A turning point for a more resilient economy

By Dhananath Fernando

What Sri Lanka faced with Cyclone Ditwah is unprecedented. The loss of human lives and the damage to homes, roads, and livelihoods cannot be captured in a single-rupee figure.

There is very little value in the blame game now. The only useful response is to ask how we can build better, not simply build back. Our strategy has to be better than before.

This is not easy. We are coming out of a painful debt restructuring and a severe economic crisis.

The first step is a decision. If we aim only to put things back to where they were, we will almost certainly fail. If we decide to build better, we must accept that the main bottleneck will not be money alone. It will be the way the State works.

Governments can find money. Multilateral agencies and friendly countries can support us. But delays come from bureaucracy and procedures.

After the tsunami, Sri Lanka had more than enough funds on paper. The real problem was spending it on time. Files moved slowly, approvals were stuck, and people waited.

Transparency and good governance are essential. Yet too many layers, too many signatures, and too much fear of taking a decision can cause more harm than good.

Four pillars

To avoid repeating the same mistake, we need four pillars to work together.

The first is the strategic layer, led by the President and the Cabinet. They must set clear priorities and identify the main areas for rebuilding. Roads, bridges, schools, hospitals, tanks, and other public infrastructure that are critical for mobility, education, health, and agriculture need immediate attention. This is a macro-level decision. The Government must say clearly which districts, which sectors, and which projects are first in line and publish that list.

The second is the Treasury and finance layer. This is where funds must be released quickly and predictably. The good news is that in the first 11 months of 2025, revenue performance has been better than expected. That gives some room. But the key is not only how much money we allocate. It is how fast we transfer it to the agencies that can actually spend it. Districts that are hardest hit must get advance allocations linked to the priorities decided at the top, with simple formulas and simple reporting.

The third is the operational layer. Here the district and divisional secretariats, provincial authorities, and local councils are in the front line. Their spending limits need to be raised for emergency work. Their procedures to call bids for urgent repairs must be simplified. If we wait for a central mechanism in Colombo to clear every road, tank, dam, culvert, and minor bridge, recovery will drag on for years. Many of these tasks can and should be done at the local level, with standard price schedules, simple contracts, and strict but reasonable timelines.

The fourth is the governance and transparency layer. Faster spending does not mean a free-for-all. The Auditor General’s Department should be involved from the start, not at the very end only to write a critical report. Clear guidelines on emergency procurement and reconstruction can be issued for all district and divisional secretariats so they act as one team. Major bridges and A-class roads can remain under central ministries. But cleaning debris, repairing rural roads, restoring minor irrigation, and helping affected households should be decentralised.

The work of rebuilding

To make this work we have to trust our officials, empower them, and hold them accountable. If the State worries about capacity, we can invite professional bodies such as the Institute of Chartered Accountants of Sri Lanka and engineers’ associations to support audit, monitoring, and technical approval. This will improve both speed and credibility.

Support to affected households should also be as close to the ground as possible. Cash transfers, vouchers, or material assistance should be handled at local level using existing social protection lists, with space to update them after proper verification. People who have lost everything should not have to travel from office to office, or from district to Colombo, to prove that they are victims.

If any regulatory changes are needed to relax procedures in the short term, the Government has the numbers in Parliament to act. Emergency regulations and amendments with sunset clauses can be used for a limited period, with clear publication of all contracts and major payments.

At the same time, the Government must revisit the 2026 Budget. Some spending planned for less urgent areas will need to be repurposed towards rebuilding and repair. This will also mean a conversation with the International Monetary Fund (IMF). Some targets and benchmarks may have to be adjusted so that the revised budget remains consistent with the programme while giving space for essential recovery spending.

In the medium and long term, ‘building better’ must be tied to structural reforms. Ditwah has shown again how vulnerable our people are. Food tariffs that keep prices high hurt poor households during and after a disaster. Construction sector tariffs on cement, steel, tiles, and fittings raise the cost of rebuilding houses, bridges, and factories. Land and labour market rigidities slow investment and job creation when people need work the most. State-owned enterprises that control key inputs like electricity and fuel must also be part of a serious reform agenda.

Usually, a government has a reform window of three to six months after coming to power. A crisis of this scale opens another window of three to six months. People understand that change is necessary when their lives and livelihoods are at stake. If the Government chooses to lead, Ditwah can be not only a tragedy but also a turning point for building a stronger, fairer, and more resilient Sri Lankan economy.

The economics of floods we keep forgetting

By Dhananath Fernando

Natural disasters and national emergencies do not arrive every day. But when they do, if we are unprepared, the damage can shape our lives for years. As floods intensify across the country, we hope our readers and all Sri Lankans are safe. Our thoughts are with everyone affected.

A familiar pattern repeats during every crisis. In the middle of the emergency, there is no shortage of commentary, ideas, and expert panels. Yet once the water recedes, our attention recedes with it. Reports gather dust, committees dissolve, and we wait for the next disaster to teach the same lesson again.

But natural disasters have an economic side that we rarely discuss. Managing them is not a simple Government-versus-private sector debate. It requires everyone – State, private sector, communities, and individuals – to play a part.

The first pillar is identification and prevention. This lies mainly with the Government. Investing public funds in proper disaster management systems is essential, not optional. A modern system must include accurate weather forecasting, river and reservoir monitoring, rapid communication tools, and tsunami alert networks.

With climate change intensifying extreme weather, Sri Lanka must prioritise floods, landslides, and coastal hazards. The encouraging news is that many global partners stand ready to help, if we can present a credible plan and maintain continuity in implementation.

The second pillar is understanding risk and preparing people. After the 2004 tsunami, Sri Lanka built some capacity: drills, awareness programmes, and clear guidance in risk zones. These efforts are not perfect, but they show we can act when we learn from tragedy.

We now need the same commitment for floods, landslides, and droughts. Risk maps must be updated regularly, zoning laws enforced, and evacuation routes rehearsed. But identifying risks alone does not guarantee safety.

The Koslanda landslide is a painful example. The area had been identified as high risk and equipment had been issued, yet the system failed. Telling people to evacuate is easy. Convincing them is difficult. Many fear theft, losing their valuables, or damage to their homes.

In every major flood near the Kelani River, we see hesitancy to leave, even when the danger is clear. For a family with limited assets, their home is everything. Walking away without assurance of security feels impossible.

This is where community-level solutions matter. Secure storage points, community-managed watch systems, and support from local Police can give people confidence to evacuate early. Temporary safe locations must be identified, tested, and publicised long before an emergency. These systems do not require large budgets, only coordination and trust.

The third pillar is insurance as a financial buffer. In Sri Lanka, the first responders are the armed forces, Government officers, and volunteer groups. Their role is essential. But in a well-prepared system, insurance absorbs a significant part of the financial loss.

Insurance is not only about payouts. When insurers assess a property, they analyse its disaster risk. This creates clear price signals. High-risk zones face higher premiums, discouraging settlement in vulnerable areas. Better data allows insurers to price risk accurately, which encourages investment in monitoring and early-warning systems. It creates a virtuous cycle where good information has real economic value.

Sri Lanka’s insurance penetration is low, and it is unrealistic to expect every household to be covered. But even partial coverage builds resilience. Insurance spreads risk, supports recovery, and funds the very information systems that reduce future losses.

Disaster management, the rule of law, and proper regulation are core responsibilities of the State. When government performs well here, the whole country benefits. Unfortunately, over successive administrations, the State has often done what it should not do, and failed to do what only it can do. Unlike many other areas of governance, disaster management has no private sector substitute.

Ignoring the economic logic of disaster preparedness is itself a silent disaster. If we continue to treat floods and landslides merely as humanitarian events, and not as recurring economic shocks that can be managed and reduced, we will keep paying the price in lives, in property, and in opportunities lost.

Disasters may be natural. Their impact, however, is shaped by the choices we make long before the rains begin.

When Price Caps Backfire: Rethinking Rice Policy

By Tormalli Francis

For a country that prides itself on self-sufficiency, Sri Lanka’s struggle to keep rice both affordable and available has become a recurring national drama. Long seen as the backbone of food security, the rice industry has weathered turbulent seasons — from erratic weather and disrupted harvests to sudden policy shifts and market shocks. In the latest Maha season, 701,453 hectares were cultivated, producing 2.7 million metric tonnes of paddy. Yet despite paddy dominating the country’s farmland, productivity gains have largely stalled — even slipping in recent years — reflecting both the resilience of farmers and the mounting strain of input shortages and climate disruptions.

