Budget 2025 and the Challenges of Economic Recovery Ahilan Kadirgamar

The NPP Government has the overwhelming support of the citizenry. This support in large measure was due to the deep economic depression that has drowned the country over the last many years. In this context, Budget 2025 signals the Government’s approach towards economic recovery. Furthermore, unlike election manifestos and public pronouncements, the budget is where a government has to walk its talk with funding.

While it would be unfair to expect a budget for one year to resolve the worst economic downturn since Independence, does this budget contain the strategies for shifting the crisis-prone economic trajectory? In this column, I begin analysing the recently announced budget proposals and articulate the policy challenges of economic recovery.

IMF Front and Centre

The broader framing of Budget 2025 can only be summarised as an International Monetary Fund (IMF) budget. The parameters for expenditure, revenues, and even the laws relating to the economy have been set by the IMF. The primary budget surplus target of 2.3% of GDP, expenditure without debt servicing of 12.8% of GDP, the revenue target of 15.1% of GDP, and a number of laws including the Public-Private Partnership Investment Management Act, are requirements set in the IMF programme.

The IMF has a chokehold on the Government. Its delegation visited Sri Lanka the week after the inauguration of the President, and again days after the parliamentary election. It waited to ensure the budget proposals met its conditionalities, before its Executive Board approved the Third Review and released another tranche last Friday. While the funds from the IMF – where each tranche amounts to USD 334 million – is a pittance, the external pressures from a range of international actors have trapped the Government into the humiliating and economically regressive conditions of the IMF.

The lesson from previous bouts of deflation, including with the Global Depression of the1930s, is that an economy can remain stagnant for long, and drastically contract

The IMF Executive Board Statement on 28 February 2025, is a blunt but clear reflection of the Government’s adherence to the IMF programme as well as the state of the economy:

“Performance under the programme has been strong. All quantitative targets for end-December 2024 were met, except the indicative target on social spending. Most structural benchmarks due by end-January 2025 were either met or implemented with delay. The recent successful completion of the bond exchange is a major milestone towards restoring debt sustainability. … By end-2024, Sri Lanka’s real GDP is estimated to have recovered 40 percent of its loss incurred between 2018 and 2023. The recovery is expected to continue in 2025. As the economy is still vulnerable, it is critical to sustain the reform momentum to ensure macroeconomic stability and debt sustainability, and promote long-term inclusive growth. There is no room for policy errors,” the statement read.

I have written extensively in the past, about the debt restructuring process and bond exchange, and what a bad deal they have been for Sri Lanka. The real concern here is that Sri Lanka has only recovered 40 percent from the severe economic contraction. Seven years have already been lost since 2018, and we are looking at many more years before we are even at square one. However, with policies dictated by the IMF, there is little room for a growth strategy, and we are losing the economic life of a generation.

Therefore, unless the Government comes up with a strategy to move out of the IMF programme, its future budgets will also be set by the IMF. While the priorities of the IMF have been those of the West and global finance capital, there is nothing reassuring today even of the stability of that unequal global order. Export-led growth and expected foreign investments that are supposedly going to uplift Sri Lanka have all been shaken by an unravelling global order accelerated by Trump’s trade wars and geopolitical polarisation. The West and the Great Powers that preach to countries like Sri Lanka about free trade are now busy putting up trade barriers and channelling their funds into military expenditure rather than development financing. Such global changes should further alert Sri Lanka to walk away from the IMF, shift out of its historical status as a dependent economy, and begin focusing on self-sufficiency.

Treasury Dominance

The budget proposals, while meagre in their allocations, illustrate a desperate attempt by the Government to support the working people. The large number of proposals of marginal increases in spending on wages, social welfare benefits, food system, rural infrastructure and allocations for healthcare and education, are signs of a desire to support the people. While such an approach is a welcome departure from the arrogant and elite policies of previous governments, I would like to highlight a couple of worrying blind spots and implementation challenges of the budget.

For those who regularly follow the annual budgets, a new report by the Finance Ministry as per the Public Finance Management Act, No 44 of 2024, provides the assumptions underlying the budget. In the ‘Budget, Economic and Fiscal Position Report’, the section on Basis Used for the Preparation of 2025 Budget, clearly states the following: “Sri Lanka recorded a deflation for five consecutive months since September 2024, reaching -4.0% in January 2025.” It further states that this trend is likely to continue for several months in 2025. This great danger of deflation, recorded prominently with evidence, is not addressed in the budget. The lesson from previous bouts of deflation, including with the Global Depression of the1930s, is that an economy can remain stagnant for long, and drastically contract. Deflation can lead to a large fall in production, with producers holding on to cash rather than taking the risk of producing amidst an expected fall in prices.

Next, in order to dig the economy out of the crisis, the Government should provide stimulus, but the public investment allocated in the budget is a mere 4% of GDP. Such levels of public investment in boom years itself would be considered very low, where historically Sri Lanka undertakes 6% to 8% of GDP each year. This is in part the consequence of anti-growth austerity measures imposed by the IMF. The point I wish to emphasise is that even with this meagre allocation of public investment, there seems to be little thinking about the need for stimulus towards creating a multiplier effect in the economy that can increase effective demand.

The claim that the economy is expected to grow by 5% this year – even if it can be achieved – holds little water, because growth is measured from such a low base, including low capacity utilisation. The blind spot on deflation and the lack of a growth strategy betrays the same old budget making approach of the Treasury, which has for long been moulded by the IMF and World Bank. The Government should direct the Treasury. Furthermore, there are worrying concerns about the economic policy making capacity of the NPP. Indeed, there is a need for serious thinking within the NPP leadership. For in their defensive positioning trying to counter or placate the neoliberal actors, including the local elite and the global establishment, they may be losing the plot on the real dynamics of the economy.

Mobilising for Change

From past experience we know that many of the budget proposals – despite their modest character this year – may not be implemented. The state machinery including the line ministries and the bureaucrats are used to blocking implementation of any innovative proposals. Next, in light of the almost impossible revenue targets in the budget this year, the Treasury may resort to its usual tactic of slowing down and curtailing budgeted expenditure, so that the primary budget surplus target could be achieved by a reduction in expenditure. While I argue that 4% of GDP in public investment this year is very low, the actual expenditure last year was a dismal 2.7% of GDP.

Ensuring that even 4% of GDP in state investment including the budget proposals are implemented – and that too in a short budget year with just 9 months to work – would require the Government to mobilise various constituencies to ensure the state machinery delivers. I have much more to say about the revenue measures, sectoral priorities, development financing and other strengths and weaknesses of Budget 2025. That is not possible in the space of this column. While I have focused here on the macro dynamics of budget making and the economic trajectory, I am writing a longer piece on the broader aspects of the budget for another forum.

For all purposes, 2025 in terms of the economy looks to be a lost year. A more generous reading would be to say that the new Government is preparing for 2026, including to mobilise the state machinery. Even as the Government focuses on implementing the budget, it needs to start preparing for Budget 2026. That, of course, should include a strategy to move out of the IMF program and the development of a viable economic growth plan. The great strivings of the people that have brought this Government to power require the NPP to find the wherewithal and muster the political will to change the economic trajectory and lift the country out of the depression.

(This article was originally published in the Daily Mirror on March 3, 2025)