Economic

In a decisive move to restore investor confidence and ensure long-term policy stability, the Government of Sri Lanka has approved the drafting of a new Investment Security Act, designed to prevent arbitrary nationalization of private enterprises and safeguard both domestic and foreign investments. The proposal, presented by President Anura Kumara Dissanayake  in his capacity as Minister of Finance, Plan Implementation, and Economic Development, aims to establish a stronger legal foundation for investment protection and dispute resolution.

Sri Lanka Moves Ahead with Investment Security Act to Rebuild Investor Confidence

The Cabinet of Ministers has already granted approval for the Legal Draftsman’s Department to begin preparing the bill, following recommendations from a high-level committee of officials who developed the initial concept paper. The Act is expected to include provisions that guarantee the protection of private property, create an Investment Security Board to handle disputes, and enhance transparency in government dealings with investors.

This landmark legislation was first proposed in the 2025 National Budget, reflecting the administration’s effort to rebuild investor trust shattered during the economic crisis of 2022. During that period, Sri Lanka’s economy contracted by 7.8%, inflation surged above 70%, and foreign direct investment (FDI) inflows fell to below $800 million—one of the lowest levels in over a decade. The uncertainty surrounding property rights, ad-hoc taxation, and frequent policy shifts further discouraged new investors and prompted several multinationals to postpone or withdraw expansion plans.

However, in the first nine months of 2025, signs of gradual recovery have emerged. According to the Central Bank, Sri Lanka recorded FDI inflows of approximately $950 million, marking a 15% year-on-year increase compared to 2024. The rupee has stabilized around Rs. 310 per dollar, inflation has eased to 5.2%, and GDP growth is projected at 2.8% for the year. Yet, economists warn that without consistent policy frameworks and legal assurance, this recovery remains fragile.

The proposed Investment Security Act is thus seen as a critical step toward creating a predictable investment climate. It will legally prohibit the arbitrary seizure or nationalization of private enterprises a fear that resurfaced during past political transitions—and ensure that any state intervention occurs under transparent, compensatory frameworks.

Economic analysts argue that the Act could also help Sri Lanka improve its ranking in the World Bank’s Ease of Doing Business Index, attract long-term investors, and position itself as a stable investment hub in South Asia. The new Investment Security Board will serve as a dispute resolution mechanism, enabling investors to settle grievances without lengthy litigation, thereby speeding up decision-making and reducing bureaucratic risks. 

If implemented effectively, the Act could complement the broader economic stabilization program under the IMF’s Extended Fund Facility and reinforce the government’s pledge to maintain a liberal, rules-based economy. As Sri Lanka transitions from crisis management to growth revival, ensuring investor protection through robust legislation will be vital to attracting capital, creating jobs, and sustaining confidence in its economic future.

Despite repeated pledges to abolish para-tariffs and streamline import duties, Sri Lanka has yet to fulfil its commitments a delay that risks damaging its credibility with global partners, including the United States.

Treasury’s Proposed Duty Structure

Treasury Secretary Harshana Suriyapperuma recently reiterated that the introduction of a new 30 percent duty band added to the existing 0, 10, 15 and 30 percent rates was not meant to raise extra revenue but to replace multiple para-tariffs such as the CESS, PAL and SCL with a more transparent and globally consistent structure.

“This particular exercise is to harmonize ourselves with the region and with global approaches on how duties are being charged, doing away with para-tariffs,” Suriyapperuma explained at a post-budget seminar. “We consider it more or less revenue-neutral not targeting additional revenue but integrating better with the global economy.”

Lack of Implementation Timeline

However, nearly a year after the proposal, the government has yet to announce a clear timetable or publish the findings of the Cabinet-approved committee reviewing existing trade agreements. While Suriyapperuma hinted that implementation may begin in the first quarter of 2026, no concrete steps or deadlines have been disclosed, leaving local industries, exporters, and international observers uncertain about the pace and direction of reform.

Economic Context and Risks

The lack of transparency comes at a time when the economy shows fragile signs of recovery. According to the Central Bank of Sri Lanka (CBSL), the country recorded 4.8 percent GDP growth in the first quarter of 2025, but momentum has slowed, with full-year growth now projected at around 4.5 percent. Inflation remains relatively subdued, and foreign reserves stood near US $6 billion by mid-2025 a modest cushion for an import-dependent economy still managing debt restructuring pressures.