The government’s recent purchase of over 40,000 metric tonnes of paddy through the Paddy Marketing Board (PMB), under a Rs. 60 billion procurement programme, highlights the state’s continued effort to stabilise supply. Yet, despite these interventions, the market still faces periodic shortages and sharp price swings that leave both farmers and consumers frustrated. These recurring bouts of scarcity expose the fragility of Sri Lanka’s rice economy — one long cushioned by decades of price controls aimed at shielding consumers. But in doing so, these policies have distorted incentives across the value chain, discouraging investments in production, storage, and distribution.. The result is a system that perpetuates the very instability it seeks to prevent. It is time to ask whether these controls genuinely strengthen food security, or merely preserve inefficiency in one of the country’s most sensitive markets.

The recent shortage of keeri samba rice lays bare the structural weaknesses in Sri Lanka’s rice production system. Favoured by urban consumers in the Western Province for its distinct taste and texture, keeri samba receives little state-level production support. Government-supplied seed paddy through the Department of Agriculture and the Paddy Marketing Board (PMB) is dominated by Nadu and other high-yielding varieties, prioritised for their productivity and lower cost. This bias is reinforced by a glaring data gap — the government lacks consumption data by variety. While the Household Income and Expenditure Survey (HIES) offers some insight into rice consumption patterns, it does not break down demand by type, leaving policymakers blind to shifts in consumer preference.

As a result, farmers often respond to the availability of subsidised inputs rather than to actual market demand. The acreage under keeri samba has steadily declined, making up only 14% of paddy cultivation during the 2024 Yala season (Figure 1). The problem is compounded by the infrequent nature of the HIES — conducted just once every five years — which fails to capture fast-changing consumption trends. Without targeted seed distribution or data-driven planning, keeri samba production remains limited and highly vulnerable to weather shocks, storage losses, and opportunistic stockpiling.

Figure 1: Keeri samba percentage of all cultivated paddy.

Sri Lanka’s rice market remains heavily tilted in favour of a few powerful millers who wield disproportionate control over both supply and price. With the capital and storage capacity to buy up large volumes of paddy right after harvest, these millers can influence availability and set the tone for prices during the off-season. This imbalance is compounded by the state’s chronic data deficit. The lack of accurate, up-to-date consumption data — especially by variety — leaves policymakers reacting to crises rather than preventing them.

While government interventions like price controls and import openings are often made in the dark, private millers operate with a distinct advantage: they have their own market data, financial liquidity, and logistical foresight. They can anticipate demand surges and time the release of stocks to their benefit, effectively steering the market. What emerges is a predictable cycle of shortages — not due to an actual lack of rice, but as the by-product of distorted policy incentives and concentrated market power.

The continued preference for keeri samba, despite its limited cultivation, has elevated it to a premium rice variety — one whose price now reflects both scarcity and status. In the aftermath of the economic crisis, as incomes recover and consumption habits shift, the price gap between Nadu and keeri samba has only widened. Yet, when the government steps in with price controls during shortages to “protect consumers,” the outcome is often the opposite. Controlled prices, especially when set below market-clearing levels, discourage traders from selling and create artificial shortages.

As supply dries up, demand intensifies, fuelling informal markups and the rise of black-market channels. When official price ceilings make open retail trade unprofitable, rice quietly flows through backdoor networks where millers, wholesalers, and retailers sell keeri samba at inflated prices. The result is a system where a handful of well-positioned players — those with the means to buy, store, and distribute — reap windfall profits while ordinary consumers face higher prices and fewer choices. In the process, transparency and trust in the rice market erode, leaving the illusion of control but little real stability.

The distortions extend to imported rice as well. A recent gazette introduced price caps for various imported varieties in response to the keeri samba shortage. But such ceilings, imposed without easing import restrictions or cutting tariffs, only worsen scarcity. Traders cannot import or sell at controlled prices when costs exceed the mandated ceiling. To make matters worse, the government often lacks the data needed to determine the true selling price, resulting in arbitrary controls that miss the mark. Ultimately, the persistent shortages of rice — across all varieties — are not a reflection of agricultural failure, but of regulatory misalignment that rewards market manipulation over genuine efficiency.

The keeri samba shortage is not merely a story of poor harvests, but of systemic policy distortions that undermine market responsiveness. By favouring uneven seed paddy distribution and enforcing rigid price controls, the government has created a rice market that ignores both consumer demand and production realities. At the same time, limited data transparency allows well-positioned players to exploit information gaps, while ordinary consumers face recurring scarcities and soaring prices. To restore stability, policy must shift from control to coordination, investing in variety-specific data, liberalising pricing, and fostering competition across the value chain, so that the rice market serves both farmers and consumers efficiently.

SriLankan Airlines: Flying in circles with no flight plan

By Dhananath Fernando

Originally appeared on the Morning

SriLankan Airlines (SLA) is not a new name in the country’s long list of financial headaches. It is our National Carrier, a symbol of pride when it flies, and a source of embarrassment when it falls into losses and political meddling. Governments have changed, but the story has remained the same.

Today, the situation is worse than ever. The airline is practically impossible to rescue in its current form. The previous Government invited investors to take over or partner with the airline, but not a single credible party showed interest. The reason is simple: the balance sheet is deeply negative.

Last year, SriLankan Airlines made a profit of about Rs. 7.9 billion. This year, it has reported a loss of about Rs. 2.7 billion. Some argue that the airline should remain under State control. But even if the Government wanted to divest, the question is who would want to buy an airline buried in debt.

The truth is, the problem is more serious than it appears. The saddest part is that there is no restructuring plan at all. The Government seems to have accepted the airline’s own proposals and continues to operate without a clear direction.

According to the National Audit Office, continuous Government support is required just to keep the airline running. Last year alone, taxpayers injected Rs. 20 billion into it.

Let us look at how much public money has been spent over the years:

2010: Government buys back Emirates’ 43.6% stake for $ 53 million

2011/’12: Capital infusion of Rs. 14.3 billion through Treasury bonds

2014: Treasury settles Rs. 26.11 billion owed to the Ceylon Petroleum Corporation (CPC) for unpaid fuel bills

2016: Cabinet approves absorbing Rs. 461 billion of SLA liabilities

2023–2024: Government agrees to absorb $ 510–553 million of SLA debt

H1 2024: Equity top-up of Rs. 5 billion for cash flow support

Budget 2025: Rs. 20 billion allocation for legacy debt service

Since parting ways with Emirates, we have repeatedly returned to the Treasury for help.

Even though the airline shows an operating profit, it is not enough. The load factor is around 70%, while the break-even point is about 76%. The main losses come from finance costs, which are roughly Rs. 30 billion each year — a huge amount compared to revenue.

To stay competitive, the airline needs investment to modernise its fleet and improve efficiency. But the Government has no funds, and no investor or lender will come forward without a Treasury guarantee. The new Public Debt Management Act makes such guarantees more difficult and costly.

Revenue and passenger numbers have also declined compared to the previous year, even as tourism recovers. According to the Sri Lanka Tourism Development Authority, SriLankan Airlines carries only about 27-30% of tourists, while nearly 70% arrive through other airlines. This suggests that service issues, repair delays, and stronger competition are taking away loyal passengers.

At the group level, monopoly businesses such as ground handling and catering help to cover some losses, but they also make the entire aviation industry less competitive.

Even if the airline were liquidated today, it would still need Rs. 379 billion to settle its debts. Around Rs. 90 billion is owed to State banks such as Bank of Ceylon and People’s Bank. Writing off those loans would hurt the stability of the banking sector.

Despite its financial troubles, SriLankan Airlines still operates on important routes and has an excellent safety record. The brand has emotional value for many Sri Lankans, which is why restructuring will face resistance from employees, trade unions, and politicians.

So what can be done?

Option 1: Dress up the balance sheet once and for all. Inject the required taxpayer money, absorb the liabilities, and then look for a strategic investor.

We have tried partial fixes for years, taking over some debt and hoping the airline will perform better, but that approach has failed. If we want to attract a serious investor, we must clean it up completely and find a partner with deep experience in aviation.

However, this must be done with a clear legislative direction and timeline. Otherwise, once the debt is absorbed and the airline begins to show a profit, a new debate will arise questioning the need to privatise a profit-making National Carrier. The political economy will then move quickly to block reform, forgetting that the taxpayer had already paid for the cleanup.

Option 2: Package SriLankan Airlines with other State assets such as the Mattala or Ratmalana airports to make it more attractive to investors.

This might require relocating some Air Force operations and preparing a comprehensive restructuring plan. But such an approach takes time, and time is exactly what we do not have. The longer we wait, the deeper we fall, and the more political and geopolitical interests get involved.

There is no point blaming the airline or its employees. The problem is not in the sky but on the ground. We simply have no plan.

It is time to get our act together, because a national airline without a flight plan can only keep flying in circles.

Tax without tricks

By Dhananath Fernando

Originally appeared on the Morning

Any budget is about two things. How much the government spends and how it raises the money.

