📈 SL Budget 2026 & Fiscal Outlook: Consolidation Path Maintained

Fitch Ratings notes that the Sri Lankan government remains committed to fiscal consolidation, with sustained revenue performance identified as key to meeting medium-term goals. • 2025 Outperformance: The expected fiscal deficit for 2025 improved significantly to 4.5% of GDP, better than the original 6.7% target, driven partly by underspending on public investment (3.2% vs. 4% target). • 2026 Targets: The budget targets a deficit of 5.1% of GDP in 2026 (wider than 2025 expectation) and a Primary Balance surplus of 2.5% of GDP (down from 3.8% expected in 2025), which still exceeds the IMF programme target (2.3%). • Revenue Projections: Revenue/GDP is projected to fall slightly to 15.4% in 2026 from 15.9% in 2025. • Key tax projections include an 8% rise in income taxes and only a 3.5% rise for goods/services taxes (viewed by Fitch as conservative). • Taxes from external trade are expected to drop 1.2% in 2026 following a surge in vehicle imports in 2025. • Investment & Debt: New measures include a LKR 342 Bn allocation for road development and tax incentives for digital infrastructure. High government debt (100.5% of GDP in 2024, projected 96% in 2027) remains a core weakness for the sovereign credit profile.