Impacts of Para-Tariffs

Economists warn that the failure to phase out para-tariffs could weaken competitiveness and discourage exports. These levies have long distorted pricing, inflated costs for consumers, and protected inefficient domestic lobbies that thrive under import substitution rather than innovation.

Unless Sri Lanka swiftly implements its para-tariff reforms with a clear, publicly disclosed schedule and transparent data, its integration with global markets and its credibility with trade partners will remain in doubt. The rhetoric of reform must now give way to action.

The government has taken approved a bold restructuring initiative for two specialised banks Housing Development Finance Corporation Bank (HDFC Bank) and State Mortgage & Investment Bank (SMIB)  as part of a broader effort to shore up the country’s financial stability and safeguard depositors’ interests.

Ownership Transfer

 Under the approved plan, the Government will transfer its shareholding in HDFC Bank into Bank of Ceylon (BOC), making the housing finance specialist a subsidiary of the state-owned commercial bank. At the same time, all shares in SMIB will be acquired by People’s Bank, placing SMIB under its wing.

Background and Financial Challenges

 Both HDFC Bank and SMIB serve a critical purpose: providing housing-related financial services in Sri Lanka. HDFC Bank was established under the Housing Development Finance Corporation Act No. 7 of 1997 and is listed on the Colombo Stock Exchange. 

 SMIB, formed under Act No. 13 of 1975, is fully state-owned and focused on mortgage financing. Yet both banks have been underperforming. HDFC Bank’s latest published financials show a net loss of around LKR 352 million, with return on equity (ROE) at –4.39% and return on assets (ROA) meaningfully negative at –0.54%. 

The bank’s market capitalisation is just LKR 2.88 billion and its price-to-book ratio stands at a weak 0.37, underlining market concern about its profitability and asset quality.

 For SMIB, the broader picture suggests weak deposit-raising capacity, low profitability and failing to meet capital adequacy norms—factors cited by the Central Bank of Sri Lanka as underpinning the push for restructuring. 

Rationale for Restructuring

Why restructure? First, integrating these weaker specialised banks into stronger state banks allows for economies of scale, centralised risk management and access to deeper deposit bases. It emphasises that the housing finance niche cannot thrive in isolation when deposit mobilisation is limited and regulatory demands (such as capital adequacy) are not met. 

Second, from a systemic risk perspective, weak specialised banks raise concerns over contagion within the financial system and erode depositor confidence especially in a pressured macro-economic environment.

 Third, through the restructuring, the banks’ housing mandate can be preserved while being supported by stronger parent institutions capable of absorbing shocks and providing strategic direction.

Strategic Challenges

However, the restructuring must go further than ownership changes. It must address core strategic failings: lack of diversification, weak profitability, low capital buffers, and sub-par asset quality. At HDFC Bank, the negative ROE and ROA reveal that returns are not covering cost of equity and assets are not generating sufficient incomeraising questions about business model viability. 

At SMIB, its niche focus on housing finance may not be sufficient in a challenging interest rate and economic climate, unless operational efficiencies and business scope are widened.

Policymakers should set clear milestones: accelerated deposit growth, improvement in net interest margin, reduction in non-performing loans (NPLs), and enhancement of capital adequacy ratios and integration of digital banking capabilities. These should be tracked publicly to ensure the restructuring yields measurable improvements and does not simply become a cosmetic ownership shift.

In sum, the Cabinet-approved transfer of shares in HDFC Bank and SMIB into larger state-owned banks is a welcome recognition that these specialist institutions have not progressed satisfactorily on their own. With HDFC Bank posting losses and SMIB under regulatory strain, the need for decisive action is clear. 

But success will depend on more than structural change it will require rigorous business model overhaul, stronger governance and ongoing regulatory oversight if depositors and the housing finance sector are to reap the benefits of stability and growth

Sri Lanka’s post-crisis appetite for vehicles is surging again and so is the country’s dependence on leasing and hire-purchase facilities. But as more buyers rush to finance their dream cars and commercial fleets through banks and finance companies, an old problem is resurfacing: a ballooning pile of debt that could soon burden the financial sector with another wave of non-performing loans (NPLs).

