Can Sri Lanka Balance Subsidies, Exports & Reform in Budget 2026?

As Anura Kumara Dissanayake’s administration unveils the 2026 budget today, Sri Lanka enters a high-stakes year. This budget is more than fiscal arithmetic it is a litmus test for whether the government can deliver on its promise of a “people’s economy”, while keeping its footing in a fragile recovery.

Since taking office, Dissanayake has championed transparency, equity and efficiency aiming to rid the state of patronage networks and revive production, especially in agriculture and manufacturing.

 But the government will have to navigate very tight fiscal space: debt-to-GDP is near 100 %, interest payments absorb half of revenues and inflation pressures loom. The budget must satisfy the International Monetary Fund (IMF), sustain exports and deliver relief without breaking the fiscal path.

Export momentum and fiscal relevance: Early 2025 data show promising export trends. Total exports (merchandise + services) from January to July reached nearly US$ 10 billion, a year-on-year rise of about 7 %.

 Merchandise exports alone grew by around 7.2 % in the same period. Sri Lanka Business Strong sectors include apparel, tea, coconut-based products and processed food. These strengths matter: export earnings boost foreign currency reserves, help stabilise the rupee and support the budget’s external viability.

However, risks remain. Imports continue to grow rapidly, widening the trade deficit. and the government must ensure that export success translates into sustainable jobs and investmentnot just short-term gains.

Subsidies and relief for the vulnerable: On the social front, the budget must respond to households squeezed by rising living costs. Agriculture subsidies are a clear test.

For the 2025 Yala season, the cabinet approved a fertiliser subsidy of Rs 25,000 per hectare for paddy (up to two hectares), and Rs 15,000 per hectare for other field cropsMeanwhile, efforts to digitise subsidies QR code systems and farmer databases are underway to ensure transparency. The Morning Properly targeted subsidies can shield poorer households and bolster rural production, but they must be carefully funded and monitored so they don’t destabilise public finances.

What to watch in Budget 2026: 

• Revenue performance: Rather than big new tax hikes, expect a focus on broadening the tax base, improving compliance and lowering leakages especially in import duties and vehicle taxes.
• Spending discipline: Capital spending must maintain quality and avoid waste. A proposed Public Investment Committee under the Fiscal Management Law could play a role in vetting projects.
• Export linkages: Budget initiatives must reinforce export-oriented sectors apparel, tea, coconut, processed foods, ICT and logistics. Export incentives, improved infrastructure and trade-facilitation reforms should feature.
• Subsidies with reform: While subsidies for agriculture and vulnerable groups are politically necessary, they must be wrapped in efficiency reforms digital delivery, better targeting, and clear timelines.
• External shock preparedness: The budget needs buffer room for risks: global slowdowns, oil-price spikes, currency pressures, and trade disruptions (especially from US and EU demand).
• Social legitimacy: The government must show that reform is not just about numbers, but about people jobs for youth, better infrastructure, stronger export value-chains and meaningful relief for low-income households.
• Predictive outlook: If the budget gets this balance right modest but effective revenue gains, disciplined spending, targeted subsidies and stronger export linkages then Sri Lanka may shift from recovery mode to sustainable growth. Export sectors could gain momentum, subsidies may support rural revival, and confidence (domestic and international) would improve.

If it misstepsby over-relying on populist relief, delaying export reforms, or under-funding subsidy systems—then macro-slippage, inflation resurgence and weakened public trust become real risks. Particularly, if export growth falters, foreign-currency pressure could undermine fiscal targets, forcing cutbacks later.

In short, Budget 2026 is about trust trust from lenders (IMF, creditors), trust from investors, and most critically trust from the Sri Lankan people.The government’s promise was clear: economic discipline and social justice must go hand in hand. If they deliver, this could mark the beginning of a new chapter not just survival, but renewal. If not, the fragility beneath the headline numbers may once again surface.