Sri Lanka Achieves Fiscal Turnaround, Ready for Balanced Spending: World Bank

Sri Lanka has achieved one of the largest fiscal adjustments in its history, equal to nearly 8 percent of GDP over the past three years, according to a new World Bank report released Tuesday. The adjustment, the Bank noted, was also sharper and faster than comparable efforts in more than 330 cases across 123 countries since 1980.

The report, Sri Lanka Public Finance Review: Towards a Balanced Fiscal Adjustment, finds that while the fiscal measures helped restore economic stability, they also weighed on households through higher indirect taxes, reduced real public-sector wages, and slower growth due to cuts in public investment.

With the economy now stabilized, the World Bank says Sri Lanka is well-positioned to focus on making public finances more equitable and efficient. The review estimates the country could raise revenues by up to 2 percent of GDP by 2029 without undermining growth or equity, while improved targeting and management of spending could deliver better results within existing budget limits.

The review recommends a series of next steps: raising revenue more fairly and efficiently by shifting toward direct taxes such as a minimum corporate income tax and digitizing tax administration; spending smarter, not more, through measures like better wage management in the public sector, protecting essential frontline services, and modernizing pay systems; reprioritizing capital investments to close infrastructure gaps, complete ongoing projects faster, and strengthen project selection and management; and enhancing social protection by targeting assistance more effectively, expanding the social registry, and moving from universal subsidies to focused support for vulnerable groups.

“Now that Sri Lanka has largely stabilized its economy, the challenge is to get better results from every rupee collected and spent,” said David Sislen, World Bank Division Director for Maldives, Nepal, and Sri Lanka. “This means modernizing tax administration, focusing on direct taxes, and making sure public spending is both efficient and fair—especially for the most vulnerable.”

The review also highlights the importance of linking planning and budgeting more closely, improving accountability, and focusing on measurable performance outcomes. The World Bank said such reforms would help deliver better services, support inclusive growth, and build long-term fiscal resilience.

The Public Finance Review (PFR) is a core World Bank diagnostic conducted every five years in member countries. The latest Sri Lanka PFR was prepared in collaboration with the Ministry of Finance and supported by targeted technical assistance in priority areas.