In a national budget, most revenue comes through taxes and tariffs. Ahead of budget day, it helps to revisit the basic principles of good taxation, because businesses and households worry not only about new taxes, but also about shifts to thresholds, exemptions, holidays, and border tariffs.

The President has indicated that the new Budget does not plan to impose new taxes, which is welcome. But tax is a technical field. Even without new taxes, changes to rates, bands, and holidays can reshape the burden. All this happens while Sri Lanka is in its 17th International Monetary Fund (IMF) programme with agreed benchmarks.

Govt. spending today is tax tomorrow

There is a blunt truth about public finance. Every rupee the Government spends must be paid for by someone. If it is not collected this year, it will be collected in the future. When we borrow to fill the deficit, interest and repayments still come from taxpayers.

Unlike a household, a sovereign can also create money. That route does not make costs disappear. It shifts them into inflation, which works like a hidden tax. This is why every expenditure line in a budget is, in effect, a future claim on citizens. Discipline on spending is the foundation for a lighter, fairer tax system.

Taxes at the border are the worst kind

Among ways to raise revenue, tariffs at the border are generally the most damaging. They raise prices for consumers, protect inefficiency, invite lobbying, and complicate trade.

This column has often examined tariff policy, so today the focus is on core tax principles that should guide the Budget.

Simplicity

Tax rules should be simple to understand and simple to administer. Complexity breeds loopholes, evasion, and higher compliance costs. Multiple bands, special cases, and technical fine print frustrate honest payers and overwhelm administrators.

Sri Lanka’s personal income tax already has several thresholds and special treatments, including differences by source and currency. The direction of travel should be towards fewer bands, clearer definitions, and straightforward filing.

Transparency

People comply more willingly when they can see the rules and the results. Transparency has two sides.

First, taxpayers must know what is taxed, how it is calculated, and how decisions are interpreted. Second, citizens should see where the money goes.

Publishing timely, readable accounts of ministries, departments, and State enterprises is part of this. Clarity in the law and clarity in spending both strengthen trust.

Neutrality

A good tax system does not pick winners or punish losers. It does not tilt the field with ad hoc holidays, selective exemptions, or retroactive changes.

Sri Lanka has seen cases of both, and we paid a price in credibility and lost revenue. Neutrality means the same rules for all, with limited, clearly justified exceptions. When policy favours the connected or penalises the unfavoured, investment shifts from serving customers to seeking favours.

Stability

Frequent tinkering is costly. When rates and thresholds change too often, compliance burdens rise and planning becomes guesswork.

Sri Lanka has repeatedly altered Value-Added Tax (VAT) rates and income tax thresholds in short spans. Stability does not mean never changing. It means changing seldom, with notice, and for clear reasons. Bad policy made in haste is expensive to unwind. The economy needs a steady hand more than clever new tweaks.

Tax competitiveness

Firms and talent look across borders. Our personal and corporate tax burdens should be in line with the region if we want to attract investment and retain skills.

Competitiveness cannot be achieved by wishful thinking. It comes from controlling spending so that rates can be kept moderate. If outlays keep rising, taxes must follow, or inflation will. Either way, growth suffers.

The Sri Lankan context

We are living with the bill for years of high spending and borrowing. Interest costs crowd out other priorities and the system leans on distortionary tools such as border taxes.

The Budget must therefore do three things at once. Hold the line on expenditure, simplify and stabilise the core taxes, and reduce reliance on tariffs and discretionary incentives that undermine neutrality and transparency.

A checklist for the Budget

Are spending commitments realistic, prioritised, and affordable without hidden inflation taxes later?

Do the tax proposals reduce bands, special cases, and compliance steps?

Are all changes clearly explained, with drafts and guidance published early?

Do measures avoid retroactivity and selective holidays?

Do the overall rates and rules keep Sri Lanka competitive in the region?

The bottom line

Revenue matters, but expenditure discipline matters more. If we keep spending under control and align with the basic principles of simplicity, transparency, neutrality, stability, and competitiveness, Sri Lanka can raise what it needs with less harm to growth. If we ignore these principles, we will pay through weaker investment, fewer jobs, and slower incomes.

As the Budget approaches, the call is simple. Keep taxes clean and predictable. Keep spending honestly and affordably. Keep Sri Lanka competitive. That is how a budget serves the people, not just the balance sheet.

Two simple tests for a good budget

By Dhananath Fernando

Originally appeared on the Morning

How should the President judge whether his upcoming Budget is good or bad? A budget is not only about income, expenditure, and the gap in between. A national budget sets policy direction while balancing the books.

In Sri Lanka there is limited control on the expenditure side in the short term. The largest item is interest payments. Most of the rest is recurrent spending on salaries, pensions, and transfers. Even when capital allocations are made for public infrastructure, they are often underspent to plug rising recurrent bills.

So how do we judge the numbers fairly when interest costs are so high? Take interest out and see if our revenue covers all non-interest spending. That is the primary balance. If revenue exceeds non-interest expenditure, we have a primary surplus.

Interest payments are largely inherited liabilities, and there is very little a finance minister can change quickly. This means the first test of a sound budget is whether the primary balance improves credibly.

But budgets are also about policy signals. Do they show a pro-poor, pro-growth direction that reduces people’s cost of living and helps businesses invest? On that front, this Budget will tell us whether the President is serious about lowering the cost of construction.

Before being elected, while presenting the National People’s Power (NPP) economic manifesto, President Anura Kumara Dissanayake said the price of tiles was too high and that import controls had pushed construction costs up. Now there is an opportunity to correct this.

Among many inputs, four items matter for any basic building: cement, steel, tiles, and sanitary ware. If the Government wants growth, policy should aim to bring these costs down.

A practical way is to cut para tariffs like cess and the Ports and Airports Development Levy (PAL), and to rationalise Customs duties where possible. Border taxes hurt cash flow because they are paid upfront.

When you import cement or tiles, cess and PAL are charged at the point of entry, so the project’s cost is frontloaded. That pushes financing needs up on day one, raises interest costs on working capital, and can make projects unviable. House builders delay, small contractors scale down, and factory expansions stall.

Today a bag of cement in Sri Lanka often costs nearly twice what it does in Thailand, and other materials show similar gaps. The result is visible in half-built houses and delayed renovations across the country. Lowering these input costs will help families finish a home, schools stretch their budgets further, and firms add floor space to expand production.

So here are the two simple tests to judge this Budget.

First, does the primary balance improve in a way that is believable and sustained?

Second, does the Budget lower the cost of construction by cutting para tariffs, simplifying taxes, and allowing more competition and supply?

If both tests are met, the Budget will be pro-poor and pro-growth. If not, the numbers may look tidy for a year, but homes will stay unfinished and investments will remain on hold.

One year in: Taking stock of the Govt.’s performance

By Dhananath Fernando

Originally appeared on the Morning

The President celebrates one year in office this week. Anniversaries are not just milestones for celebration but moments for reflection. After the first year, it is important to pause, assess performance, and take a look back at how the Government has fared.

We can measure it in two ways: against the promises made in the manifesto or against the real impact it has created. Manifestos, however, are written in a different time and often fail to account for the speed at which global dynamics shift.

What matters more is how a government adapts to unexpected events and whether it can remain steady in its commitments while being flexible in its tactics.

Navigating global shocks

For this Government, the most immediate test came in the form of external tariffs imposed by the United States. For an export-dependent country like Sri Lanka, this was no small matter. Yet, through negotiations and careful positioning, the Government managed to secure rates comparable to those faced by competitors such as Vietnam, Indonesia, Thailand, and Bangladesh.

This outcome was not perfect; Sri Lanka did not secure special exemptions or a breakthrough advantage, but in relative terms, it ensured that exporters were not left at a severe disadvantage. Given our vulnerability, parity itself can be considered a modest success.

Staying the course on economic anchors

The more significant achievement, however, has been in what the Government chose not to do. In Opposition, it was deeply critical of the International Monetary Fund (IMF) programme, debt restructuring, and even institutional independence. In office, it resisted the temptation to reopen these debates.

The IMF agreement is not a magic pill for growth, but it is an anchor of credibility. Bilateral and multilateral partners are only willing to extend support if Sri Lanka remains within the framework. Re-negotiating or exiting would have shattered fragile investor confidence. The decision to stay the course despite earlier political rhetoric is one of the Government’s strongest moves.

Equally important was continuity in the bureaucracy. Retaining senior officials like the Treasury Secretary and the Central Bank Governor, despite earlier criticism, signalled stability. The Central Bank’s independence — once challenged in court by the same political actors — was not overturned. In a country where ad hoc shifts in policy have been the norm, these decisions represent a break with the past.

Policy consistency and digitisation

The Government has also placed a clear emphasis on digitisation. This is not glamorous politics, but it is critical for modernising the State.

