By the Frontpage Journal Business Desk
Sri Lanka’s economic turning point in 2024, underscored by the liquidity surplus reported in the Annual Economic Review 2024 of the Central Bank of Sri Lanka, offered a momentary reprieve from financial turbulence. But in a country where fiscal fragility and industrial underdevelopment have long coexisted, the central question remains unresolved:
can Sri Lanka translate short-term financial relief into long-term national competitiveness?
The answer depends on bridging the gap between two often disconnected realms, fiscal governance and industrial policy. Without this connection, Sri Lanka risks moving from one temporary fix to another, unable to sustain stability or foster inclusive growth. The Central Bank’s decisive liquidity operations, including Rs. 858 billion in net foreign exchange purchases and sustained Open Market Operations, helped shift the money market from a deficit to a surplus position by the end of 2024. While this restored short-term balance, it also masked deeper issues: a persistent structural fiscal deficit, weak domestic production capacity, and an economy vulnerable to external shocks.
On one side is the pressing need for fiscal prudence. The government’s narrow tax base, excessive debt servicing costs, and dependence on short-term borrowing continue to weigh on the country’s macroeconomic fundamentals. On the other side is the desire for growth, jobs, and foreign exchange stability, objectives that cannot be achieved without productive investment in the real economy, especially in export-oriented manufacturing and value-added industries.
The solution lies in strategic integration. Fiscal policy should not operate in isolation from industrial goals. It must be recalibrated to not only stabilize the present but to strategically invest in the future. One way to do this is through smart public investment. Rather than cutting spending indiscriminately, fiscal reform must protect and prioritize capital allocations that improve national productivity, such as industrial zones, logistics infrastructure,
technology parks, and skills training. These are not expenses; they are foundational investments that enable the private sector to thrive and compete.
Another opportunity lies in targeted incentive frameworks. Sri Lanka has experimented with tax holidays and duty waivers, but many of these lacked performance metrics or sectoral focus. A smarter approach would tie incentives to measurable outcomes, export volume, employment generation, carbon neutrality, or domestic value addition. This links fiscal support directly to national competitiveness.
Equally, revenue generation must be aligned with economic structure. As Sri Lanka pivots to manufacturing and formalizes its SME base, the tax system must evolve to be fair, broad-based, and digitally enabled. This not only enhances fiscal resilience but encourages productive behavior in the private sector. If designed well, taxation can become a tool for guiding investment into sectors that align with national priorities.
But integration is not just about money, it’s also about governance. Fragmented institutional mandates and poor coordination often paralyze policy execution. For Sri Lanka to succeed,
ministries of finance, industries, trade, education, and technology must operate under a unified development vision. A national competitiveness council, backed by data, analytics, and cross-ministerial authority, could guide reforms and monitor progress.
The risks of not acting are clear. Without a competitive manufacturing base, Sri Lanka will remain dependent on volatile remittance flows and tourism receipts. Without fiscal discipline, it will remain beholden to external lenders, vulnerable to sovereign downgrades and investor flight. And without integration, it will continue to pursue piecemeal solutions that fail to move the needle.
The opportunity, however, is equally clear. Sri Lanka can reimagine its future, not as a service-dependent, import-heavy economy stuck in recurring crises, but as a smart, green, agile manufacturing hub integrated into regional value chains. A country where public finance supports long-term competitiveness, and where policy coherence replaces short-term improvisation.
Fiscal policy and industrial strategy must no longer be treated as separate debates. They are two sides of the same coin. And in a world where nations compete not just on resources, but on coherence and execution, Sri Lanka must build that missing link, before the window of opportunity closes once again.
Source: Central Bank of Sri Lanka, Annual Economic Review 2024
