ECONOMYNEXT \u2014 Sri Lanka ran a rare budget surplus in the first half of 2026 as strong tax collections coincided with sharp delays in state spending, including emergency rebuilding funds, the World Bank said in its latest Sri Lanka Development Update October 2026, titled \u201cFrom Recovery to Transformation\u201d.<\/p>\n
By mid-year, the government had disbursed only about 8 percent of the 500 billion rupees allocated for reconstruction after Cyclone Ditwah.<\/p>\n
Execution was slow across the board, with only 16.7 percent of the full-year capital budget spent, while less than half of a 100 billion rupee relief package linked to the Middle East war had been paid out.<\/p>\n
\u201cThis under-execution reflects weaknesses in public investment management, including project selection, procurement, and implementation capacity \u2014 rather than financing constraints,\u201d the report said.<\/p>\n
In contrast, state revenues showed strong growth. Total revenue rose 27.2 percent year-on-year, with tax collections climbing 25.9 percent, mainly driven by Value Added Tax (VAT) and duties on vehicle imports following the lifting of import curbs.<\/p>\n
With overall spending expanding just 7.9 percent, the government recorded a primary surplus of 1,233.1 billion rupees and an overall budget surplus of 9.5 billion rupees, compared with a 406 billion rupee deficit during the same period last year.<\/p>\n
Revenues were further supported by new tax laws certified in June, which raised capital gains taxes, introduced VAT on foreign digital service providers, and increased VAT on financial services. The state is also piloting a national e-invoicing system.<\/p>\n
Heavy interest costs continue to weigh on public finances, consuming around 46 percent of government revenue in 2025, though this has eased from nearly 80 percent at its peak between 2022 and 2023. The World Bank expects this share to fall to about 34 percent by 2028.<\/p>\n
However, with government primary spending legally capped at 13 percent of gross domestic product (GDP), the World Bank warned that the administration must focus on spending efficiency.<\/p>\n
\u201cThis spending ceiling increases the importance of improving spending quality rather than simply increasing spending levels,\u201d it said. (Colombo\/Oct6\/2026)<\/p>","protected":false},"excerpt":{"rendered":"
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