Fitch Ratings has highlighted Sri Lanka’s commitment to increasing fiscal revenues as a key factor in strengthening the country’s credit profile. The 2025 budget, presented on 17 February, underscores the government’s ambition to raise revenue as a share of GDP—targeting 15.1% in 2025, up from 11.4% in 2023.

The proposed fiscal plan includes a 36.5% increase in revenue from taxes on external trade and a 13.1% rise in income tax revenue. Fitch considers these targets feasible, provided that the liberalisation of import restrictions, particularly for vehicles, proceeds as planned. However, any slowdown in this process due to concerns over foreign exchange reserves could pose a risk to the fiscal outlook.

Despite these efforts, Sri Lanka’s public finances remain fragile, with the budget projecting only a slight reduction in the fiscal deficit—from 6.8% of GDP in 2024 to 6.7% in 2025. This is due to increased public capital expenditure (up 61%), wage hikes (up 12%), and subsidy growth (up 11%). While higher public investment could support long-term economic growth, implementation challenges may affect the actual deficit size.

The budget’s slower-than-expected fiscal consolidation deviates from targets set under Sri Lanka’s USD 3 billion IMF Extended Fund Facility (EFF) programme. Although the government aims to achieve a primary budget surplus of 2.3% of GDP in 2025, higher-than-expected interest payments (8.9% of GDP) could strain public finances. Fitch assumes the IMF will continue disbursements under the EFF despite these fiscal adjustments but warns that limited progress in debt reduction could impact Sri Lanka’s credit standing.