Sri Lanka’s austerity is one of the most severe in recent history

Sri Lanka has undergone one of the sharpest and fastest episodes of austerity in history, driven by a massive retrenchment in public investment and a suppression of real wages, according to data from a report by the World Bank.

- BY SHIRAN ILLANPERUMA

On 9 September 2025, the World Bank published a report called Sri Lanka Public Finance Review: Towards a Balanced Fiscal Adjustment. The 109-page report is anchored in the theoretical certainty that austerity was a painful but necessary adjustment following Sri Lanka's default on its external debts in 2022. Yet even within this paradigm, the report provides a treasure trove of data that serves as a damning indictment of how austerity has suppressed investment, undermined growth, and deepened social distress in the country.

Across 330 episodes of austerity in 123 countries between 1980 and 2024, Sri Lanka’s ‘fiscal adjustment’ from 2021 to 2024 stands out as being ‘sharper and faster’, the World Bank said. For Sri Lanka, this record fiscal consolidation is second only to what it went through from 1980 to 1983, a turbulent period of neoliberalisation bookended by state-sponsored union busting and ethnic pogroms.

Growth and Investment

Since Sri Lanka entered into its 17th IMF programme in 2021, its primary balance (the difference between government revenue and expenditure, not counting debt repayment) has increased by eight percent. Yet this achievement came at extraordinary cost.

The most severe blow has been dealt to public investment —a retrenchment of public investment drove seventy-two percent of the spending adjustment between 2019 and 2023. The contribution of public investment to growth turned negative between 2021 and 2023, dragging overall GDP downward. Instead of acting counter-cyclically, public investment was shackled precisely when it was most needed to absorb labour, stimulate demand, and lay the foundations for industrial recovery.