Rising imports show consumer optimism — and credit dependency

Between January and May 2025, Sri Lanka imported around US $312 million worth of vehicles, with April alone accounting for US $107 million, according to Central Bank data. The value of import letters of credit opened for vehicles has also skyrocketed to US $1.2 billion, signaling the reopening of a once-frozen market. But while these numbers highlight consumer optimism, they also reveal a dangerous overreliance on credit in a fragile economy still recovering from the 2022 financial collapse.

Finance firms heavily exposed to vehicle loans

Finance and leasing companies, which remain the main gateway for vehicle ownership, are now carrying significant exposure to this lending segment. Past studies show that more than half of all lending by finance firms is tied to vehicle loans, and the NPL ratio in the non-bank financial sector has already risen to 17.5 percent, up from 13.9 percent just two years earlier. Analysts warn that unless the trend is controlled, finance companies could face major challenges in collecting dues as incomes remain under pressure and the rupee continues to fluctuate.

To address these emerging risks, the Central Bank of Sri Lanka (CBSL) has tightened its Loan-to-Value (LTV) regulations, reducing the amount customers can borrow against a vehicle. Effective from November 8, 2025, loans for commercial vehicles have been capped at 70 percent of the vehicle’s value, down from 80 percent. For motor cars, vans, and SUVs, the limit has been cut to 50 percent from 60 percent, while three-wheelers remain at 50 percent. The cap for all other vehicles has also been reduced from 70 percent to 50 percent.

According to CBSL officials, these new restrictions are meant to strengthen financial discipline, prevent overexposure to risky vehicle loans, and help manage the balance of payments. By forcing buyers to contribute a higher down payment, regulators hope to create a more stable lending environment and reduce the likelihood of mass defaults. The move could also discourage unnecessary imports and reduce pressure on the rupee.

Possible Negative Impact on Market Demand

However, the tighter credit rules come with their own drawbacks. The new limits are likely to dampen vehicle demand, especially among small businesses and middle-income buyers who depend heavily on leasing. Finance companies could see reduced growth in their loan portfolios and lower profits, while consumers may turn to informal lenders or multiple small loans to bridge the funding gap a shift that could actually heighten financial risk rather than contain it.

Experts Call for Additional Safeguards

Economists caution that while the Central Bank’s LTV policy is a step in the right direction, it must be complemented by stronger borrower assessments, realistic vehicle valuations, and improved recovery mechanisms. Without such safeguards, Sri Lanka’s leasing boom could quickly turn into another debt trap, burdening finance companies with bad loans and threatening broader financial stability.

For now, the message from the regulator is clear: drive responsibly financially and otherwise.

Strengthening Investor Protection and Policy Stability

In a decisive move to restore investor confidence and ensure long-term policy stability, the Government of Sri Lanka has approved the drafting of a new Investment Security Act, designed to prevent arbitrary nationalization of private enterprises and safeguard both domestic and foreign investments. 

The proposal, presented to the cabinet by President Anura Kumara Dissanayake in his capacity as Minister of Finance, Plan Implementation, and Economic Development, aims to establish a stronger legal foundation for investment protection and dispute resolution.

The Cabinet of Ministers has already granted approval for the Legal Draftsman’s Department to begin preparing the bill, following recommendations from a high-level committee of officials who developed the initial concept paper. 

The Act is expected to include provisions that guarantee the protection of private property, create an Investment Security Board to handle disputes, and enhance transparency in government dealings with investors.

This landmark legislation was first proposed in the 2025 National Budget, reflecting the administration’s effort to rebuild investor trust shattered during the economic crisis of 2022. 

During that period, Sri Lanka’s economy contracted by 7.8%, inflation surged above 70%, and foreign direct investment (FDI) inflows fell to below US $800 million one of the lowest levels in over a decade. 

The uncertainty surrounding property rights, ad-hoc taxation, and frequent policy shifts further discouraged new investors and prompted several multinationals to postpone or withdraw expansion plans.

Rebuilding Confidence Amid Economic Recovery

However, in the first nine months of 2025, signs of gradual recovery have emerged. According to the Central Bank, Sri Lanka recorded FDI inflows of approximately $950 million, marking a 15% year-on-year increase compared to 2024. 

The rupee has stabilized around Rs. 310 per dollar, inflation has eased to 5.2%, and GDP growth is projected at 2.8% for the year. Yet, economists warn that without consistent policy frameworks and legal assurance, this recovery remains fragile.