Investment in digital platforms, citizen-facing services, and e-governance can reduce corruption, cut red tape, and improve trust. Execution here will matter more than announcements, but the focus is right.

Where it fell short

Yet, the record is mixed. The first 100 days, a period traditionally reserved for hard reforms, lacked decisive moves on growth. This was a lost window. Early political capital is invaluable, and reforms delayed are often reforms denied.

On electricity, the amendments pushed through were poorly thought out. While the sector desperately needs investment to modernise the grid, the structure presented remains too complicated to attract private capital. This has left both investors and consumers uncertain. The result: more delay in a sector central to growth.

The casino regulation bill was another missed opportunity. Instead of a carefully designed framework to maximise foreign exchange inflows and create predictable tax revenues, the rushed bill left loopholes and generated criticism.

Properly regulated gaming could have been a valuable source of revenue, especially given the need for fresh dollar inflows, but haste undermined credibility.

A mixed scorecard

Looking at the first year as a whole, the Government can claim several wins:

• Managing global tariff shocks without falling behind competitors

• Staying in the IMF programme and pushing debt restructuring forward

• Maintaining institutional continuity and not reversing Central Bank independence

• Prioritising digitisation as a long-term reform

At the same time, its shortcomings are notable:

• Failing to push through bold, growth-driven reforms in its first 100 days

• Weak design in critical reforms like electricity

• A poorly structured casino bill that squandered an opportunity for new revenue

The road ahead

The next stage will be harder. Stabilisation was the first priority; growth must now take centre stage. Without growth, fiscal adjustment will remain politically painful, and social patience will wear thin. The Government must focus on reforms that can unleash private investment by simplifying tariffs, unlocking land titles, and modernising State enterprises.

Above all, it must resist the temptation of short-term populism. Stability has been bought at a cost, but it will only pay off if the Government uses this breathing space to create conditions for long-term expansion.

Anniversaries are for both reflection and recommitment. As the Government marks one year, the people expect not just steadiness in storms but boldness in calm. If the first year was about survival, the second must be about growth.

Land: Sri Lanka’s forgotten asset

By Dhananath Fernando

Originally appeared on the Morning

The headlines are full of talk about asset declarations of ministers. But while the political class debates what they own, the nation has forgotten its real asset: our land. If the forthcoming Budget is to mean anything for growth, it must finally prioritise the country’s most underutilised resource.

Sri Lanka’s land problem is not new. The Harvard Growth Diagnostics study and many others have identified weak property rights as a binding constraint on growth. About 80% of land, including forests and reserves, is owned by the State. Vast tracts lie idle in the hands of Government agencies. Even private land, though held by millions of families, is often locked away from productive use because it exists only in the form of deeds, not secure, State-backed titles.

This distinction is crucial. A deed records the history of a land transaction but does not guarantee ownership. Multiple deeds can exist for the same plot, leaving ownership contested. A title, by contrast, is conclusive proof. It is recognised by the State, cannot be disputed once registered, and gives families and businesses the security to invest, sell, or borrow against it.

The ‘Bim Saviya’ programme, launched in 1998, was meant to move Sri Lanka from deeds to titles. Nearly three decades later, out of 16 million land parcels, just over a million titles have been issued. At the current pace of around 50,000 per year, the process will take 300 years. By then, the world will have moved on, but Sri Lankans will still be queuing at banks, waiting months for loan approvals while surveyors sift through deed histories stretching back three decades.

The consequences are immense. Without secure titles, banks hesitate to lend. Businesses cannot expand. Farmers cannot unlock capital. Families remain vulnerable to fraud. As Hernando de Soto famously described, Sri Lanka is sitting on mountains of “dead capital”.

Why are we stuck? The law itself is outdated, modelled on Torrens systems that do not reflect Sri Lanka’s complex co-ownership, religious, and customary land arrangements. Institutions are fragmented, with responsibility split between the Survey Department, the Land Title Settlement Department, and the Registrar General’s Department. No single body is fully accountable.

Capacity gaps are crippling: more than half of surveyor posts remain vacant. Dispute resolution has collapsed, with only 11% of mediation boards functioning by 2023. Even where land has been surveyed and gazetted, hundreds of thousands of titles remain in limbo.

This is not simply a funding issue. It is a leadership issue. Unless the Cabinet elevates land titling to a national priority, progress will continue to crawl.

The 2026 Budget is the moment to act. Three bold steps can change the game.

First, modernise the law. A legal taskforce must redraft the 1998 act within 12 months, clarifying co-ownership, religious, and State land, and establishing a proper compensation mechanism.

Second, make conversion compulsory. Every sale, mortgage, or inheritance should automatically become a title transaction. Within 15 years, the deed registry could be phased out entirely.

Third, fill the gaps with private capacity and smart financing. Licensed private surveyors can be engaged under Government oversight. Modest registry surcharges and optional fast-track services can reduce reliance on Treasury allocations, while donor or Public-Private Partnership support can be tied to performance milestones.

These reforms would more than pay for themselves. Banks report that title-backed loans can be processed in as little as a week, compared to two or three months for deeds. That is not just about efficiency. It is the difference between a farmer missing a planting season and being able to grow, or a small business waiting months for credit versus expanding immediately.

Most importantly, titles provide ordinary citizens what deeds cannot: security, credit, and peace of mind.

While airtime is wasted on politicians’ asset declarations, Sri Lankans are waiting for their real assets, their land to be recognised and freed. Accelerating ‘Bim Saviya’ is not a technocratic exercise. It is a once-in-a-generation reform that can unlock growth, empower citizens, and give the economy the lifeline it so badly needs.

This budget should finally deliver it.

Housing for presidents vs. housing for people

By Dhananath Fernando

Originally appeared on the Morning

The past week’s talk has been about curtailing housing facilities and other perks for former presidents. Many Sri Lankans are rightly interested in where former leaders live. But here is the real question: why are millions of ordinary Sri Lankans struggling to build their own homes?

Housing is a basic human need. Yet in Sri Lanka, it is not only the poor but even the middle class who fight an uphill battle.

Look around any neighborhood: countless homes remain unfinished. The ground floor is barely complete, steel rods jut out of columns waiting for a first floor that never comes. Walls stand unplastered, kitchens are bare, and curtains are unaffordable. For many families, building a house is a lifelong project, and they often finish only when they are close to retirement.

A few years ago, Advocata research showed just how bad the situation was. Sri Lanka’s housing affordability is among the worst in the world, worse than New York, Tokyo, or London. We rank only behind Shanghai. In simple terms, compared to how much we earn, our housing costs are higher than in some of the richest cities on earth.

Even lifetime savings don’t take us far. A Sri Lankan in the 70th income percentile can only afford a 500 sq ft house. To buy a modest 1,000 sq ft house, you need to be in the top 20% of earners.

Why is housing so expensive? The answer is simple: construction materials are outrageously costly because of sky-high import tariffs. Wall tiles, floor tiles, cement, steel, bathroom fittings, you name it, are all slapped with layers of taxes: CESS, PAL, Customs duty, VAT. Sometimes these add up to over 100%.

Some argue tariffs don’t matter since Sri Lankan companies make many of these products locally. But if that’s true, why do we need tariffs at all?

The reality is that imported materials are often 50–75% cheaper than local products. Once tariffs block competition, local manufacturers raise their prices too. And when tariff rates cross 70% or 100%, imports stop coming in entirely. So the Government doesn’t earn much revenue either; most Customs income actually comes from vehicle imports, not construction materials.

Take the numbers: cement in Sri Lanka costs about 120% more than in China. Steel is 48% more expensive than in Singapore. Tariffs on tiles and bathware are above 70%.

This is not just about houses. High construction costs spill into the whole economy.

Every industry needs buildings and energy. When our costs are higher than the region, our businesses become uncompetitive. Since most construction is financed through bank loans — often at interest rates around 12% — these inflated costs also bleed into debt burdens for families and companies alike.

The Government itself pays the price. Each year, capital expenditure is a major budget item, and inflated costs mean taxpayers get less value for every rupee spent. The tourism sector suffers too. Hotels are expected to renovate every five to seven years, but when construction is so costly, they either delay upgrades or pass the expense onto visitors, hurting competitiveness.

And look at our negative list in trade deals. Most construction materials are excluded, meaning they will stay protected even under free trade agreements. That says a lot about who benefits from keeping costs high.

For small and medium-sized enterprises, the story is even worse. Expanding a workshop, building a new facility, or even basic repairs all become nearly impossible when construction costs are inflated and when credit is tight.

If the Government is serious about helping industries, boosting competitiveness, and giving relief to the middle class, it must bring down the cost of construction. And that means cutting tariffs.

It’s time we cared as much about the housing struggles of ordinary Sri Lankans as we do about the houses of former presidents.

