Sri Lanka’s economic recovery is gaining structural depth after years of fiscal stress, according to Central Bank Governor Dr Nandalal Weerasinghe. Presenting the Financial Stability Review 2025, he confirmed that key fiscal indicators revenue, primary surplus, and deficit have all exceeded expectations, marking the first significant fiscal outperformance in decades.
Fiscal Discipline and Revenue Surge
Dr Weerasinghe described the outcome as “a rare display of fiscal discipline that has strengthened debt dynamics.” Government revenue for 2025 is now projected to exceed 15.3 percent of GDP, driven by improved tax administration, import-related revenues, and a moderate revival in economic activity.
He said the primary surplus, initially forecast at 2.3 percent of GDP, is also set to surpass expectations. “The Government’s fiscal performance is exceeding expectations, with stronger revenue and tighter spending producing a lower deficit,” he noted.
This combination stronger income and restrained expenditure has created space to stabilise debt ratios earlier than expected. Sri Lanka’s debt trajectory, long regarded as unsustainable, is now moving toward gradual reduction. Lower borrowing costs and reduced reliance on short-term financing are already evident in Treasury-bill markets.
Why It Matters: The First Fiscal Outperformance in Decades
For decades, fiscal targets in Sri Lanka have tended to miss their mark, either due to weak revenue mobilisation or election-year spending. The Governor’s announcement therefore signals a decisive break from that pattern. A smaller deficit also means less pressure on domestic interest rates and foreign financing needs, both critical for restoring investor confidence and rebuilding reserves.
Analysts view this development as essential for the country’s debt-restructuring credibility. By exceeding fiscal targets under its IMF-supported programme, Sri Lanka strengthens its case for debt sustainability and for gradual easing of external financing conditions.
Debt Dynamics and Structural Repair
Dr Weerasinghe said “debt dynamics are now better than what was expected earlier.” Improved fiscal performance automatically reduces the pace at which public debt accumulates. With expenditure broadly in line with projections, the fiscal deficit is lower than anticipated, creating room for more predictable debt servicing.
Lower debt-to-GDP ratios and improved primary balances reduce the risk premium attached to Sri Lankan sovereign assets. This, in turn, can ease future borrowing costs for both the Government and private borrowers. The Governor emphasised that maintaining this trajectory would require “disciplined fiscal management and continued confidence in the financial system.”
Private-Sector Credit: From Contraction to Cautious Recovery
Turning to the financial sector, Dr Weerasinghe said the credit cycle is showing signs of normalisation. “The share of public-sector credit is coming down, creating more space for private credit growth,” he explained.
Private-sector lending remains below pre-crisis levels but is improving month by month. This shift indicates a steady not overheated recovery, allowing businesses to access capital without triggering inflationary pressure.
The Governor dismissed concerns about systemic risk, explaining that the widening credit gap “reflects a rebalancing of credit flows rather than instability.” He said the Central Bank continues to monitor exposure in sensitive sectors, including real estate and margin trading, to maintain balance.
Lending Trends and Sectoral Exposure
The Central Bank’s review showed margin-trading exposure in banks remains limited, though total margin loans rose from Rs 14 billion in January to Rs 60 billion by end-August a sign of improved investor confidence rather than speculation. Finance-company lending remains concentrated in vehicle leasing, while mortgage lending is still subdued.
To support credit recovery, the Central Bank is encouraging banks to reduce intermediation costs and net interest margins, which remain above 4 percent. As the financial sector stabilises, these margins are expected to narrow, improving affordability for borrowers and promoting competition.
Inflation, Growth, and Stability Outlook
Inflation is expected to stabilise at 5 percent in 2026, consistent with the Central Bank’s medium-term target. “The economy is now growing around 5 percent, a healthy pace following the contraction in 2022 and 2023,” Dr Weerasinghe said. He projected growth of 4 to 5 percent next year, supported by stronger domestic demand and external sector improvements.
This outlook suggests that Sri Lanka is entering a phase of balanced growth where fiscal consolidation does not suppress expansion, and inflation remains under control. The Governor described it as a “sustainable recovery path built on credible macroeconomic anchors.”
He acknowledged that some of the year’s revenue gains were boosted by temporary factors, such as the short-term surge in vehicle imports following the easing of restrictions. However, he said the underlying trend broader tax compliance and better administration will persist beyond this year.
Rebuilding Confidence and Financial Stability
Financial-system indicators have improved in tandem with macro stability. Capital adequacy ratios across banks remain above regulatory thresholds, non-performing loans are declining, and foreign-exchange liquidity is less constrained.
The Central Bank is focusing on transparency, competition, and risk management to further strengthen the financial system. Dr Weerasinghe said ongoing policy coordination between fiscal and monetary authorities is key to avoiding the “boom-and-bust” cycles that previously derailed growth.
Sustaining the Gains
While the tone of optimism is clear, the Governor underscored that maintaining credibility is essential. Fiscal slippage, policy reversal, or premature easing could undo recent progress. “The key task now is to sustain these gains through disciplined fiscal management and continued confidence in the financial system,” he concluded.
With public-sector borrowing easing, private credit recovering, and inflation anchored, Sri Lanka appears to be entering its most stable phase since the crisis years. The challenge ahead is to keep fiscal reform and institutional discipline at the centre of policy turning short-term recovery into long-term resilience.
