ECONOMYNEXT – Sri Lanka’s budget turned almost to surplus in January 2026 with a gap of only 3.8 billion rupees, after the deficit collapsed in 2025 turning the current account into surplus, but the central bank depreciated the rupee pushing up the cost of living.
In January 2025, revenues grew 35.2 percent to 468 billion rupees, with tax revenues rising 35.1 percent to 434 billion rupees and non-tax rising 37 percent to 34.5 billion rupees.
Tax revenues were boosted from February 2025, with external controls reduced to give an economic freedom for people to allow car imports.
Blocking car imports and other highly taxed items (non-essential goods), has been a tactic employed to worsen fiscal crises in what critics call a ‘cascading policy error’ of macro-economists who cut rates by printing money.
The money printing seems to come from a belief that inflation rather than stability to allow economic agents to work and engage in long term investments, leads to growth.
Recurrent spending grew 1.2 percent to 429.4 billion rupees, with a net fall in interest costs.
With recurrent spending lower than total revenues, the current account of the budget was in surplus, in line with the gold rule of budgeting.
Capital expenditure was 43.2 billion rupees, 4 percent up from 41.5 percent which was almost financed from current spending.
In recent years Sri Lanka has spent on capital projects without feasibility studies to please macro-economists who want a Keynesian ‘multiplier effect’ from heedless spending rather than well-designed projects that expand the capacity of the country and give permanent growth.
For the full year 2025, Sri Lanka also ran a current account surplus in the budget for the first time since 1987.
In 2025, the overall budget deficit also collapsed to 744 billion rupees from 2,199 billion rupees a year earlier.
In 2025, the central bank depreciated the rupee from 296 to the US dollars to 310 even as budget deficit contracted.
Macro-economists who printed money to ‘cut rates’ have for decades blamed budget deficits (politicians) for external trouble and also current account deficits (the general public) and also twin deficits.
Sri Lanka however generally has lower budget deficits in the year the central bank prints money to cut rates and trigger a currency crisis, and higher deficits in the year of the stabilization crisis that follows, analysts have shown.
It has been pointed out that the narrative spread by macro-economists that budget deficits (rather than inflationary rate cuts to boost growth) are responsible for external crises and a loss of confidence in the currency, is a spurious claim that can be easily debunked.
READ MORE : Sri Lanka’s deficit lie: the inflationist narrative that leads to currency crises and default
DEFICIT NARRATIVE: In Sri Lanka the fiscal deficit rises in the stabilization year. The deficit barely rises in the year the forex crisis is triggered by targeting the call money rate, and in some cases it has remained flat in nominal terms as well.
In the year of stability, the correction is carried out by shrinking private credit even as the fiscal deficit rises.
There is strong opposition in Sri Lanka to central bank printing money through domestic operations. In 2025 money was printed mostly through buy-sell swaps and leaving liquidity from dollar purchases unsterilized until they turned into investment and import credits.
Excess liquidity at times rose close to 400 billion rupees, in part due to fx swap liquidity, twice the level seen in inflationary rate cuts that led to the first sovereign default and steep depreciation from a ‘float’ initiated with a surrender rule in place.
Sri Lanka lost the ability to run current account surpluses in 1987, amid steep currency depreciation after budget deficits going out of control earlier in the decade with nominal interest rates rising to very high levels.
Currency depreciation destroys capital, leading to high nominal interest rates and destroyed budgets as current spending and also capital project estimates become out of control moving targets, analysts have pointed out.