Editorial: Lanka’s fragile fiscal balancing

The good news is that the once-shaky and tottering economy of Sri Lanka has stabilised considerably, thanks to the debt restructuring process, but it is not yet out of the woods. To attain long-term sustainability, multilateral institutions like the World Bank and economists have been recommending fiscal discipline and institutional reforms. It will be quite a formidable challenge for the Left-leaning President Anura Kumara Dissanayake to steer the economy through choppy waters, not only to avert a relapse of crisis but also to access foreign funds. The question is how much room to manoeuvre does the president have in order to take hard economic decisions that could adversely affect his constituents in the short run. Can he afford to defer fulfilling the aspirations of people, especially the poor and vulnerable, and even others who have been at the receiving end of austerity measures?

The World Bank’s latest Sri Lanka Development Update, titled Better Spending for All, has projected a lower growth rate of 3.5% in 2026 as against 4.6% in 2025. There’s cautious optimism in the air. Given the overall fiscal constraints and pre- and post-crisis structural problems, the country has been making some progress, however irregular it is.

There was some concern about the Anura government resisting or rejecting the prescription of a broad package of reforms aimed at enabling private sector-led growth. For instance, given the critical and dominant position of the public sector or State-owned Enterprises (SOEs) in the economy, it is not going to be easy to reform them. Though the government is committed to improving the fiscal sustainability of SOEs and attracting domestic and foreign investment to enable the growth of the private sector, it will find it difficult to initiate reforms due to financial and ideological reasons. In other words, the island nation’s economic challenges are embedded not only in its economic architecture, but also in its politics.

The ruling dispensation, with its ideological baggage, will have to shed some avowed ideals and be pragmatic to take the country forward. This would mean taking difficult and even unpopular decisions, some of which may go against their ideology. Reducing public spending when a significant part of it goes for paying salaries and welfare schemes will be more difficult than being pro-private sector. Likewise, there will be less resistance to improving the ease of doing business compared to labour reforms, where competitive wages would mean lower wages and greater flexibility is a euphemism for increased job insecurity and contractual and informal work. The president and the government seem to have come to terms with it. Indications are that the government has chosen pragmatism over idealism, as is evident in some of the pro-market reforms initiated in recent times, even though they were unpopular and met with opposition from some sections of society.

Besides policy juggling in political and economic domains, the government will have to do some balancing act in foreign affairs as well. Colombo needs to be cautious and New Delhi be wary about China’s so-called “debt trap diplomacy” in the island nation. The Indian government needs to be alert and watchful about Chinese moves and also up its game with regard to trade, economic, and development assistance to counter and restrict Chinese influence.