Budget 2026: Interest or investment?

AT the end of the IMF program, by around 2028, Sri Lanka is projected to spend over 40% of Government revenue on debt repayments, one of the highest ratios among peer-group countries.

- By Kusum Wijetilleke

With at least eight million Sri Lankans categorised as poor, the narrative of stability is superficial. Higher public sector numbers and increased salaries contradict claims of a lack of fiscal space for health and education. As the economy expands, repayments under Macro-linked Bonds will continue to increase while persistent structural weaknesses in the external sector and weak FDI inflows sustain dependence on high-interest commercial borrowing.

Meanwhile, reserve accumulation and fiscal discipline risks domestic liquidity, higher growth and inflationary pressure.

Budget 2025, the National People's Power Government's first, proposed a basic salary increase of between 24% and 50% for the roughly 1.1 million (m) public servants.

In total, the Government allocated Rs. 100 billion (b) for salary increases for the current fiscal year, reports suggest a total additional spend of Rs. 330 b for public sector wages. A separate 'Cost of Living Allowance' was also approved for three years starting January 2025. In August 2025, Cabinet approval was granted for the recruitment of another 60,000 public servants to fill "essential vacancies" across government ministries, departments and institutions. This recruitment is overseen by a special committee led by Secretary to the Prime Minister in conjunction with the Ministries of Finance and Public Administration.

At the time, the NPP Government blamed a lack of fiscal space for historically low spending on health: 1.4% of GDP, and education: 0.9% of GDP.

The administration also allocated a record Rs. 1.3 trillion (t) towards capital expenditure for fiscal year 2025, a target it will most certainly not meet, like every Government prior.