billion in personal remittances from Sri Lankans is the largest net contributor to forex earnings. The inflows support the external current account and ease pressure on the rupee. The tourism sector generated US$3.2b in 2024. The sector is heavily indebted with a non-performing loan ratio of 40% in the second quarter.
The chamber takes a punt that the “digital economy will play an increasingly significant role, with IT/Business process outsourcing services expected to drive export earnings beyond US$1.5 billion. Investments in digital public infrastructure, including digital IDs and e-government initiatives, will enhance efficiency and reduce waste, further modernising the economy’’. US$1.5 billion in IT export earnings is barely “increasingly significant’’. Besides, Sri Lanka is yet to get started on digital public infrastructure at scale. In 2024, computer and IT/BPO-related services generated a mere US$848 million. It was US$794.9 million in 2023.
CBSL has also said earlier that growth remains below the 2015-2019 trend.
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