The proposed Investment Security Act is thus seen as a critical step toward creating a predictable investment climate. It will legally prohibit the arbitrary seizure or nationalization of private enterprises fear that resurfaced during past political transitions and ensure that any state intervention occurs under transparent, compensatory frameworks.

Economic analysts argue that the Act could also help Sri Lanka improve its ranking in the World Bank’s Ease of Doing Business Index, attract long-term investors, and position itself as a stable investment hub in South Asia. 

The new Investment Security Board will serve as a dispute resolution mechanism, enabling investors to settle grievances without lengthy litigation, thereby speeding up decision-making and reducing bureaucratic risks.

If implemented effectively, the Act could complement the broader economic stabilization program under the IMF’s Extended Fund Facility and reinforce the government’s pledge to maintain a liberal, rules-based economy. 

As Sri Lanka transitions from crisis management to growth revival, ensuring investor protection through robust legislation will be vital to attracting capital, creating jobs, and sustaining confidence in its economic future

Sri Lanka’s flagship retirement savings vehicle, the Employees’ Provident Fund (EPF), is sitting at the heart of a governance tug-of-war between the government and the International Monetary Fund (IMF). Under current legislation the Central Bank of Sri Lanka (CBSL) holds custodianship of the EPF’s assets yet the IMF’s recent Governance Diagnostic Assessment clearly flagged this as a conflict-risk and recommended the creation of an independent fund manager to oversee the scheme. 

During a recent appearance before the Parliamentary Committee on Public Finance, CBSL Governor Nandalal Weerasinghe disclosed that the government had formally instructed CBSL to retain its custodianship role for now, despite the IMF recommending legislative reform to spin out EPF management into a separate institution akin to a Public Debt Management Office.

The IMF argues that with the EPF owning very large shareholdings across Sri Lanka’s banking and financial sector many state-owned and subject to potential political influence guardianship by CBSL creates a material risk of conflict of interest.

They note that “state-owned financial institutions are often exposed to increased risk of political influence over their operations” and that when a fund is investing in banks supervised by the same central bank, the appearance of compromised governance arises. 

The EPF is the largest defined-contribution scheme for private and semi-government employees in Sri Lanka. As at the end of 2024 the Fund’s net worth stood at approximately Rs 4.38 trillion  up roughly 12.6 % from Rs 3.89 trillion at end-2023. 

According to the EPF’s website, assets reached Rs 4.3757 trillion at end-2024, with liabilities to members of Rs 4.2895 trillion. Member contributions jumped to Rs 234.4 billion, refunds fell to Rs 188.1 billion, and the number of contributing accounts rose by 10.8 % to 2.92 million. 

During 2022 the EPF declared a rate of return of 9.00% to members, with assets at Rs 3.4599 trillion, up 9.3 % from the previous year. 

With such a large asset base amounting to several % of GDP the EPF is more than a pension pool: it is a strategic national financial lever. The IMF’s governance diagnostic warns that when a large pension fund is overseen by the same institution that supervises banks and invests in them, it may indirectly shape government or banking behaviour, reduce transparency, and increase risk of politically-driven investments. 

Creating a separate, independent fund manager could enhance clarity of accountability, reduce the potential for conflicted decision-making, and raise transparency (especially important given the IMF’s broader governance agenda, which calls for stronger independence of oversight institutions). From an economic-policy standpoint, retention of the EPF under CBSL custody means the same entity that steers monetary policy (and supervises banks) also invests the largest retirement fund in the country heightening systemic concentration risk. In a situation of banking stress or large-scale government borrowing (as Sri Lanka continues to face), the EPF could be exposed to losses that bleed into general economic stability or foreshadow hidden contingent liabilities.

Shortfalls in implementing planned investment spending could weaken Sri Lankan economy’s growth potential, making longer-term fiscal consolidation more challenging, Fitch Ratings said.

Meanwhile, Fitch noted that the government’s 2026 budget proposals indicate that the authorities remain committed to reducing government debt/GDP over the medium term after beating the targets in the 2025 budget.

Fitch Ratings is also of the view that sustained strong revenue performance will remain key to meeting the government’s fiscal goals.