SOE closure is good, but is only the beginning

By Dhananath Fernando

Originally appeared on the Morning

The Government’s recent decision to shut down 33 State-Owned Enterprises (SOEs) is commendable and a step in the right direction. Sri Lanka has far too many SOEs, with the State entangled in almost every sector imaginable – aviation, retail, banking and finance, agriculture, ports, insurance, transport, energy, and even chemical production.

What many people do not realise is that government involvement in business is not just inefficient. It is at the heart of our debt and economic crisis. SOEs are heavily indebted, crowd out credit that should go to the private sector, and operate in areas where private businesses could be far more productive.

Once upon a time, there was an argument that the government should be in business to ensure a ‘level playing field.’ That argument has long expired. Today, SOEs do not level the field, they tilt it. With mounting losses, inefficiency, and distortions, they have undermined competitiveness rather than protected it.

The State already has a stake

It is worth remembering that the Government already has a built-in stake in every business through taxation. Corporate tax is 30% of profits, and once businesses cross the Value-Added Tax (VAT) threshold, a further 18% is levied on value addition. In other words, the State captures a significant share of private profits without having to own or operate businesses.

The problem is that Sri Lanka has too few private businesses because the State has occupied their space and run it unproductively.

The real giants of losses

Closing 33 SOEs is good, but it is only the beginning. Sri Lanka has more than 500 SOEs if one includes subsidiaries and sub-subsidiaries. Some even operate as departments – railways and postal services, for instance, which are technically not SOEs but still run as commercial operations.

In reality, around five large SOEs account for 80% of the losses. These are:

• Ceylon Electricity Board (CEB)

• Ceylon Petroleum Corporation (CPC)

• National Water Supply and Drainage Board (NWSDB)

• Sri Lanka Transport Board (SLTB)

• SriLankan Airlines

Restructuring these giants is critical. Attempts have already been made with the CEB, but as this column has previously argued, reform has been slow and the hurdles to attracting capital remain high.

SriLankan Airlines is another pressing case. Our sovereign credit rating remains partly hostage to the airline’s bond restructuring. The CPC and SLTB are not far behind in the severity of their problems.

A web of loss-making interconnections

One reason Sri Lanka went bankrupt was the unhealthy web of financial interconnections between these SOEs. When the CEB sold electricity below production cost, it borrowed fuel from the CPC, making the CPC loss-making as well.

The CPC, in turn, tried to recover losses by charging SriLankan Airlines higher-than-market prices for jet fuel. The airline was compelled to buy from the CPC since both were Government-owned and it too bled losses.

When all three made losses, they turned to the People’s Bank and Bank of Ceylon for loans, exposing depositors’ money to undue risk. With large amounts of credit guaranteed by the Treasury, private businesses were crowded out both by lack of funds and unfair competition.

A tilted playing field

The distortion is not confined to energy and transport. In insurance, for example, the law required all companies to split life and general insurance operations. The only exception? Sri Lanka Insurance – the State player.

In gaming, the new regulatory authority does not cover the National Lotteries Board or the Development Lotteries Board and private players are barred from entering the lottery market.

In ports, the problem is even more blatant. The Sri Lanka Ports Authority is both regulator and operator. It owns shares in private terminals such as Colombo International Container Terminal (CICT) and South Asia Gateway Terminal (SAGT) while running its own Jaya Container Terminal. It is regulator, competitor, and shareholder all rolled into one. That makes the very idea of a level playing field a joke.

Mixed signals

While shutting down 33 institutions, there are also news reports of the Government expanding into new businesses, such as opening outlets for sugar sales. These mixed signals send the wrong message.

The principle must be simple: the Government should focus on its core mandate – ensuring the rule of law – and let the private sector drive commercial activity. If necessary, regulate. But only when necessary. The State should take its 30% tax share, make tax administration efficient, and leave the rest to entrepreneurs.

The way forward

The next step is the passage of the proposed SOE holding company bill. This will bring most SOEs under a single holding company structure, paving the way for divestiture, Public-Private Partnerships (PPPs), and, where appropriate, outright privatisation.

Some SOEs must be privatised fully. Others should enter PPPs. But the guiding principle should remain the same: let the private sector run businesses, not the State.

Closing 33 SOEs is a start. But unless we confront the inefficiency of the big five and end the distortions that SOEs create across the economy, Sri Lanka will remain stuck in the same cycle of loss, debt, and stagnation.

Tariff hikes on onions and potatoes: Farmers protected, poor forgotten

By Dhananath Fernando

Originally appeared on the Morning

Over the last few weeks, while the Government and Opposition sparred over political theatre, ‘crossing the Rubicon’ as they call it, a decision with far more impact on ordinary people went largely unnoticed. The import tariffs on big onions and potatoes were increased to Rs. 50 and Rs. 80 per kilo, respectively.

The Minister claims that earlier the Special Commodity Levy (SCL) was Rs. 10 for big onions and Rs. 60 for potatoes. The justification? Protecting farmers.

Yes, farmers matter. But protecting them at this cost by placing the full burden on consumers is unacceptable. Sri Lanka is still reeling from its economic crisis. According to a LIRNEasia survey, four million people fell into poverty during the crisis, raising the total to seven million.

World Bank data suggests nearly 25% of Sri Lankans now live below the poverty line. The Department of Census and Statistics (DCS) estimates that one needs around Rs. 17,000 per month just to stay above it. In this context, how do we justify a Rs. 80 and Rs. 50 tariff on two of the poorest man’s dry rations?

When ‘protection’ means higher prices

These tariffs are not unique to onions and potatoes. Similar duties apply to many day-to-day essentials. Take onions: the DCS notes that the retail price is about Rs. 140 per kilo. With the revised SCL, the price will likely hit Rs. 170–180. That means nearly one-third of the price is simply a tax disguised as ‘farmer protection.’

Potatoes tell the same story. At Rs. 300 a kilo, the extra Rs. 20 levy pushes the price to Rs. 310–320. Roughly a quarter of the price is tax. Supermarket shelves already show potatoes at Rs. 340 and onions between Rs. 190 and Rs. 230.

So should we not protect farmers? Of course we must. But let’s remember: farmers already receive fertiliser subsidies, seed subsidies, and other support. If further protection is needed, the better way is direct cash support linked to output. That way, the cost does not cascade to millions of poor consumers who have no escape. After all, the number of onion and potato farmers is tiny compared to the number of people who eat them.

A breeding ground for corruption

Tariffs that change overnight also open space for corruption. Anyone with inside information can import just before the revision and pocket huge windfalls after the levy kicks in. With commodities like onions and potatoes, which last more than a month in storage, the temptation is obvious.

We have been here before. Remember the sugar levy hike years ago? That saga exposed how easy it is to game the system with commodities that have long shelf lives. Garlic, rice, and other essentials are also caught in this cycle of discretionary tariff tinkering.

The vicious cycle

High food tariffs ripple through the entire economy. When essentials become expensive, workers from estate labourers to factory staff inevitably demand higher wages. Over time, these wage pressures erode competitiveness and trap the country in a vicious cycle of high costs and low productivity.

Even the International Monetary Fund’s (IMF) Governance Diagnostic has flagged this issue, urging Sri Lanka to remove discretionary powers over tariffs and taxes. Reforms to the Strategic Development Projects Act are meant to address exactly this kind of arbitrary policymaking.

Who really drowns in the Rubicon?

At a time when taxpayers are already stretched thin, paying some of the highest personal taxes in the region and facing steep border taxes on everything from food to vehicles, an SCL of Rs. 80 on potatoes and Rs. 50 on onions is simply unfair. If farmers are to be supported, it should be done directly, with incentives for productivity, not by inflating the grocery bill of every struggling household.

Politicians may talk about crossing the Rubicon. But for the poorest of the poor, the Rubicon is not crossed; it is drowned in. And they drown in it under the weight of a rising cost of living.

Sri Lanka’s railways can’t run on ticket fixes alone

By Dhananath Fernando

Originally appeared on the Morning

The Deputy Minister of Transport has earned much praise on social media for streamlining the online ticket booking process, especially for scenic train journeys like the one to Badulla.

The change is simple but effective. Moving forward, the name and ID card or passport number used to purchase a ticket must match the person boarding. Authentication will be checked before you step on the train.

This intervention is commendable. But in economics, problems rarely end at the surface. This ticket issue is only a symptom of something much deeper.

The root problem is a classic demand-supply mismatch. When tickets sell out within minutes, only to appear in the black market at two or three times the price, with buyers still willing to pay, the signal is clear: demand far outstrips supply. One way to fix this is to raise prices so that limited resources (in this case, train seats) are allocated more efficiently. The other way is to increase supply so that more people can enjoy the ride.

Sadly, our current system does neither. The result? A thriving black market. Even with the new rule, there is still room for ticket manipulation at the gate. Ticket checkers now have the discretion to allow someone onboard whose details don’t match exactly and when there is scarcity, that discretion can be monetised.

