SRI LANKA Trends and Developments Contributed by: Ayanthi Abeyawickrama, Varners
Sri Lanka: Navigating a New Economic Chapter Introduction Sri Lanka is in the midst of a profound economic transition. Following the unprecedented crisis of 2022, the country has embarked on a com - prehensive programme of fiscal consolidation, institutional reform and structural adjustment, supported by the International Monetary Fund (IMF). For both foreign and domestic investors, this transformation presents a dynamic mix of opportunity and complexity. This article provides an updated account of key developments shaping Sri Lanka’s current investment and economic climate. While reforms are ongoing, notable progress has been made across multiple sectors, ranging from tax policy and public finance to digital transformation and tourism resurgence. Post-Crisis Stabilisation and IMF Support Under the 48-month IMF Extended Fund Facility (EFF) arrangement, Sri Lanka has continued to meet reform milestones. In July 2025, the IMF completed its fourth review, agreeing to dis - burse an additional USD350 million and thereby bringing total disbursements to USD1.74 bil - lion. Inflation remains subdued, reserves have strengthened and the rupee has remained rela - tively stable. The Central Bank of Sri Lanka has cautiously eased policy rates, with the Standing Lending Facility Rate and Standing Deposit Facility Rate currently at 9% and 8%, respectively. Mean - while, private sector credit rose by LKR133 bil - lion in May 2025, and revenue collection has exceeded expectations. The temporary relief granted to small and medium-sized enterprises (SMEs) from parate
execution lapsed on 30 June 2025 for loans exceeding LKR50 million. The parate execution enables licensed banks to repossess secured assets without recourse to court proceedings, thereby expediting debt recovery. Its enforce - ment had previously been suspended, initially for six months by the previous government and subsequently for an additional three months by the present administration. With the expiry of the moratorium, the law has now resumed full effect, potentially triggering a wave of enforce - ment actions by banks seeking to recover non- performing loans. Strong Revenue Performance and Fiscal Discipline Government tax revenues rose 21% in the five months up to May 2025, reaching LKR1.804 trillion. Customs alone contributed over LKR1 trillion in the first half of 2025, driven in part by resumed vehicle imports, which generated LKR220 billion in levies. Over 18,000 vehicles were imported from January to May 2025, fol - lowing the lifting of the 2020 import ban. Let - ters of credit amounting to USD742 million were opened, approaching the proposed cap of USD1 billion. Fiscal performance also improved significantly, with the primary surplus expanding and the over - all budget deficit shrinking. These gains reflect both stronger revenue collection and restraint in current expenditure, despite a rising public sec - tor wage bill. Tax Reform and Incentive Rationalisation Following past criticism for granting ad hoc and non-transparent tax holidays, the government has now agreed – under IMF structural bench - marks – to introduce amendments to the Stamp Duty (Special Provisions) Act by August 2025 and to the Port City Act by October 2025. These
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