By the Frontpage Journal Strategy & Policy Desk
The year 2024 marked a cautious turning point for Sri Lanka’s economy. Liquidity conditions in the domestic money market, which had remained in deficit throughout 2023, shifted into a surplus as a result of assertive actions by the Central Bank. Net foreign exchange purchases exceeding Rs. 850 billion, coupled with targeted swaps and bilateral inflows, led to a liquidity surplus of nearly Rs. 168 billion by year-end. The financial strain of the immediate past appeared to ease. But as the Annual Economic Review 2024 of the Central Bank of Sri Lanka makes clear, this short-term relief cannot be mistaken for long-term recovery.
The core of the challenge remains structural. Monetary policy has created breathing space, but it cannot substitute for sustainable fiscal reform or industrial transformation. Sri Lanka must now decide whether to use this moment of calm to rebuild a more resilient economic architecture or to slide once again into a pattern of crisis and reaction. The country’s way forward requires more than liquidity, it demands vision, policy integration, and disciplined execution.
First, fiscal sustainability must become a foundational principle, not a reactionary measure. The budget deficit, though narrowed marginally, continues to place pressure on domestic borrowing and inflation. Revenue collection remains weak relative to GDP, and public debt consumes a disproportionate share of government income. Sri Lanka’s fiscal base must be broadened through progressive taxation, improved compliance, and the elimination of inefficient subsidies.
However, fiscal discipline cannot be achieved by austerity alone. A smarter approach is needed, one that prioritizes investment over consumption, and productivity over patronage. Government expenditure should be directed toward infrastructure that enables economic competitiveness: industrial parks, port and airport connectivity, renewable energy, education, and skills development. These are not mere costs, but catalysts for transformation.
Second, Sri Lanka must commit to becoming a manufacturing-led economy. The country has long been dependent on volatile revenue streams, tourism, remittances, and low-value exports, while import dependency has steadily grown. This imbalance lies at the heart of its foreign exchange crisis.
A manufacturing-led strategy would allow the economy to absorb labor, develop domestic supply chains, and generate consistent foreign exchange. Key sectors such as advanced apparel, food processing, electronics, pharmaceuticals, and green technology offer opportunities for diversification and value addition. If supported with logistics infrastructure, power stability, tax incentives, and policy continuity, these sectors can reposition Sri Lanka as a high-efficiency node in regional and global value chains.
Workforce development will be vital. Too many young people remain unemployed or under-skilled for modern industry. Technical education, vocational training, and closer collaboration between universities and industries must become part of a national development agenda. Without skilled labor, the vision of industrial expansion will remain aspirational.
Third, a fundamental integration of fiscal policy and industrial strategy is required. These two spheres, often treated as parallel, must now operate in tandem. Fiscal incentives should not be scattered arbitrarily but aligned with the government’s industrial priorities. Manufacturing clusters should be tax-supported and performance-monitored.
Public procurement should favor local value chains. Investment approvals should be streamlined and guided by strategic national objectives.
Crucially, this integration must be governed by institutional clarity and accountability. Sri Lanka needs a central economic policy coordination mechanism, perhaps a National Competitiveness Council, empowered to align decisions across finance, trade, investment, industry, and education. Without such coherence, policy execution will remain fragmented and ineffective.
Environmental sustainability must also be embedded into every stage of this transformation. As global markets move toward decarbonization, Sri Lanka’s future competitiveness depends on embracing green industrial practices. Energy efficiency, circular production, and environmental certifications are not only moral imperatives but commercial requirements in modern trade.
What Sri Lanka faces is not merely an economic challenge, but a strategic crossroad. The liquidity surplus reported in 2024 provides a rare opportunity to shift course, to exit the cycle of macroeconomic distress and enter a path of deliberate, structured growth. But this shift will require more than market operations or debt relief. It will require leadership that is bold enough to move beyond stabilization and build for the long term.
The foundations are within reach: a youthful population, strategic location, industrial potential, and a temporary easing of financial pressure. What remains is the political and institutional will to capitalize on them, to treat fiscal prudence, industrial development, and policy integration not as separate goals, but as a single, interdependent strategy for national resilience.
If Sri Lanka chooses this path, it will not only recover. It will rebuild with strength, relevance, and purpose.
Source: Central Bank of Sri Lanka, Annual Economic Review 2024