The budget, unveiled on 7 November, targets a deficit of 5.1% of GDP in 2026, wider than the 4.5% that the government expects in 2025. The original deficit target for 2025 in last year’s budget was 6.7% of GDP, but in March the International Monetary Fund (IMF) projected a lower figure of 5.4%.

The latest budget forecasts the primary balance before interest payments will remain in surplus at 2.5% of GDP in 2026, down from an expected 3.8% in 2025, but still above the 2.3% target under Sri Lanka’s IMF programme. The government aims to reduce the fiscal deficit to 3.8% of GDP by 2030 under its medium-term fiscal framework.

Fitch Ratings noted that continuing to meet the key fiscal markers laid out in the IMF programme would help the authorities to improve Sri Lanka’s policy-making record adding macroeconomic stability would also benefit.

The official budget deficit projection for 2026 is wider than the 4.6% of GDP that Fitch anticipated when it affirmed Sri Lanka’s rating at ‘CCC+’ in October 2025. However, the effect on Sri Lanka’s debt trajectory could be more than offset by the over-performance in 2025, where Fitch Ratings had expected a budget deficit of 5.4% and a primary surplus of 2.4%.

Fitch Ratings stressed that the outperformance in 2025 was partly driven by underspending, with the public investment/GDP ratio significantly below target, at 3.2% against the original goal of 4%.

It added “shortfalls in implementing planned investment spending could weaken the economy’s growth potential, making longer-term fiscal consolidation more challenging.”

However, Fitch stated that the latest budget highlights several measures that have the potential to lift investment and benefit growth including the resumption of an expansion of Bandaranaike International Airport (BIA), a Rs. 342 billion (1% of 2026 Fitch-estimated GDP) allocation towards road development, tax incentives for the construction of digital infrastructure and planned legislation to increase the use of public-private partnerships in infrastructure projects.

(Source : adaderana.lk)

As Anura Kumara Dissanayake’s administration unveils the 2026 budget today, Sri Lanka enters a high-stakes year. This budget is more than fiscal arithmetic it is a litmus test for whether the government can deliver on its promise of a “people’s economy”, while keeping its footing in a fragile recovery.

Since taking office, Dissanayake has championed transparency, equity and efficiency aiming to rid the state of patronage networks and revive production, especially in agriculture and manufacturing.

 But the government will have to navigate very tight fiscal space: debt-to-GDP is near 100 %, interest payments absorb half of revenues and inflation pressures loom. The budget must satisfy the International Monetary Fund (IMF), sustain exports and deliver relief without breaking the fiscal path.

Export momentum and fiscal relevance: Early 2025 data show promising export trends. Total exports (merchandise + services) from January to July reached nearly US$ 10 billion, a year-on-year rise of about 7 %.

 Merchandise exports alone grew by around 7.2 % in the same period. Sri Lanka Business Strong sectors include apparel, tea, coconut-based products and processed food. These strengths matter: export earnings boost foreign currency reserves, help stabilise the rupee and support the budget’s external viability.

However, risks remain. Imports continue to grow rapidly, widening the trade deficit. and the government must ensure that export success translates into sustainable jobs and investmentnot just short-term gains.

Subsidies and relief for the vulnerable: On the social front, the budget must respond to households squeezed by rising living costs. Agriculture subsidies are a clear test.

For the 2025 Yala season, the cabinet approved a fertiliser subsidy of Rs 25,000 per hectare for paddy (up to two hectares), and Rs 15,000 per hectare for other field cropsMeanwhile, efforts to digitise subsidies QR code systems and farmer databases are underway to ensure transparency. The Morning Properly targeted subsidies can shield poorer households and bolster rural production, but they must be carefully funded and monitored so they don’t destabilise public finances.

What to watch in Budget 2026: 

