By Uddeepa Peiris
Sri Lanka's 2025 budget, introduced by President Anura Kumara Dissanayake, aims to revitalize the nation's economy post-crisis. This article examines how the budget's provisions are poised to stimulate capital market growth and strengthen corporate governance. Key initiatives include tax reforms, infrastructure investments, and the restructuring of state-owned enterprises (SOEs), all designed to foster a more transparent and robust financial ecosystem.
Introduction: In the aftermath of a severe financial crisis, Sri Lanka's government has unveiled the 2025 budget with a focus on economic recovery and sustainable growth. Central to this agenda is the development of capital markets and the enhancement of corporate governance standards. This paper explores the specific budgetary measures intended to achieve these objectives and their potential impact on the country's financial landscape.
Tax Reforms to Stimulate Capital Markets: The 2025 budget introduces several tax reforms aimed at broadening the tax base and encouraging investment. Notably, the expansion of capital gains tax to encompass a wider array of financial and real estate assets is expected to promote a fairer tax system and incentivize participation in capital markets. Additionally, the removal of exemptions and the application of a 15% concessionary corporate income tax on the export of services are designed to enhance revenue while making the investment climate more attractive.
Infrastructure Investments and Digital Transformation: Recognizing the role of infrastructure in economic development, the budget allocates significant funds for both physical and digital infrastructure projects. A notable allocation of Rs. 500 million is designated for the development of new tourist locations, aiming to boost tourism—a vital sector for capital inflow. Moreover, the government has earmarked US$10 million for digital transformation strategies, including the implementation of a unique digital ID and new legislation for digital services. These initiatives are projected to generate $15 billion in revenue through the digital economy over the next five years, thereby enhancing the efficiency and accessibility of capital markets.
Restructuring State-Owned Enterprises (SOEs): The budget outlines plans to address the longstanding debt of entities like SriLankan Airlines by establishing a holding company to improve governance, financial discipline, and operational efficiency of SOEs. This restructuring is anticipated to enhance transparency and accountability, setting higher standards for corporate governance across the board. Improved governance in SOEs can serve as a benchmark for private enterprises, fostering investor confidence and encouraging greater participation in the capital market.
Fiscal Consolidation and Economic Growth: While the budget aims for a primary account surplus of 2.3% of GDP, it also projects a fiscal deficit of 6.7%, exceeding the International Monetary Fund's (IMF) target of 5.2%. This deviation underscores the challenges in balancing fiscal consolidation with growth initiatives. However, the government's commitment to increasing revenue to 15.1% of GDP by 2025 reflects a strategic effort to enhance debt affordability and create a more conducive environment for capital market activities.
Potential Challenges and Risks: While the budget presents numerous opportunities, it is crucial to consider potential challenges and risks associated with the proposed measures. For instance, global economic conditions may impact the effectiveness of these initiatives, particularly in terms of foreign investment inflows and trade performance. Additionally, the successful implementation of reforms depends on strong governance and institutional capacity. Resistance to changes, both from political factions and business interest groups, could slow down critical reforms. Ensuring stakeholder buy-in and maintaining policy consistency will be vital in overcoming these hurdles.
Depth of Analysis: While the budget introduces promising reforms, a deeper analysis of their economic implications is necessary. For instance, understanding the sectoral impact of tax reforms and infrastructure investments can provide better insights into economic growth trajectories. The potential for job creation in emerging industries, such as digital services and tourism, must also be evaluated. Furthermore, considerations around income inequality should be addressed, as certain fiscal policies may disproportionately affect different income groups. Addressing these aspects will provide a holistic view of the budget’s long-term economic impact.
Conclusion: Sri Lanka's 2025 budget presents a comprehensive approach to revitalizing the economy through targeted reforms in taxation, infrastructure development, and corporate governance. By expanding the tax base, investing in critical infrastructure, and restructuring SOEs, the government aims to create a more transparent and dynamic financial environment. These measures are poised to stimulate capital market development and elevate corporate governance standards, thereby positioning Sri Lanka on a path toward sustainable economic growth.
(- Uddeepa Peiris is a seasoned Asset Management Professional with over twelve years of experience in investment management, portfolio management, and risk analysis. Now based in France, he remains actively involved in the financial sector, specializing in strategic planning and trade finance -)