Sri Lanka’s recent fiscal turnaround improves short-term confidence,

Sri Lanka’s recent fiscal turnaround has improved short-term confidence, but economists warn that monetary discipline will determine whether the gains last into 2026. Although tax revenues surged and the budget deficit narrowed sharply, renewed pressure on the rupee has raised concerns about policy consistency at the central bank.

The currency weakened to around Rs 310 against the US dollar in 2025, compared with 290 a year earlier, amid claims of unsterilized liquidity injections and selective convertibility controls. Analysts say such measures risk undermining the central bank’s 5 percent inflation target, which is crucial for anchoring expectations in a high-debt economy.

At the same time, cyclone-related disruptions reduced excise revenues, particularly from vehicle imports, while higher public sector wages increased recurrent spending. With limited fiscal buffers and large interest obligations, experts caution that even mild inflation or currency slippage could quickly reverse recent progress unless monetary policy remains firmly disciplined.

 

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