Vol 2, 2025 | National budget sparks debate amid IMF reforms and protests

Saif Islam explores the macroeconomic and political implications of Sri Lanka’s latest budget and the potential for a resurgence of anti-government protests.

“We will focus on transforming the economy,” promised President Anura Kumara Dissanayake as he presented his first and much-anticipated national budget to parliament in mid-February. The budget, while maintaining key austerity measures mandated under the International Monetary Fund’s (IMF) USD 2.9 billion bailout programme – introduced in response to Sri Lanka’s severe economic crisis in 2022 – has elicited both praise and criticism in near equal measure. Notably, Dissanayake’s adherence to the IMF programme stands in contrast to his campaign pledge last year to revisit its terms, which indicates his ability to prioritise economic pragmatism over his commitment to left-wing ideology. While the budget underscores policy continuity and seeks to reinforce economic stability, it has drawn opposition from segments of the public sector and trade unions, raising concerns over the potential for civil unrest.

Tight budget in a tough climate

The 2025 budget underscores the government’s commitment to fiscal discipline, aligning with key benchmarks set by the IMF. Central to this strategy is the target of a 2.3 percent primary surplus of the gross domestic product (GDP), a critical requirement under the IMF programme. The fiscal deficit is projected to reach 6.7 percent of GDP – notably surpassing the IMF’s preferred threshold of 5.2 percent, underscoring the ongoing challenges in fiscal consolidation. Among the budget’s measures is a 12 percent increase in salaries and wages for public sector employees, with a net increment for the lowest-grade workers. However, these adjustments have faced criticism for failing to keep pace with historical inflation rates, and the government has simultaneously curtailed certain benefits and allowances for public sector workers.

Additionally, President Dissanayake unveiled plans for the privatisation of certain state-owned enterprises (SOEs) – a move that, if implemented, could lead to job losses. While these reforms remain contentious, the IMF asserts that they are pivotal to Sri Lanka’s economic recovery, citing strengthening economic growth, rising revenues, and subdued inflation as indicators of progress. Moreover, these measures are expected to bolster Sri Lanka’s debt repayment ability from 2028, following recent debt restructuring agreements with bondholders and bilateral creditors.

Protests and strikes by public workers

In March 2025, an estimated 30,000 public health workers across Sri Lanka – including nurses, paramedics, and other medical personnel – participated in countrywide demonstrations opposing the government’s budgetary reductions, such as cuts to overtime and holiday pay. Unionised nurses launched a partial strike on 17 March, which was followed by a full-day strike by paramedics on 18 March. These actions came on the heels of earlier unrest, including coordinated protests by healthcare unions outside public hospitals on 27 February. Teachers have also staged separate demonstrations in response to budget-related grievances. The IMF expressed concerns that such unrest could hinder Sri Lanka’s fragile economic recovery, emphasising the importance of adhering to the reform agenda to ensure sustainability. However, popular sentiment remains broadly negative.

The IMF expressed concerns that such unrest could hinder Sri Lanka’s fragile economic recovery, emphasising the importance of adhering to the reform agenda to ensure sustainability.”

In fact, since the mass protests of 2022, Sri Lanka has experienced sporadic demonstrations and strikes addressing persistent socio-economic grievances. For example, from May to July 2024, approximately 13,000 non-academic workers across all 17 state universities staged a strike demanding a 15 percent salary increase and a 25 percent rise in their monthly compensation allowance. The industrial action significantly disrupted university operations. Although not as intense as the 2022 upheavals, these actions underscore ongoing public dissatisfaction with economic conditions, which might intensify over time in response to the government’s austerity measures.

Challenging times ahead

President Dissanayake remains resolute in adhering to IMF-mandated reforms, prioritising expenditure control, revenue generation, and economic growth. In parallel, the government has actively pursued stronger economic ties with both China and India, seeking to attract foreign direct investment and expand trade opportunities, including potential free trade agreements. However, the long-term sustainability of Sri Lanka’s economic recovery remains uncertain, particularly given the country’s staggering external debt burden, exceeding USD 55 billion. Moreover, while trade liberalisation could stimulate economic growth, it risks exposing domestic industries to intense competition from larger economies such as China and India, potentially disadvantaging Sri Lankan manufacturers.

Despite the potential for further protests and industrial action in the short to medium term, a repeat of the 2022 mass uprising that led to the ousting of Sri Lanka’s political leadership appears unlikely. Instead, Dissanayake’s tenure will likely be defined by his ability to navigate economic turbulence while maintaining social cohesion – an arduous task given the competing pressures of fiscal prudence, political stability, and public discontent.