• Revenue performance: Rather than big new tax hikes, expect a focus on broadening the tax base, improving compliance and lowering leakages especially in import duties and vehicle taxes.
• Spending discipline: Capital spending must maintain quality and avoid waste. A proposed Public Investment Committee under the Fiscal Management Law could play a role in vetting projects.
• Export linkages: Budget initiatives must reinforce export-oriented sectors apparel, tea, coconut, processed foods, ICT and logistics. Export incentives, improved infrastructure and trade-facilitation reforms should feature.
• Subsidies with reform: While subsidies for agriculture and vulnerable groups are politically necessary, they must be wrapped in efficiency reforms digital delivery, better targeting, and clear timelines.
• External shock preparedness: The budget needs buffer room for risks: global slowdowns, oil-price spikes, currency pressures, and trade disruptions (especially from US and EU demand).
• Social legitimacy: The government must show that reform is not just about numbers, but about people jobs for youth, better infrastructure, stronger export value-chains and meaningful relief for low-income households.
• Predictive outlook: If the budget gets this balance right modest but effective revenue gains, disciplined spending, targeted subsidies and stronger export linkages then Sri Lanka may shift from recovery mode to sustainable growth. Export sectors could gain momentum, subsidies may support rural revival, and confidence (domestic and international) would improve.

If it misstepsby over-relying on populist relief, delaying export reforms, or under-funding subsidy systems—then macro-slippage, inflation resurgence and weakened public trust become real risks. Particularly, if export growth falters, foreign-currency pressure could undermine fiscal targets, forcing cutbacks later.

In short, Budget 2026 is about trust trust from lenders (IMF, creditors), trust from investors, and most critically trust from the Sri Lankan people.The government’s promise was clear: economic discipline and social justice must go hand in hand. If they deliver, this could mark the beginning of a new chapter not just survival, but renewal. If not, the fragility beneath the headline numbers may once again surface.

The micro, small and medium enterprise (MSME) sector in Sri Lanka—long hailed as the backbone of the economy is now facing acute stress, with many firms on the verge of collapse amid constrained bank lending and inadequate government relief. While MSMEs contribute over half the nation’s gross domestic product and employ millions, their plight is now emerging as a critical fault‐line. 

Budget 2026 offers no meaningful lifeline

Speaking on behalf of the Ceylon Federation of MSMEs, President Mahendra Perera warned that the 2026 Budget fails to provide meaningful support to this vital constituency. He highlighted two major concerns: the absence of viable relief for businesses saddled with non-performing loans, and the impending reduction of the VAT registration threshold from Rs. 60 million to Rs. 36 million, effective April 2026 a move he says will squeeze small retailers and shift the burden onto struggling consumers.

NPL firms are shut out of new credit lines

Despite the government introducing new credit lines for MSMEs, Perera pointed out that businesses which have already suffered multi-year losses cannot access fresh financing because they are classified as NPLs (non-performing loans). “There is no mechanism for businesses that have been hit over the past five years to obtain new loans,” he told the Daily FT. Many firms remain liquidity-constrained, unable to service existing debt, let alone grow.

Official data underline how critical MSMEs are to Sri Lanka’s economy. The sector is estimated to generate over 52% of GDP and employ around 4.5 million people.

 Yet, the support structure is breaking down. A survey commissioned by the government found that during 2019–22 more than one-in-five surveyed MSMEs had closed permanently or temporarily 20.2%. 

While some relief measures were introduced such as circulars from the Central Bank of Sri Lanka (CBSL) advising banks to negotiate business revival plans with affected SMEs by 31 March 2025 critics say they fall far short of the scale and specificity required.

Banks still go for collateral, not restructuring

 The bank-execution issue looms large. Many MSMEs report that banks continue to move toward enforcing collateral calls and recovery actions rather than restructuring loans. Such pressure comes just when government-promoted budgeted credit facilities are being rolled out, yet these schemes do not reach enterprises already trapped in NPL status. The mismatch, Perera says, means that while new financing is nominally available, the firms that most need help are excluded.

Adding to the complexity is the value-added tax change. By lowering the registration threshold to Rs. 36 million, the government risks dragging more small retailers into the VAT net and increasing end-consumer VAT burdens potentially reducing demand for MSME-supplied goods and services just as cash‐flow is already under strain.

Macro risk to Sri Lanka’s growth path

The MSME crisis also has broader macro implications. With MSMEs accounting for such a large part of output and employment, their distress risks dragging down investment, exports and broader growth momentum. The economy grew by around 4.5% in the first quarter of 2025, but analysts warn that structural damage and enterprise distress could undermine this recovery. 

In the coming days, the Federation plans to press the government and engage with banks to advance a practical mechanism that will restore viable access to capital for genuinely affected MSMEs. Without such intervention, the sector may not only shrink but also leave a lasting void in Sri Lanka’s employment and growth engine.

