📈 Treasury Signals Shift in IMF-Backed Tax Reforms to Focus on Administration

Treasury officials revealed that Sri Lanka's next phase of fiscal reforms will shift from raising tax rates to modernising tax administration through a new Medium-Term Revenue Strategy (MTRS), aimed at building a growth- and SME-friendly environment. • Core Administration Reforms: Developed with IMF technical assistance, the strategy targets collecting an additional 1.9% of GDP through improved compliance and modernisation of the Inland Revenue Department (IRD) rather than higher tax rates. • Fiscal Growth vs. Sustainability: The Parliamentary Committee on Public Finance (CoPF) highlighted that taxes have temporarily become the second-largest contributor to production-based GDP (at 12.4% vs. 4-5% historically) due to recent consolidation. Officials agree this contribution must decline as structural reforms stimulate value addition in manufacturing and services. • Key Economic and Debt Indicators: • Public debt fell to 98.3% of GDP in 2025 (projected 86.7% by 2032). • 2025 Budget deficit narrowed to 2.3% of GDP—the lowest since 1956—with a primary surplus of 5.4% of GDP. • Tax-to-GDP ratio hit 15.4% in 2025, the highest since 1997. • Total revenue and grants jumped 34.6% YoY during the first four months of 2026, generating a primary surplus of Rs. 863 Bn (surpassing the full-year target of Rs. 360 Bn). Capital expenditure execution remained low at 9.8%. • Emerging Risks: The Treasury's latest Fiscal Risk Statement identified climate change and natural disasters as top fiscal risks alongside macroeconomic uncertainties, requiring enhanced disaster-risk financing in future budgets.