Consider the plight of a tourist agent. A train ride from Colombo to Ella is often a must-have in a Sri Lanka travel package. But with no forward booking option, agents can’t guarantee it until clients confirm. Tourists, being tourists, change plans. Some may decide on the ride after they land. Without flexibility in the system, we simply miss out and so do hotels, tuk drivers, and restaurants along the Ella-Badulla route.

The Deputy Minister’s action fixes a short-term loophole. A lasting fix means addressing supply. That requires running more trains to Ella, catering to different market segments with different service levels. But to do that, we must partially unbundle Sri Lanka Railways. Maintaining the track is a different skill set from operating engines, which in turn is different from managing passenger services. Station management and facilities are yet another field.

These can be run by separate entities – some public, some through public-private partnerships. Multiple operators would naturally compete to offer better booking systems, more frequency, and pricing that reflects demand. The result? Convenience for passengers and new economic activity along the line.

Sri Lanka Railways is no small outfit. It employs around 14,000 people and carries more than 300,000 passengers every single day. If the facilities were improved with faster services, cleaner stations, and reliable scheduling, that number could grow significantly. What we provide now is only the bare minimum of what is possible. With proper investment and reform, the railway could move far more people, cut road congestion, and become a competitive transport choice rather than a last resort.

And yet, we have barely touched another major opportunity: cargo transport by rail. Right now, the railway’s contribution to freight movement is minimal. This is a missed economic opportunity.

Moving goods by train is cheaper, more energy-efficient, and takes pressure off our congested roads. Properly developed, a modern rail cargo service could connect ports, industrial zones, and inland markets, cutting logistics costs and boosting trade competitiveness. It is a market just waiting to be tapped if we have the vision and the reforms to make it happen.

There is also an untapped goldmine in land assets. Sri Lanka Railways owns some of the most valuable land in the country, much of it in high-value urban and tourist areas. Train access makes these lands even more valuable. But under the current Railways Act, long-term leases are near-impossible. That means this land sits idle, locked away from productive economic use.

Meanwhile, the railway bleeds money. Between 2010 and 2020, it lost roughly Rs. 300 billion. Losses in 2023 alone were Rs. 11 billion, and in 2022, Rs. 12 billion. This is unsustainable not just for the balance sheet, but for a country already straining under heavy public debt.

This is not a story about ticket booking. It’s a story about how poor reforms, lack of competition, and outdated laws have drained resources from a sector that should be a profit centre for the Government and a vital artery for public transport and cargo movement.

If we keep patching the symptoms while ignoring the disease, the losses will keep mounting, the black markets will keep thriving, and the opportunity for Sri Lanka Railways to be a driver of growth will remain stuck at the station. The choice is ours: keep running on the same broken track, or reform the system so that our trains carrying both people and goods can finally pick up speed

NOT TOO LATE FOR A WINNING BET: The need to redraft the Gambling Bill

By Sudaraka Ariyaratne

Originally appeared on the Morning

After weeks of discussion, the Committee on Public Finance (COPF) approved the Gambling Regulatory Authority (GRA) Bill last Wednesday (13).

While the Bill faces its second reading in Parliament tomorrow (19), its many deficiencies remain helping create a regulator not worth its salt.

Gaming encompasses both gambling; games of pure chance like casinos and lotteries and betting, which mixes chance with skill, such as horseracing.

Despite moral arguments against gaming, a blanket ban is unlikely to be effective. Singapore learned this the hard way and legalised gaming under strict regulation in 2005.

A legal, well-regulated gaming industry mitigates the social ills of gambling more effectively than a blanket ban that allows the ills to multiply in the confines of the shadow economy.

Moreover, a legal, well-regulated gaming industry can also promote tourism, boost growth, generate revenues, and protect consumers.

Sri Lanka’s gaming industry - comprising casinos, betting centres, and lotteries - has operated for decades without a proper regulatory framework.

The recent opening of Melco’s City of Dreams casino in Colombo introduces the integrated resort model and an international investor for the first time, revolutionising the industry.

Melco arrives at a crucial time for the industry, which relies mainly on patrons from India, China, and the Middle East.

As the only regional country west of Southeast Asia with legalised casinos, Sri Lanka has faced little competition so far, but with the UAE and Thailand planning new casinos with international partners, it can no longer delay introducing a proper regulator and the rubber stamp of integrity that comes with it.

As Colombo Port City courts investors for its integrated resort, a robust regulatory framework is essential to attract a global player like Melco, which is an internationally listed corporation.

Such investors signal not only industry growth but also that Sri Lanka is business-friendly. Yet Melco already laments regulatory uncertainty; ‘Although we have obtained the Sri Lanka License, there is considerable uncertainty about how the legal and regulatory environment may change,’ notes its 2024 annual report.

Without clear regulation, new international investors are unlikely to enter soon.

The GRA Bill was thus a welcome move, but its many deficiencies make it unlikely to position Sri Lanka as a competitive regional player. Instead, it risks creating an ineffective regulator, mirroring Cambodia’s struggling, poorly-regulated gaming industry.

First, the GRA Bill targets mostly casinos, exempting lotteries and largely ignoring the growing betting sector, making the misnomer of the gaming regulator as a gambling regulator in the Bill seem intentional.

While amendments to include lotteries under the regulator are said to be on the way, little light has been shed on the negligence of the betting industry in the Bill - particularly the many international online betting platforms frequented by local patrons, including online prediction markets for sports and elections.

The moment calls for a true Gaming Regulatory Authority, not merely a Gambling Regulatory Authority.

The Bill gives the Minister of Finance excessive power, making the regulator an executor of the Minister’s will rather than an independent body. The Minister can appoint board members and the Director General, make regulations, issue binding directives, and control the authority’s funding through budget allocations.

A truly independent, incorruptible regulatory body requires that the Constitutional Council has a say in the appointment of its board members, that the Director General is appointed through a competitive process, that the authority is granted more independent rules-making power, that the Minister does not have the power to issue binding directives on its activities, and that it is funded through license/regulation fees as opposed to budgetary allocations.

This last point is crucial as a lucrative industry requires competent, well-paid regulators, which weak funding cannot support.

The Bill also neglects the tourism-gaming link, failing to grant the tourism sector ex-officio board representation or stipulate industry experience as a qualification for board appointments.

In contrast, with Sri Lanka Tourism Development Authority having ex-officio representation on the board, and experience in hospitality being recognised when appointing board members, the regulatory authority could be better geared towards tourism development.

Given the higher entry barriers for local patrons - locals are levied an entry fee of $ 50 to enter casinos in Sri Lanka under Casino Business (Regulation) Act of 2010 - tourists are the target consumer base of most casino operators in Sri Lanka, and as such, the tourism sector deserves a greater say in the regulation of the industry.

When it comes to local patronisation of gambling, however, lotteries cannot be ignored. Low-income Sri Lankans participate in the industry via lotteries, which are extremely regressive, given that the government uses lotteries to redistribute revenues that it collects from low-income groups back to them.

Given that the inefficiencies and corruption at the lottery boards result in the redistribution of less than 20% of their revenues back to the public, their inclusion under the purview of the gaming regulator is paramount.

The GRA Bill is weak on online gaming, only licensing local operators, which does little to curb youth addiction to international platforms. Singapore’s new online gaming law shows that stronger measures are needed to protect the youth from addiction to online gaming than the Bill currently provides for.

The Bill also neglects the regulator’s role in information collection, which is the lifeblood of effective regulation.

While electronic gaming equipment and slot machines record transactions automatically, the regulator should be able to trace every table game transaction. The regulator should ensure that all transactions are properly recorded with the help of AI, CCTV, and supervisory oversight.

Such information is crucial for monitoring odds and thus protecting consumers. It can also help the Inland Revenue Department with revenue assurance, and would even allow Sri Lanka to tax operators on gross gaming revenue rather than self-reported profits - a global norm in an industry prone to profit manipulation, especially via the shifting of overheads to a highly taxed part of the business - such as gaming - as a form of tax optimisation, particularly in a wholly-owned integrated resort environment.

The Bill’s penalties are also grossly inadequate for a billion-rupee industry. Most offences carry fines of Rs. 100,000 and/or two years’ imprisonment, which will not deter violations. These penalties should be raised to match international norms to ensure real deterrence.

The GRA Bill, as it stands, is woefully inadequate for establishing a robust regulatory framework. Its many deficiencies risk creating an ineffective regulator that maintains the status quo at best, or a Frankenstein whose dangers are yet unknown at worst.

Truthfully, Sri Lanka lacks the domestic expertise to build a strong gaming regulator alone. The government must therefore seek international expertise - particularly from Singapore, the Philippines, and Macau - to redraft the Bill rather than pass it in unjustified haste.