The signs are clear: Sri Lanka’s MSMEs are running on fumes. They require targeted relief, inclusive credit restructuring and demand‐support policies not just new loan schemes that do not reach the hardest hit. Whether policy-makers step in now will determine whether the sector survives or becomes another casualty of the crisis.

Sri Lanka’s state-sector reform rhetoric risks being hollow when confronted with the reality of multiple non-operating enterprises still burdening the public purse.

 As at 30 July 2024, there were 10 public companies and 2 public corporations officially categorised as non-operative, yet their names, financials and formal resolutions remain elusive  a silent fiscal time-bomb.

 According to official disclosures, the Sri Lanka Rubber Manufacturing & Export Corporation (SLRMEC) has already been closed and its Elpitiya Foam Rubber factory leased out; likewise the Co‑operative Wholesale Establishment (CWE) had all employees retired by 30 Sep-2023 but no liquidation action taken. 

The Board of the dormant entities has decided some be liquidated contingent on a Cabinet decision while others be voluntarily dissolved owing to sustained losses. Yet by 31 July 2024, of the four companies scheduled for dissolution only the liquidation process had begun and for the remaining six, no process at all.

Attempts to identify the full list of the 12 entities face significant information gaps. Publicly available sources name some: for example, lists of dormant SOEs include the Janatha Estates Development Board (JEDB) and Sri Lanka State Plantations Corporation (SLSPC) among long-non-viable commercial entities.“While the closure of 33 dormant SOEs is a step in the right direction two examples are JEDB and SLSPC which have long ceased to operate as viable commercial entities Another dataset shows the non-operative list includes Lanka Cement Corporation Ltd, Selendiva Investments Ltd and Magampura Ports Management Company (Pvt) Ltd among entities to be shut down. srilankamirror.com+1

The lack of a comprehensive, verified listing raises urgent red-flags. The most recent official study reports that twenty SOEs incurred losses totalling around Rs 850 billion. If even a subset of the non-operating firms contributes to such loss accumulation, the fiscal drag remains material.

Governance and resolution remain weak. The fact that six of the ten dormant public companies had not commenced any liquidation as of mid-2024 speaks volumes about implementation failure.

 A commentary on the delays in SOE restructuring described the process as a “huge responsibility” facing the Ministry of Finance but with “delays” persisting. 

For Sri Lanka to restore fiscal credibility and free up resources for productive use, the following actions are essential: publish the full list of dormant entities with their latest financials; assign each an exit status (revive, merge, and liquidate) with timelines; and start the liquidation/closure process without further delay. These “zombie” enterprises are not inert they carry costs, liabilities and opportunity losses. And time is no longer a friend.

The Asian Development Bank (ADB) has approved a US$100 million financing package to help Sri Lanka consolidate its fragile economic recovery and strengthen fiscal stability after the worst financial crisis in the nation’s post-independence history.

The funding, which complements ongoing support under the IMF-led reform program, is aimed at improving fiscal governance, enhancing revenue collection, and encouraging private sector participation three pillars seen as essential to sustain the country’s long-term recovery.

Announcing the initiative, ADB Country Director for Sri Lanka Takafumi Kadono said the country had made “commendable progress in restoring fiscal and debt sustainability” following its 2022 economic collapse. “We will work closely with the government to promote inclusive, sustainable growth by strengthening fiscal governance and building a more efficient, accountable, and resilient public sector,” he added.

Strengthening Fiscal and Revenue Systems

The new ADB-backed program will focus on streamlining public expenditure to ensure better use of limited state resources. This includes digitalizing and reforming budgetary processes, reducing waste, and introducing stronger audit and monitoring systems to make public spending more transparent and efficient.

On the revenue side, Sri Lanka will receive support to strengthen domestic and international tax compliance through a multi-year tax improvement strategy. The program will also build on the country’s recent entry into the Global Forum on Transparency and Exchange of Information for Tax Purposes, helping authorities track cross-border tax evasion and broaden the revenue base.

Kadono noted that strengthening tax administration is vital for Sri Lanka to reduce reliance on borrowing. “Sustainable revenue growth is the backbone of long-term fiscal discipline,” he emphasized.

Empowering the Private Sector and SOEs

ADB’s program also targets the creation of a predictable investment climate by developing a new legal framework for public private partnerships (PPPs) that aligns with international best practices. This framework is expected to attract private investment into infrastructure and public services while reducing the financial burden on the state.

