ECONOMYNEXT – Sri Lanka’s budget deficit will rise 1.4 percent to 6.5 percent of gross domestic product in 2026 as a result of extra spending related to Cyclone Ditwah relief and recovery, a Finance Ministry document shows.
Capital expenditure will rise by 1 percent of GDP to 5.0 percent from 4.0 percent in the original budget passed in parliament, the document said.
Recurrent spending will grow 16.9 percent of GDP from the original 16.5 percent in the original budget.
Sri Lanka is planning to spend an extra 500 billion rupees for Ditwah spending.
Sri Lankas budget and debt metrics have improved under International Monetary Fund programs and also the monetary stability provided by the central bank with its broadly deflationary monetary policy, though there are concerns over recent exchange rate policy.
The rupee depreciated steeply in 2025 amid current account surpluses and improvements the budget, showing serious flaws in the operating framework of the central bank.
Macro-economists started to escape accountability for depreciating currencies in the 1980s, shattering budgets even as politicians carried out the most comprehensive economic reforms in Sri Lanka’s history.
In the 1980s after the severe anchor conflicts emerged (running monetary policy conflicting with exchange rate stability) inflation in Sri Lanka exceeded the levels seen in the Great Inflation period and Latin American nations with commercial debt defaulted.
Sri Lanka is now emerging from its first external default and analysts have warned that if the parliament does not take action to restrain inflationism and stop the anchor conflicts, a second default is likely as fiscal fixes usually fail if monetary stability is denied.
Unlike accounts of companies, government budgets do not count currency depreciation in the deficit and the debt expands, even though people pay extra taxes.
Currency depreciation also destroy the finances of state enterprises, especially electricity and power companies, forcing the to raise tariffs promoting social unrest and political instability or run losses which tax payers have to bear later.
Macro-economists however using core inflation – an econometric measure that was cooked up in the 1970s after the Smithsonian agreement collapsed – now usually ignore rising commodity prices, which was the key focus of classicals who kept the age of inflation at bay.
As central bankers escaped accountability, accountants had to abandon historical cost accounting and bring in inflation accounting.
In 2026 however Sri Lanka proposed a budget in which both expenditure and current spending increased only in single digits, as budget were made before ‘full employment policies’ and high inflation.
Tax revenues were planned to rise 4 percent to 4,910 billion rupees, which is expected to the same after Ditwah, and current spending was to rise only 3 percent before Ditwah.
Amid monetary stability provided by the central bank in 2025, current spending grew only 5 percent based on provision data provided to parliament.
Inflation makes budget deficits a moving target as current spending rises with inflation and demands for subsidies go up social and labour unrest. Budget surpluses which were common before the collapse of the Bretton Woods disappeared in most countries.
However capital allocaltions were increased.
Sri Lanka’s Treasury Secretary Harshana Suriyapperuma told a post-budget forum that the strategy was to progressively cut current spending and boost capex.
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