An in-depth analysis of the government’s second national budget and its implications for business and economic recovery
Sri Lanka’s Budget 2026 arrives at a critical juncture, a nation attempting to emerge from one of its worst economic crises while rebuilding investor confidence and charting a path toward sustainable growth. The government’s second national budget presents ambitious targets, promising economic transformation while grappling with the reality of debt restructuring and structural reforms. But does this budget deliver the confidence businesses need, or does it raise more questions than answers?
Economic Recovery: Impressive Numbers, But Sustainable?
The budget speech opens with impressive macroeconomic achievements. The economy grew by 4.8 percent in the first half of 2025, surpassing multilateral forecasts. Inflation has returned to positive territory, the financial sector has stabilized, and gross official reserves have exceeded USD 6 billion. The government projects revenue to reach 16 percent of GDP, with the primary surplus as a percentage of GDP reaching its highest level in history.
These are undeniably positive indicators for businesses seeking stability. The stabilization of the exchange rate and Treasury Bill interest rates creates a more predictable environment for investment planning and working capital management. However, the critical question remains: can this momentum be sustained beyond the short-term stabilization phase?
The government’s target of achieving over 7 percent economic growth in the medium term is ambitious, particularly given the structural challenges that persist. While export growth from USD 8.5 billion to USD 9.1 billion shows promise, this 7 percent increase, though positive, needs acceleration to drive the transformational change the economy requires.
Debt Sustainability: Walking a Tightrope
Perhaps the most contentious aspect of Budget 2026 is the debt management strategy. The government acknowledges that the IMF declared Sri Lanka’s debt unsustainable in 2022, yet confidently projects meeting debt service obligations while reducing the debt-to-GDP ratio from 114.2 percent in 2022 to 96.8 percent by 2026, with a target of 87 percent by 2030.
For businesses, this creates a dual narrative. On one hand, the successful payment of USD 1,948 million in foreign debt service by September 30, 2025, demonstrates capacity and commitment. On the other, the upcoming USD 487 million payment by year-end and continued foreign debt obligations create lingering concerns about resource allocation between debt servicing and growth-enabling infrastructure.
The budget addresses “unfounded opinions” about potential debt payment difficulties in 2028, but businesses typically prefer concrete risk mitigation strategies over reassurances. The strategy of maintaining gross financial requirements below 13 percent of GDP and limiting annual foreign currency debt servicing to 4.5 percent of GDP provides some clarity, but the execution will be critical.
Investment Climate: Reforms vs. Reality
The government’s emphasis on creating an “investment-friendly environment” through governance reforms and anti-corruption measures addresses a fundamental concern for both foreign and domestic investors. The commitment to transparent legal frameworks for public-private partnerships, state-owned enterprises, and public asset management signals a departure from the discretionary practices that historically undermined business confidence.
The amendments to the Strategic Development Projects Act and Colombo Port City Commission Act aim to streamline foreign direct investment procedures and enhance transparency, moves that should appeal to international investors evaluating Sri Lanka against regional competitors. The planned Investment Protection Act for early 2026 adds another layer of security.
However, businesses will be watching implementation closely. Sri Lanka has a history of announcing reforms without adequate follow-through. The proof will be in reduced bureaucratic delays, consistent policy application, and genuine protection against arbitrary government actions.
Digital Economy: USD 15 Billion Opportunity
One of the budget’s most forward-looking elements is the identification of digitalization as a strategic growth driver, with projections of the digital economy reaching USD 15 billion. This represents a significant opportunity for technology companies, digital service providers, and businesses willing to embrace digital transformation.
The commitment to building digital infrastructure, strengthening the Integrated Treasury Management Information System (ITMIS), and creating e-procurement systems not only reduces corruption opportunities but also creates business efficiencies. For the private sector, this digital push could reduce transaction costs, improve transparency in government dealings, and create new market opportunities.
Export Diversification: Beyond Traditional Markets
The National Export Development Plan (2025-2029) and the establishment of an export committee to negotiate free trade agreements demonstrate recognition that Sri Lanka cannot rely solely on traditional export markets and products. The proposed Trade National Single Window (TNSW) and necessary financial facilities for promoting goods and services exports address longstanding complaints from exporters about procedural complexities.
