Sri Lanka’s 2025 budget may widen fiscal deficit, says Moody’s

Moody’s warns Sri Lanka’s 2025 budget could slow fiscal consolidation, impacting its economic recovery efforts.

A toy vendor counts Sri Lankan currency notes at his shop in a market in Colombo, Sri Lanka, on February 17, 2025. Photo by Thilina Kaluthotage/Reuters

By Alana Salsabila and Clarisa Sendy

Moody’s Ratings has warned that Sri Lanka’s budgeted expenditure for 2025 is likely to result in a wider fiscal deficit and a slower-than-expected fiscal consolidation, raising concerns over the country’s economic recovery. The assessment came a day after President Anura Kumara Dissanayake unveiled the budget, which is seen as a crucial step in rebuilding Sri Lanka’s economy and preparing to resume debt repayments from 2028.

Economic challenges in Sri Lanka’s 2025 budget

Sri Lanka, which has been grappling with a severe economic crisis in recent years, is seeking to restore stability and ensure long-term growth. In his budget speech, Dissanayake outlined plans to transform the economy and implement structural reforms aimed at reducing debt burdens while boosting productivity. However, Moody’s has expressed concerns that higher expenditure levels could undermine efforts to narrow the fiscal deficit.

“The increase in spending could make it more difficult for Sri Lanka to achieve its fiscal consolidation targets,” Moody’s said in its statement. “While the government is focusing on economic transformation, rising expenditure could slow down the process of stabilizing public finances.”

Impact on debt repayment and economic recovery

A major focus of the budget is ensuring Sri Lanka can resume debt repayments by 2028, following the country’s sovereign default in 2022. The government has been working with international lenders, including the International Monetary Fund (IMF), to restructure its debt and implement economic reforms.

The 2025 budget includes measures aimed at improving revenue collection, reducing dependency on foreign assistance, and fostering sustainable economic growth. However, analysts argue that increased government spending could make it challenging to maintain fiscal discipline.

“The government’s revenue generation measures are critical,” said an economist at a Colombo-based think tank. “Without strong revenue growth, higher spending could lead to an unsustainable fiscal position, which may impact debt restructuring efforts.”

Government’s strategy for economic transformation

President Dissanayake emphasized that the 2025 budget is designed to lay the groundwork for long-term economic stability. The government plans to invest in infrastructure, social programs, and industrial development, which are seen as essential for boosting economic output and creating jobs.

Among the key initiatives in the budget:

Tax reforms aimed at improving collection efficiency
Public sector restructuring to enhance productivity
Increased social welfare spending to support vulnerable groups
Investment in energy and transportation sectors to drive growth

Despite these efforts, Moody’s remains cautious about whether Sri Lanka can balance increased expenditure with fiscal responsibility.

Concerns over fiscal consolidation

Fiscal consolidation—the process of reducing the budget deficit and stabilizing public debt—is a key priority for Sri Lanka. However, rising government spending in 2025 could delay progress in achieving fiscal discipline, potentially affecting investor confidence and the country’s credit rating.

The IMF has previously stressed the importance of strict fiscal policies to ensure Sri Lanka remains on track for economic recovery. While the government has committed to maintaining primary budget surpluses, Moody’s suggests that higher-than-expected spending could complicate these efforts.

“The challenge is balancing economic growth with fiscal consolidation,” said a senior financial analyst. “Sri Lanka must ensure that increased expenditure does not lead to excessive borrowing, which could weaken the overall recovery.”

Future outlook for Sri Lanka’s economy

The success of Sri Lanka’s 2025 budget plan will largely depend on its ability to generate higher revenues while maintaining expenditure discipline. The government has expressed confidence that its reforms will create a more resilient economy, capable of sustaining growth and meeting debt obligations.

Moody’s assessment highlights the risks associated with increased spending, but also acknowledges the importance of economic transformation efforts. Sri Lanka’s ability to navigate fiscal challenges while implementing structural reforms will determine its long-term economic trajectory.

As the country moves forward, investor sentiment, IMF cooperation, and global economic conditions will play a crucial role in shaping Sri Lanka’s financial stability and recovery.