The Hard Choices Facing Sri Lanka’s Economy and Society

Frontpage Journal – Economic Insights

Sri Lanka’s economic story in recent decades has been one of resilience tested repeatedly by political, natural, and financial shocks. From the 30-year civil war and the 2004 tsunami to the Easter Sunday attacks, the COVID-19 pandemic, and the unprecedented sovereign debt default, the country has faced a long chain of crises. These events were not triggered by its citizens or small businesses, yet the brunt of the consequences continues to fall on them. Today, Sri Lanka is attempting to navigate a path out of bankruptcy while imposing new taxes, restructuring public debt, and restoring confidence. But this path, though necessary, is proving deeply painful, particularly for a population already burdened by inflation, high living costs, and uncertainty about the future. Striking a balance between economic reform and social well-being has become the government’s most complex challenge yet.

Rising house robberies, violent crimes, and social unrest are not isolated phenomena. They are symptoms of a deeper societal imbalance caused by deteriorating economic conditions and public frustration. As inflation erodes purchasing power and wages fail to keep pace with living costs, desperation mounts, especially among lower and middle-income groups. When basic needs such as food, shelter, education, and healthcare become difficult to afford, it should not come as a surprise that social tensions begin to manifest in unlawful behavior and increased unrest. In this context, the psychological toll of prolonged economic hardship is as severe as the financial burden itself.

While taxation is a vital tool for generating government revenue and stabilizing the economy, Sri Lanka’s approach in recent years has raised valid concerns. New taxes, including digital taxes, increased VAT, PAYE, corporate income levies, and indirect charges on fuel and utilities, are being introduced in an economic climate that is already hostile to enterprise. Businesses, especially small and medium-sized enterprises (SMEs), are struggling to recover after successive shocks. When compliance costs rise and profitability shrinks, many informal businesses remain outside the tax net, creating further imbalance and injustice in the system. Unlike in high-income countries that provide social safety nets, streamlined regulatory systems, and ease of doing business, Sri Lankan entrepreneurs and professionals often face bureaucratic inefficiencies, limited credit access, and high input costs. Taxation in this context feels more like a burden than a civic duty.

It is important, however, to acknowledge the other side of the argument. Sri Lanka cannot recover from a sovereign debt default without a credible and disciplined fiscal plan. Revenue generation through taxation is essential for the government to meet its financial obligations, pay for public services, and regain access to global credit markets. The International Monetary Fund (IMF) support program hinges on the government’s ability to demonstrate fiscal responsibility, reduce the budget deficit, and eventually achieve debt sustainability. Without these measures, foreign investors will remain cautious, interest rates will remain high, and macroeconomic stability will remain out of reach. In this sense, tax reforms and austerity measures, however unpopular, form a necessary part of the recovery process.

The problem is not the imposition of taxes per se, but the absence of balance, transparency, and an enabling environment for economic activity. In countries like Singapore, Germany, or South Korea, tax compliance is higher because citizens and businesses understand what they receive in return, efficient public services, rule of law, infrastructure, healthcare, and education. These economies have invested in building trust with their populations by ensuring transparency, reducing corruption, and providing a clear roadmap for national development. In contrast, Sri Lanka’s social contract between the state and its citizens has been fractured by years of mismanagement, corruption, and inefficiency. Citizens are now being asked to make sacrifices without feeling that the burden is fairly shared or that the outcomes will be equitable.

The SME sector, often described as the backbone of Sri Lanka’s economy, has been disproportionately affected. These enterprises account for more than 75% of all businesses in the country and provide significant employment. Yet, they face multiple structural barriers, from erratic tax enforcement and complicated compliance procedures to weak access to finance and limited digital infrastructure. In an environment of shrinking consumer demand and increasing overheads, many SMEs are being pushed to the brink. Instead of serving as the engines of recovery, they risk becoming casualties of policy that is well-intentioned but poorly targeted.

Adding to the challenge is the high cost of borrowing. With interest rates still elevated, credit is largely inaccessible to small businesses and low-income households. For many, repaying loans has become an insurmountable burden, and investment in expansion or innovation is not even a consideration. At the same time, foreign currency reserves remain fragile, limiting the ability to import essential goods or maintain stable exchange rates. In this setting, businesses are caught in a vice, struggling to stay afloat while facing higher taxes, lower demand, and greater uncertainty.

Meanwhile, the government’s focus on debt restructuring is both vital and politically sensitive. Reaching agreements with bilateral and multilateral lenders, as well as commercial bondholders, is essential to reduce the long-term debt servicing burden. Success in this process will free up fiscal space for essential spending and ease pressure on interest payments. However, debt restructuring alone will not be enough. Structural reforms must follow, reforms that improve governance, reduce public sector inefficiencies, and cut down on wasteful expenditure. Citizens are willing to make sacrifices if they believe their taxes are funding real, tangible improvements in public services and economic opportunities.

To move forward, Sri Lanka needs a multi-pronged approach that focuses not only on macroeconomic stability but also on inclusive growth. First, there must be a renewed commitment to ease of doing business, especially for SMEs. This includes simplifying tax codes, digitizing compliance, providing low-interest credit, and reducing bureaucratic hurdles. Second, the government must increase transparency and communication about how tax revenues are being used and how policy reforms will deliver long-term benefits to the public. This builds trust, which is essential in times of hardship.

Third, more targeted social protection programs are needed to shield the most vulnerable from the effects of inflation and economic disruption. Direct cash transfers, food subsidies, and utility relief programs must be strengthened, particularly for daily wage earners, pensioners, and low-income families. At the same time, public investment in rural infrastructure, agriculture, and education can stimulate local economies and reduce migration pressure to urban centers.

Fourth, any strategy for national recovery must involve the diaspora and private sector. The Sri Lankan diaspora, with its resources, knowledge, and networks, can play a pivotal role in investment, skills transfer, and global positioning. Government agencies should actively engage with them to co-develop investment vehicles and development partnerships. The domestic private sector, too, must be seen as a partner—not an adversary. Policies should incentivize innovation, exports, and technology adoption, helping businesses to grow and create jobs.

Finally, political stability remains the cornerstone of economic recovery. Investors, both local and foreign, need assurance that Sri Lanka will not spiral into further political or social turmoil. Transparent governance, respect for democratic norms, and long-term policy consistency are vital to restore confidence.

In conclusion, Sri Lanka stands at a difficult but decisive juncture. The necessity of tax reforms and debt restructuring is undeniable, but so too is the urgent need to protect livelihoods, rebuild trust, and provide pathways for economic mobility. A fair and balanced approach—one that recognizes the sacrifices of ordinary people while actively enabling business and innovation—offers the only viable route to lasting recovery. No recovery will be credible unless it is inclusive. No reform will be sustainable unless it is just. In between survival and stability, the country must now choose to rebuild with compassion, competence, and collective purpose.