ECONOMYNEXT – Sri Lanka has recorded a surplus in the current account of the budget after 38 years in 2025, central bank data showed as tax revenues surged and current spending was kept in check.
The central bank also helped keep spending down by keeping inflation low (missing the inflation target) despite some depreciation of the currency, especially in the latter part of the year.
Tax revenues surged 36 percent to 5,049 billion rupees in 2025 partly helped by taxes pon car imports which were resumed last year after blocking them as forex shortages emerged from inflationary rate cuts in 2020.
Blocking highly taxed imports, especially cars, and depriving tax revenues to the government, torpedoing fiscal metrics, is a frequent tactic of macro-economists after they trigger forex shortages with inflationary rate cuts.
In 2025, current spending fell 2 percent to 5,232 billion rupees.
As a result of strong revenues and the absolute fall in current spending, Sri Lanka reported a current account surplus in the budget of 217 billion rupees, after 38 years.
Sri Lanka last reported a current account surplus in 1987.
Monetary depreciation and uncontrollable spending
In 2025, Sri Lanka’s interest costs were reported as 2,500 billion rupees, down from 2,690 billion in 2024 and below a budgeted 2,950 billion rupees, helping keep down current spending.
A stronger monetary standard leads to lower interest rates, a phenomenon that was observed in gold vs silver standards in the past, analysts say.
Sri Lanka’s nominal interest rates and inflation started to surge in the early 1980s, after IMF’s Second Amendment to its articles, triggering steep depreciation allowing central bankers to escape accountability for runway monetary debasement.
The monetary depreciation and resulting inflation made budgets impossible to manage.
At the time Sri Lanka’s Treasury was also run by inflationist macro-economists seconded from the central bank who ignored advice from Singapore’s economic architect Goh Keng Swee, who was invited by then President J R Jayewardene to advice on monetary stability and economic fixes.
RELATED : How Sri Lanka rejected Singapore monetary advice and politicians, people paid the price
Before currency depreciation and high inflation promoted by macro-economists, it was easy for countries not only to run current account surpluses (called the Golden Rule of Budgeting) but also to run overall budget surpluses simply by cutting spending.
Now current spending rises with inflation, including wage bills and interest costs, making spending a moving target.
Most countries lost the ability to run budget surpluses after the collapse of the gold standard.
The US for example was able to run budget surpluses in the late 1990s for the first time since the collapse of the Bretton Woods, amid so-called ‘deflation’.
RELATED : Sri Lanka above target primary budget surplus partly due to central bank ‘deflation’
But the US again lost the ability as the country was reflated under inflationist (re-flation) doctrine promoted by the likes of Bernanke and Stiglitz triggering the housing bubble.
Some taxes finance capital spending for the first time in nearly 4 decades
Meanwhile in 2025 capital expenditure in Sri Lanka was 998 billion rupees in 2025, higher than 790 billion rupees in 2024.
Sri Lanka’s overall budget deficit was 744.9 billion rupees in 2025, down from 2,039 billion a year earlier.
With a current account surplus of 217 billion rupees, a part of the capital spending in the budget was financed for the first time since 1987, with taxes.
Sri Lanka has been spending money on non-current spending to please macro-economists for stimulus purposes (push up growth numbers with heedless spending for a ‘multiplier’ effect) without regard to actual long-term returns or evaluation of project priorities in the past.
But the new administration has said it focuses on priority projects that bring returns beyond the one year.
Debt to GDP down to 91-pct
In 2025 central government domestic debt grew to 18,675 billion rupees, from 11,319 billion rupees. Foreign debt grew to 11,319 billion rupees from 10,429 billion rupees.
Central government debt to GDP fell to 91.6 percent in 2025, from 96.1 percent. There are some additional SOE debt.
With aggressive monetary depreciation in 2026, the gains can be easily reversed.
The rupee is already at 315 to the US dollar by March.
Foreign debt also inflates with monetary depreciation, while simultaneously reducing disposable incomes of people forcing lower consumption of real goods and capping living standards and tax revenues at existing income levels.
By claiming that exchange rate is market determined, (though it is it very clear that Sri Lanka has explicit exchange rate policy, as shown by IMF reserve targets and net dollar purchases of the central bank which has aggressively weakened the rupee over the past year) monetary authorities have escaped accountability in the past for flawed operating frameworks and doctrinaire inflationism, critics say.
Exchange rates are determined purely by monetary policy in clean floating exchange rate regimes. But in reserve collecting central banks, exchange rate policy also comes into play.
Monetary depreciation from a deeply flawed operating framework of IMF prone countries have also been legitimized through inflationist doctrines like ‘exchange rate as the first line of defence’ critics say, again allowing officials to escape accountability for debasement and the social and political unrest that follow.
Politicians who are accountable however pay the price in the electorate as higher cost of living triggers social unrest.
Sri Lanka’s central bank has depreciated the rupee from 4.76 to the US dollar to 315 so far, discrediting prudent economic programs of elected governments especially in the recent past, critics have said.
Undermining Prudent Fiscal Policy with Monetary Depreciation
2018 was an emblematic year in which buy-sell swaps monetized privatization proceeds and rate cuts were also used to depreciate the currency even as energy prices were hiked under a price formula.
Despite the price formula the CPC made losses from dollar borrowings as it was barred from buying dollars as the Treasury is now.
In 2026 also the central bank has depreciated the rupee by printing money through buy-sell swaps, as well as heavy purchases of dollars, brushing aside President Anura Kumara Dissanayake’s call to maintain the value of the monetary unit, even before the current mid-east crisis hit.
Depreciation also bloats foreign debt, in addition to keeping nominal interest rates high.
East Asian and GCC countries including Qatar, UAE, Oman are Saudi have rejected these inflationist doctrines and maintain monetary stability as Sri Lanka did during two world wars before the setting up of the central bank.
Unlike in countries like Qatar and Dubai, inflationist central banks in countries like Sri Lanka and India can amplify and internalize external shocks by destroying the currency.
Qatar and Dubai set up their own currency originally through the Qatar-Dubai currency board when the Reserve Bank of India printed for macro-economic policy and devalued the Indian rupee.
In Sri Lanka the Treasury has also been choked out of dollars through privileges and monopolies of the central bank, forcing it to borrow dollars to repay interest and settle loans pushing the country into a debt trap, instead of buying dollars in the market or charging dollar taxes.
There have been calls to remove the privileges of the central bank, especially since repaying the IMF loan this time is the responsibility of the Treasury and not the central bank and bring strict laws to stop monetary authorities from triggering crises and forex shortages.
(Colombo/Mar23/2026)