For businesses, the focus on connecting with global value chains and capturing new export markets presents growth opportunities, particularly for companies that can scale and meet international standards. However, success depends on complementary reforms in logistics, quality certification, and skills development, areas where the budget provides limited detail.
Capital Market Performance: A Silver Lining
The capital market’s performance offers perhaps the most tangible evidence of improving business sentiment. The All Share Price Index’s historic increase from 11,855 points to 21,779 points between September 2024 and September 2025 an 84 percent gain reflects growing investor confidence. Market capitalization expanding from Rs. 4.4 trillion to Rs. 7.8 trillion and foreign purchases increasing from Rs. 37 billion to Rs. 47 billion demonstrate both domestic and international appetite for Sri Lankan assets.
For listed companies, this creates opportunities for capital raising and improved valuations. For businesses considering public listings, the improved market conditions make 2026 potentially attractive for IPOs.
The Infrastructure Investment Paradox
While the budget emphasizes private sector-led growth and infrastructure development through Public-Private Partnerships, the example of the Kurunegala and Galle technology parks reveals systemic issues. These facilities, started by previous governments at “great expense” but abandoned, with contractors’ loans remaining unpaid for years, illustrate governance and project implementation failures.
The allocation of Rs. 2,000 million already and proposal of another Rs. 1,000 million to resolve these issues, while necessary, represents capital tied up in fixing past mistakes rather than creating new growth opportunities. The plan to open two additional technology parks must be accompanied by sustainable business models and genuine private sector participation to avoid repeating past failures.
Rural Development and Social Protection: Balancing Growth and Inclusion
The budget’s focus on rural poverty eradication and social protection through programs like Aswesuma reflects political reality but also economic necessity. Creating a prosperous village at the grassroots level expands domestic markets for businesses and reduces social instability risks.
The expansion of Mahapola scholarships, increased allowances for elderly and kidney patients, and allowances for school supplies create purchasing power at lower income levels, beneficial for FMCG companies, retail businesses, and consumer-oriented services. However, businesses will be monitoring whether these social expenditures remain fiscally sustainable without crowding out productive investments.
Public Sector Reform: Still a Work in Progress
The three-phase salary increase for public servants addresses employee demands but raises questions about productivity improvements and fiscal sustainability. The commitment to filling essential vacancies and implementing digitalization initiatives in the public sector could improve the business operating environment if executed effectively.
However, public sector efficiency remains a significant concern for businesses dealing with government procurement, regulatory approvals, and service delivery. The budget’s emphasis on reorganizing and modernizing the public sector needs concrete implementation timelines and performance metrics.
The Verdict: Cautious Optimism with Execution Risks
Budget 2026 presents a coherent vision of economic stabilization transitioning toward sustainable growth, with several positive elements for businesses: improved macroeconomic stability, commitment to transparency and governance reforms, recognition of the private sector’s leading role, and strategic focus on digitalization and export diversification.
However, significant execution risks remain. The ambitious growth targets, debt management strategy, and reform agenda require consistent implementation, an area where previous Sri Lankan governments have struggled. The budget’s success will ultimately depend on maintaining fiscal discipline while creating space for growth-enabling investments, delivering on governance and transparency commitments, accelerating export diversification beyond modest current gains, ensuring infrastructure investments support private sector productivity, and maintaining macroeconomic stability amid global uncertainties.
For businesses, the prudent approach is cautious optimism, recognizing improvements while remaining vigilant about implementation. The foundations for recovery appear stronger than a year ago, but transforming stabilization into sustainable, inclusive growth requires more than ambitious speeches and budget allocations. It requires consistent, competent execution and genuine partnership between government and the private sector.
The next 12 months will reveal whether Budget 2026 marks a genuine turning point or merely another chapter in Sri Lanka’s cycle of promising reforms followed by disappointing implementation. Business leaders should engage constructively while preparing contingency strategies because in Sri Lanka’s economic history, the gap between budget promises and actual outcomes has often been substantial.
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