As this is Sri Lanka’s first attempt at gaming regulation, it is far easier to get it right now than to amend entrenched laws later, when vested interests will have multiplied. By passing the Bill in its current form, the NPP government - elected to fight corruption - risks a major gamble, increasing both corruption risks and rent-seeking vulnerabilities.

Macau aims for $ 30 billion in gross gaming revenues in 2025, with Singapore and the Philippines targeting around $ 7 billion each. Sri Lanka’s gaming industry could reach $ 1 billion in a decade, but achieving this - and its broader economic benefits - requires a robust regulatory framework, which demands an improved Bill.

(The writer is a Research Consultant at Adcovata Institute and a doctoral candidate at Rice University.)

Milking the tax system

By Tormalli Francis

Originally appeared on the Morning

• Why VAT exemptions sour the market

A Value-Added Tax (VAT)-free litre of milk or cup of yoghurt may feel like relief at the checkout, which is in fact a silent distortion of lost revenue, stifled competition, and a marketplace where not all producers compete on an equal playing field.

The Government’s VAT exemption on locally produced milk and yoghurt is presented as a move to improve child nutrition and support local dairy farmers. On the surface, it appears humane and sensible; after all, what government wouldn’t want to make nutritious food more affordable while reducing dependence on imports?

But public policy, like milk, can curdle if left unchecked.

Milk production in Sri Lanka is a long-standing traditional industry that has endured for thousands of years, producing over 500 million litres of milk annually (Figure 1), with more than 130,000 farmers (Figure 2) contributing to the production of milk islandwide.

Yet this exemption, packaged with its good intentions, highlights a recurring policymaking problem in the Sri Lankan economy: sacrificing long-term efficiency for short-term optics. In reality, VAT exemptions, however well intentioned, often distort the tax system, weaken the fiscal base, and may ultimately harm both consumers and the very farmers they are meant to protect.

Equal tax, equal opportunity

In a sound tax system, neutrality is essential; similar goods should be taxed in similar ways, and the system should not favour one product or producer over another.

Exempting only locally sourced milk and yoghurt breaks this principle. It grants preferential treatment to domestic producers, while imported milk powder, which is still a staple in many urban Sri Lankan households, remains subjected to VAT. This selective exemption can hinder fair competition, discourage innovation, and misallocate resources, ultimately compromising market efficiency.

This distorts market dynamics. Producers of other dairy products such as cheese, butter, and especially curd face a cost disadvantage, not because of inefficiency but because of policy. The exemption becomes a de facto subsidy, not through open direct Government expenditure but through hidden distortion in the tax system.

A country case example of a similar situation is seen in Georgia, where VAT exemptions apply to domestically produced milk and dairy products but not to imported or reconstituted alternatives. While intended to support local farmers and consumers, this approach creates an uneven competitive environment. Producers who rely on imported inputs including those making value-added dairy products face rising costs without benefiting from the exemption.

Such policies also break the VAT chain, as inputs are subjected to VAT and outputs are exempted. This raises production costs, especially for downstream manufacturers, distorts price signals, and leads to inefficient resource allocation across the sector.

Undermining revenue for reform

In the context of Sri Lanka’s fiscal challenges and commitments to international financial institutions like the International Monetary Fund (IMF), it is important to broaden the tax base.

VAT exemptions reduce potential Government revenue, which could otherwise be allocated to essential public services or targeted welfare programmes. Maintaining a wide array of exemptions complicates tax administration and undermines efforts to achieve long-term fiscal sustainability.

When tax revenue is eroded by such sector-specific exemptions, this shifts the burden elsewhere – either to other goods or services or to Government borrowing. Sri Lanka is in a period of fiscal crisis, with IMF-backed reforms requiring revenue generation. Exemptions reduce tax income from a high-volume essential product, limiting funds for healthcare, education, or infrastructure.

Ad hoc policy changes and weak tax administration have been the major contributors towards the decline in tax revenue, which have brought in fiscal challenges. A well-developed tax system is an efficient revenue instrument, but exemptions and reduced rates erodes its performance.

Basic commodities such as milk and yoghurt are often the options for exemptions or reductions in most Low-Income Developing Countries (LIDCs). In 2020, the VAT exemptions in these countries amounted to 1.3% of GDP. Revenue loss from such policies tends to outweigh the actual gains for the vulnerable groups.

Better tools for better targets

A key justification for exemptions on milk and yoghurt is to improve nutrition and support dairy farmers by making these products more affordable for vulnerable groups and increasing farmer incomes.

The dairy industry has been identified as the priority sector for development among the other livestock sub sectors in the country for its crucial role in reducing nutritional deficiencies across all age groups, and serving as a key source of affordable, high-quality nutrition for the population.

But VAT exemptions are an imprecise way to deliver support. While they aim to make basic commodities more affordable, such blanket policies often result in an imbalance, as higher-income households benefit more than the intended low-income groups.

A greater proportion of basic commodities are consumed by the richer households with greater purchasing power as they are likely to capitalise on these tax breaks. This misalignment highlights the inefficiency of VAT exemptions as a tool for social welfare. It is, in essence, a regressive subsidy disguised in the language of progressivism.

With exemptions having a progressive impact, they are poorly targeted ways to help low-income households, showcasing that directly targeted mechanisms will be better tools to address distributional concerns.

If the goal is to improve nutrition among the most vulnerable and improve farmers’ livelihoods, Sri Lanka should focus on strengthening targeted, transparent support systems. Direct transfers to low-income households, investment in school milk programmes, input subsidies to farmers, and upgrading the dairy industry infrastructure would deliver an efficient and equitable alternative.

These measures ensure that support reaches those who need it most without distorting market signals or undermining long-term efficiency.

Not a structural solution

Sri Lanka’s VAT exemption on locally produced milk and yoghurt may feel like a compassionate move, and in some ways, it is. But ultimately, it’s a fiscal quick fix, not a structural solution. A neutral tax system with broad based rates and minimal carve-outs helps maintain fairness, supports productive specialisation, and sustains Government revenue.

If we want to nourish our economy as well as our children, we must move from tax distortion to targeted policy. Milk can be good for the bones, but only when it doesn’t weaken the backbone of the economy.

(The writer is a Research Analyst at Advocata Institute)

(The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of this publication)

Figure 1: Trend of total annual local milk production (million litres) – 2015-2024

(Source: Livestock Statistics, Department of Census and Statistics)

Figure 2: Number of dairy farmers by district – 2024

(Source: Livestock Statistics, Department of Census and Statistics)

Solutions to Trump’s tariffs lie beyond negotiating tables

By Dhananath Fernando

Originally appeared on the Morning

We all hope that by 1 August, Sri Lanka will secure a better deal with the United States on the proposed tariffs affecting around 25% of our total exports. Continued engagement is essential, but we must recognise a hard truth: the real solutions go far beyond negotiations.

Even if we manage to win a 0% tariff deal with the US, that alone won’t fix our export problem. Our exports aren’t underperforming because of foreign tariffs; they are underperforming because we are not competitive enough. The problem lies at home.

While diplomatic efforts must continue, meaningful results will only come from bold, domestic trade and investment reforms. And those reforms must happen together, not in isolation.

Consider the recent India-UK Free Trade Agreement. It is expected to boost bilateral trade by $ 34 billion. The UK will cut average tariffs on Indian goods from 15% to 3%. Tariffs on whisky and gin will fall from 150% to 75%, and down to 40% within 10 years. Car tariffs will drop from over 100% to 10%. On the other hand, 99% of Indian exports to the UK, including textiles, food, and footwear, will enter tariff-free.

What does this mean for Sri Lanka? Simply put, Indian products will now have a significant edge in markets we once competed in. Even though Sri Lanka benefits from the UK’s new Developing Countries Trading Scheme (DCTS), India’s preferential trade access will make its goods more competitive than ours.

India isn’t stopping there. Trade agreements with the European Union (EU), Chile, the Gulf Cooperation Council, New Zealand, the European Free Trade Association (EFTA, comprising Switzerland, Norway, Iceland, and Liechtenstein), and ASEAN are all underway. Each deal pulls the rug further from under our feet.

Unlike India, Sri Lanka is not a large market. We don’t have the leverage to bring global powers to the table. Beyond basic-level conversations with Bangladesh, China, and Indonesia, we haven’t shown much interest in trade deals. The agreements we have signed – with Singapore and Thailand – are gathering dust. The long-stalled Comprehensive Economic Partnership Agreement (CEPA) with India remains a missed opportunity.

