ECONOMYNEXT – Sri Lanka’s budget deficit halved to 455.8 billion rupees in the 10 months to October 2025, down 57 percent from 1,060 billion rupees, official data show, while the current account showed a surplus for the second month.
Tax revenues grew 34 percent to 4,033 billion rupees, and non-tax revenues also grew 18.6 percent to 302 billion rupees, taking total revenues to 4,336.2 billion rupees, up 33.2 percent.
Current Account Surplus
Current spending was 4,223 billion rupees up to October, lower than total revenues giving a 112.4 billion rupee surplus in the current budget, which is rare in Sri Lanka.
With the central bank missing its high 5 percent inflation floor and 7 percent ceiling, tax increases improve budgets, as expenses are controllable.
Under high inflation targets, macro-economists make budgets impossible to control, as expenses keep rising, making deficits a moving target.
A key uncontrollable expense is high nominal interest rates which remain elevated as depreciation destroys capital and external crises trigger high rates to kill credit.
Sri Lanka’s budget started to go haywire from the early 1980s as the rupee was depreciated in the wake of the IMF’s Second Amendment.
Macro-economist then blamed monetary instability and depreciation coming from deeply flawed operating frameworks with anchor conflicts on deficits.
Stone Age Money
Macro-economists now claim that exchange rates or the value of money is ‘market determined’ and is not a function of monetary policy and also exchange rate policy if the central bank collects reserves.
“To claim that exchange rates are market-determined is absurd,” says EN’s economic columnist Bellwether.
“In that case the economy is effectively reduced to barter. The usefulness of money is that it has a stable value as a unit of account and a store of wealth.
“Under ‘market-determination’ money is reduced to something like beans and carrots. We are back in the stone age, worse than cowrie shells.
“That is one of the reasons these flexible exchange rate regimes, which are neither floats (value of money determined by monetary policy) or hard pegs (determined by exchange rate policy) have so much instability, from discretionary use of central bank powers to reduce the usefulness of money.”
It is not money that is market determined by interest rates. Money has to be anchored so that there is no inflation and its value is preserved over long periods for people to transact. Exchange rate stability allows cross border transactions and deferred payments.
In 2025, the rupee depreciated to 304 to the US dollar by October from 290 in November 2024.
In 2025, the rupee has been depreciated mostly by deploying exchange rate policy, amid intermittent deflationary monetary policy, analysts have pointed out.
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In 2025 the rupee depreciated amid external current account surpluses. Macro-economists have also blamed current account deficits for external instability. Current account deficits however come when capital inflows are spent domestically.
Current account surpluses imply ‘capital flight’ which are not accommodated by printed money.
The improving budgets have denied one of the favourite excuses for currency external instability.
Sri Lanka has not been able to run a current account surplus in the budget since the late 1980s.
Sri Lanka however is expected to end the year with a current account deficit of 455 billion rupees based on projections given when presenting a budget for 2026.
Meanwhile, up to October 2025, capex was 582 billion rupees, up from 531 billion rupees last year. Year end capex is expected to top trillion rupees with payments for work carried out being finalized and some capital transfers being made.
Up to October, the primary surplus was 1,639 billion rupees with interest costs running at 2,084 billion rupees. Year end interest costs are estimated at 2,650 billion rupees which will drive the current account of the budget into deficit.
High nominal interests are also a result of bad money, which destroys capital.
Sri Lanka has a primary surplus in the budget, which means interest costs are higher than primary expenditures. Most well-managed countries with monetary stability, run primary deficits, where interest costs are much smaller than primary expenditure.
The better managed countries run current account surpluses allowing some current incomes to be used for capex. Before the collapse of the Bretton Woods and IMF’s Second Amendment, countries routinely ran budget surpluses, Bellwether says.
Sri Lanka is projected to end 2025 with an overall deficit of 1,248 billion rupees, down from 1,707 billion rupees in 2024.
This year spending is to be managed within the approved spending limits by repurposing 50 billion rupees of expenditure for Ditwah spending.
For 2026, the deficit was projected at 1,757 billion rupees. A 500 billion rupee supplementary estimate has been announced by President Anura Kumara Dissanayake for Ditwah cyclone recovery.
(Colombo/Dec15/2025)
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