Originally appeared on The Morning
Every year, as we get closer to the national budget, excitement builds among different stakeholders. Businesses look for tax concessions, industries expect incentives, Government institutions seek larger allocations, and the general public hopes for some relief on the cost of living. Budget time has traditionally been about what the Government is going to give and how much it is going to spend.
With the Appropriation Bill for 2027 now presented to Parliament, the conversation is once again gathering momentum. However, this year’s budget is unique for several reasons. More importantly, Sri Lanka can no longer afford to look at the budget in the traditional way. What we need is a growth-oriented budget, and we are already late in making the reforms necessary to achieve that growth.
The post-IMF test
The first reason this budget is important is that most of its implementation will take place after the current International Monetary Fund (IMF) programme is scheduled to conclude in March 2027. The recent staff-level agreement for the Seventh Review has reiterated the importance of keeping Budget 2027 in line with the IMF programme.
However, after the programme concludes, the Government will have greater discretion over economic policy, unless another programme is agreed upon. Technically, the Government may have more room to deviate from the current reform path. But doing so could undermine the confidence we have worked hard to rebuild among investors, creditors, and international rating agencies.
The real test is whether we can maintain economic discipline without the IMF constantly reminding us what needs to be done.
The political window
The second reason is political. Budget 2027 provides the Ministry of Finance with a relatively good opportunity to introduce difficult reforms with less immediate electoral pressure. As we move closer to the next national elections, political considerations will inevitably become stronger.
Even now, we can see how difficult it is to maintain economic discipline when political and social pressures increase. The recent decision to extend fuel subsidies is a good example. While the need to protect people from rising global energy prices is understandable, broad subsidies come at a fiscal cost and can weaken price signals.
This makes Budget 2027 a useful indication of the Government’s long-term economic direction.
Preparing for global shocks
The third reason is the global environment. The continuing tensions in the Middle East, uncertainty surrounding US economic and trade policies, higher global borrowing costs, and possible adverse weather conditions linked to El Niño are all significant risks. Sri Lanka has very little control over these developments. What we can control is how prepared our economy is to face them.
In this context, the budget cannot simply be a statement of revenue and expenditure. It must be a credible economic policy document.
Slowing growth
The biggest concern is that our growth reforms are already late.
The latest economic growth figures explain why. Sri Lanka recorded economic growth of 4.2% in the second quarter of 2026, compared to 5.1% in the first quarter. Construction activity expanded by 13.9%, while mining and quarrying grew by 17.4%. Manufacturing expanded by only 3.2% and services by 2.7%, while agriculture contracted by 2.3%.
Construction was responsible for more than half of the growth recorded within the industrial sector. Taxes less subsidies on products also increased significantly.
These numbers tell us something important. A substantial part of our recovery is being supported by construction and related activities rather than broad-based expansion across the economy.
There is nothing wrong with construction-led growth. Roads, bridges, buildings, and infrastructure are essential for economic development. Construction also creates employment and supports many other industries.
But we cannot keep constructing our way to sustainable economic growth.
A highway can be built once. Once the construction is completed, that particular source of growth disappears. What matters is whether the highway helps businesses reduce transportation costs, farmers reach markets, exporters become competitive, and new investments take place.
If the necessary policy reforms are missing, even a well-built highway may not deliver its full economic benefits.
The President has already indicated plans for approximately Rs. 2 trillion in capital expenditure in 2027, including development and infrastructure investment. This is a significant allocation and can support the recovery. However, the important question is not merely how much we spend, but what economic return we receive from that spending.
Large construction projects also have political appeal. They create visible results that can be presented to voters. This is not unique to the present Government. Successive governments have preferred projects that people can see over reforms whose benefits may take several years to materialise.
But what is politically visible is not necessarily economically productive.
Debt and investment
There is also the question of debt sustainability. Sri Lanka has worked hard to regain economic stability after the crisis. Yet the country remains vulnerable to global interest rates and changing investor confidence. Sri Lanka’s dollar-denominated bonds maturing in 2035 have recently traded at yields above 8% in the secondary market.
This is a reminder that returning to international capital markets could still be expensive. With external debt repayments becoming more demanding in the coming years, our ability to borrow at affordable rates will depend on fiscal discipline, stronger exports, adequate reserves, and sustained economic growth.
We cannot afford another cycle of borrowing heavily for projects that fail to generate sufficient economic returns.
Therefore, Budget 2027 must place greater emphasis on policy reforms that encourage private investment. Simplifying tariffs, improving access to land, reforming State-owned enterprises, improving the electricity sector, reducing unnecessary regulations, and making labour markets more flexible are all important. These reforms may not require large budget allocations, but they can have a much greater long-term impact than many expensive projects.
Reform over allocation
This brings us to another important point. We often judge a budget by how much money has been allocated to each ministry. Instead, we should pay greater attention to the institutions being established or strengthened to deliver reforms.
For example, strengthening public debt management, improving investment approvals, ensuring independent regulation, and making public procurement more transparent can make a significant difference to economic growth.
Equally important, the budget should identify institutions that have outlived their original purpose. Sri Lanka has many Government institutions created under different economic circumstances. Some perform overlapping functions, while others continue to operate despite having limited relevance to today’s economy.
Building new institutions without reforming or closing unnecessary ones will only increase the burden on taxpayers.
The Government should also recognise that the economic stability we enjoy today was not achieved overnight. It required difficult decisions and policy continuity across political changes. Protecting those gains is equally important.
In that sense, Budget 2027 should not be judged by the number of proposals announced or the amount of money allocated. We should judge it by whether there is a credible plan to attract investment, expand exports, create productive employment, and improve the country’s debt sustainability.
More importantly, the budget should provide clear timelines, responsible institutions, and measurable outcomes for the reforms being proposed. Sri Lanka has had enough budget promises that remain unimplemented.
Investors and rating agencies will be watching not only what is announced but also whether the Government can deliver.
Budget 2027 is therefore more than an annual accounting exercise. It is a test of whether Sri Lanka can move from economic stabilisation to sustainable growth, while maintaining the discipline required to avoid another crisis.
We have spent several years trying to stabilise the economy. We cannot afford to spend another several years merely talking about growth.
The time for growth reforms is already running late. Budget 2027 will tell us whether we are ready to act.
Research Publication