Moreover, the initiative will strengthen state-owned enterprise (SOE) oversight by introducing a credit risk framework and specialized monitoring units steps that aim to increase accountability and reduce fiscal risks posed by loss-making SOEs.

Climate and Gender Focus

The ADB package introduces first-time reforms such as a Fiscal Risk Statement and a national climate finance strategy to mobilize green investment. It also embeds gender-sensitive budgeting and reforms in public procurement to make national development both inclusive and equitable.

A Long Road to Stability

Economists view the ADB’s latest package as timely, given Sri Lanka’s ongoing challenges in debt restructuring, foreign reserve buildup, and fiscal reforms. While macroeconomic indicators have improved since 2023, sustained external support and disciplined policy implementation will be key to ensuring recovery translates into broad-based growth.

Founded in 1966, the Asian Development Bank, owned by 69 member countries, remains one of Sri Lanka’s most consistent development partners. With this latest initiative, ADB signals its continued confidence in Sri Lanka’s reform path one aimed at transforming fiscal resilience into real economic opportunity

Sri Lanka’s external sector appears resilient on the surface, but the underlying trends reveal a fragile balance that could unravel if poor governance and short-sighted policies persist.

 Despite Central Bank data showing a year-to-date current account surplus and steady foreign reserves, growing import pressure, weak investment flows, and policy complacency threaten to derail the country’s 2025 foreign reserve target and potentially trigger another foreign exchange crisis.

During the first nine months of 2025, Sri Lanka’s current account recorded a surplus of 1.9 billion US dollars, an improvement of 29 percent from the same period last year. 

The gain was mainly driven by stronger exports, a recovery in tourism, and a sharp rise in worker remittances. However, this momentum took a concerning turn in September when the country posted its first current account deficit of the year 183 million US dollars  caused largely by surging vehicle imports.

Merchandise imports jumped by 24.5 percent year-on-year in September to reach 2.05 billion US dollars, while exports grew at a slower pace of 12.5 percent to 1.13 billion US dollars. 

The result was a sharp widening of the trade deficit to 910 million US dollars, compared with 634 million US dollars a year earlier.

 The Central Bank attributed this deterioration mainly to the sudden spike in vehicle imports, which totalled 286 million US dollars for the month and a staggering 1.2 billion US dollars during the first nine months of 2025.

Remittance inflows have been a critical stabilising factor. In September alone, remittances rose by 25 percent from a year earlier to 696 million US dollars, with the cumulative figure for the nine-month period reaching 5.8 billion US dollars, up 20 percent year-on-year.

Tourism too has contributed modestly to external inflows, bringing in 1.8 billion US dollars in September and 2.47 billion US dollars for the nine months, a 5.3 percent increase from the previous year. The services sector, although posting a mild 6 percent decline in September, maintained a moderate gain overall with total inflows of 2.85 billion US dollars.

These foreign inflows, combined with the Central Bank’s cautious management of external debt obligations, have kept gross official reserves at about 6.2 billion US dollars by end-September, including the currency swap arrangement with the People’s Bank of China.

 Yet, beneath this stability, there are troubling signs. Foreign investors continued to exit the Colombo Stock Exchange, while inflows into government securities remained limited, reflecting persistent doubts about policy consistency and fiscal transparency. 

Economists warn that the apparent strength of the external sector masks deep structural weaknesses.

 The re-emergence of a trade deficit, a 3.9 percent depreciation of the rupee by end-October, and a surge in luxury imports point to familiar patterns that preceded the 2022 foreign exchange crisis. Many analysts argue that the government’s amateur handling of trade policy and its failure to maintain consistent macroeconomic discipline could once again leave the economy exposed to external shocks.

To prevent a repeat of past crises, Sri Lanka must treat the current external stability as an opportunity to build real resilience. This means curbing non-essential imports, improving export competitiveness, ensuring transparent fiscal management, and restoring investor confidence through predictable policies. Without such measures, the country’s fragile surplus could rapidly erode, leaving reserves vulnerable to another depletion cycle.

Sri Lanka’s external sector may look stable today, but complacency could turn that strength into illusion. The government must act decisively, not rhetorically, to consolidate its foreign reserves and protect the economy from sliding back into a familiar and costly foreign exchange crisis.