Let’s be honest. Competing with India in terms of price, scale, and often even quality is becoming increasingly difficult. That’s why the rational path forward is clear:

1. Integrate deeper with India

2. Unilaterally reduce trade barriers

3. Use this openness to attract investment

India’s aggressive trade strategy gives its exporters – and its value chains – a global advantage. If Sri Lanka can position itself as a reliable partner within India’s export ecosystem, we can gain by being part of its value chain. But to do that, we must get our house in order.

Currently, all our focus is on negotiation tables. But investment will not come unless we fix our own fundamentals. That means reforms in land use, labour laws, and industrial zones. Investors are not waiting for handshakes and smiles; they are looking for reliable, efficient, and reform-oriented partners.

Meanwhile, new regulatory pressures are emerging in our traditional markets too. The EU’s new Corporate Sustainability Due Diligence Directive (CSDDD) will reshape how businesses operate. 

This law requires large EU companies – and by extension their global suppliers – to actively prevent human rights and environmental violations across their operations. Without flexible labour regulations and well-functioning industrial zones, Sri Lanka risks losing even the markets we already have.

So here we are, caught between slow internal reforms and an aggressive global trade race.

The opportunity is still within reach. Deeper integration with India, along with smart reforms, can turn Sri Lanka into a competitive, attractive export and investment hub.

One year ago, Parliament passed the Economic Transformation Bill. One year later, we are still talking, not doing. That alone proves that solutions to US President Donald Trump’s tariffs – and many of our economic woes – won’t be found across negotiation tables. They begin right here, at home.

Electricity reforms at risk

By Dhananath Fernando

Originally appeared on the Morning

• Don’t let amendments derail investment and progress

A new conversation is unfolding around electricity sector reforms in Sri Lanka. After years of debate, there has been broad political consensus on two core principles:

• The urgent need for investment in the sector

• The structural reforms necessary to attract that investment – specifically, the unbundling of generation, transmission, and distribution

The logic is simple: generation, transmission, and distribution are fundamentally different businesses, each with unique asset types, risk profiles, and operational needs. Only by separating them can we improve transparency, increase efficiency, and create space for private capital to flow into each segment.

While there was promising alignment in this direction, the latest developments suggest we may be reversing course, creating uncertainty for investors and risking long-term progress.

The new amendments: One step forward, two steps back?

The 2024 Sri Lanka Electricity Act made an important move by further unbundling generation by source – hydro, coal, thermal, and wind – recognising that each comes with distinct technologies, operating models, and investment requirements. For instance, managing a coal plant requires an entirely different skillset and infrastructure than managing a wind farm.

However, the proposed new amendments roll back this approach by consolidating all generation entities under a single holding company. This re-centralisation undermines the very rationale for unbundling in the first place. It introduces operational inefficiencies and reduces cost transparency, making it harder for regulators to set fair and efficient tariffs.

Even more concerning, the amendments propose that the Government retain 100% ownership – effectively shutting the door on private capital.

The real cost of Govt.-only investment

If the Government intends to invest in electricity infrastructure, it must do so by borrowing through Treasury bills or bonds, adding to the national debt and worsening our already precarious debt-to-GDP ratio. Credit rating agencies will take note, likely downgrading Sri Lanka’s sovereign rating.

More critically, the cost of capital for the Government is around 9% – a prohibitively high rate for infrastructure investment. Every rupee spent here is a rupee less for health, education, or social safety nets.

Let’s not forget: in 2023, the Government injected Rs. 126 billion into the Ceylon Electricity Board (CEB). In 2024, the CEB posted a Rs. 144 billion profit, but only because of that prior cash infusion. Continued State dominance in investment only perpetuates a cycle of dependency.

Why private capital is not forthcoming

Even borrowing from domestic banks is becoming difficult. The Central Bank has capped bank exposure to the electricity sector at 25% of Tier 1 capital (and 55% in aggregate), with strict timelines to reduce this by 2030. These prudential limits are vital for financial system stability, but they also restrict the flow of private lending to the sector.

Another common route – borrowing with a Treasury guarantee – has also become costlier. Under the 2024 Public Debt Management Act, every Treasury guarantee must now carry a risk-based premium. When the CEB explored borrowing $ 50 million from the Asian Infrastructure Investment Bank, the risk premium alone was 4.8%, pushing the total cost of borrowing even higher.

Grid capacity and the renewable energy paradox

None of these challenges exist in isolation. Without urgent investment in transmission and distribution, additional solar or wind generation is meaningless – the grid simply cannot handle the load.

In a recent discussion with Advocata Institute, International Solar Alliance Director General Ashish Khanna emphasised the critical need for grid upgrades and private sector participation. Even Sri Lanka’s Prime Minister participated in early dialogues on a country partnership framework to this effect.

Yet, the new amendments – with their insistence on 100% State ownership and a two-year delay in further unbundling – send precisely the wrong signal. Investors see this as a red flag, not a green light.

Global implications and geopolitical costs

The concerns are not limited to domestic stakeholders. Leading development partners – including the World Bank, Japan International Cooperation Agency (JICA), and Asian Development Bank – have already expressed reservations about the proposed amendments.

We must remember that Japan is a key member of the Official Creditor Committee and one of Sri Lanka’s most consistent development partners. Our multilateral creditors hold a large portion of Sri Lanka’s foreign debt. Their support will be critical not only for the power sector, but for our entire economic recovery as well.

At a time when we are exploring regional grid connectivity and aspiring to meet 70% of energy demand through renewables, these regressive amendments risk turning vision into mere wishful thinking.

The electricity sector does not operate in a vacuum. It is tied to our economic recovery, fiscal health, investment climate, and geopolitical standing. The proposed amendments, while perhaps well-intentioned, threaten to undermine years of consensus-building and policy progress.

We urge policymakers to reconsider. The reforms must be guided not by bureaucratic convenience or outdated control models, but by pragmatism, transparency, and investor confidence. If we fail to course correct now, the cost won’t just be measured in kilowatt hours – it will be measured in lost opportunities, rising debt, and a future dimmed by indecision

Fixing the checkout bottleneck

By Dhananath Fernando

Originally appeared on the Morning

• Time to modernise e-commerce taxation

Delays in delivery and regulatory confusion around e-commerce platforms have become a pressing concern for consumers and small businesses across Sri Lanka. As parcels pile up at Customs and prices surge unexpectedly, it is time to take a step back and understand the root of the problem – and the economics behind it – before rushing to find solutions.

Many wonder how e-commerce platforms like Temu, AliExpress, and eBay offer such a vast variety of goods at prices far below those in local retail shops. The answer lies in a concept known as ‘long tail economics,’ popularised by Chris Anderson in 2004. 

Unlike traditional retail models that rely on selling large quantities of a few popular products, long tail economics thrive by offering a wide range of niche items in small volumes. Digital platforms are well suited for this, as they don’t bear the physical storage and shelf-space constraints that burden brick-and-mortar stores.

In conventional retail, stocking niche items is often unprofitable; they take up space and sell slowly. But online marketplaces can list millions of such products without significant overheads. Their costs are further reduced by economies of scale in shipping, especially when handling a large number of small parcels.

Until recently, Sri Lanka allowed such parcels to enter under a simplified flat-rate tariff system – typically around Rs. 850 per parcel – based on weight rather than the Harmonised System (HS) code. For low-weight or low-value items, some tariffs were not imposed at all. 

This system made cross-border e-commerce accessible and affordable, and in doing so, empowered many Sri Lankan entrepreneurs and gave consumers access to a wider variety of goods at lower prices.

However, it also led to concerns. The simplified system was being exploited by some to bring in commercial-scale shipments disguised as personal use, thereby bypassing higher taxes. Customs officials and industry stakeholders raised questions about revenue loss and the legality of weight-based tariffs under the Customs Ordinance. 

As a result, authorities moved to tighten the rules: now, all parcels must be declared by HS code and taxed accordingly, regardless of weight.

The unintended consequence? Long delays at Customs, consumer frustration, rising costs, and uncertainty for both consumers and e-commerce platforms. The system, simply put, is not ready to handle such granular processing at high volumes.

So what is the way forward?

The answer isn’t to block e-commerce; it’s to build a smarter system.

Create a legal framework for vendor tax collection

Globally, many countries have adopted a vendor collection model, where e-commerce platforms collect taxes at the point of sale and remit them to the authorities. But in Sri Lanka, this isn’t legally possible yet. First, the Government must establish a clear legal mechanism for platforms to collect tariffs and remit them to Customs or the Inland Revenue Department.

In implementing a vendor collection model, Sri Lanka can also introduce a minimum threshold, requiring only platforms that handle a certain number of parcels per month to participate in the scheme. This ensures that the system is manageable and initially applies to larger platforms with sufficient volume and technical capacity, avoiding undue burden on small or infrequent operators.

Integrate Customs tariff systems via API

Even if legally allowed, platforms must be able to accurately determine the applicable tariff at the time of purchase. That is where Application Programming Interface (API) integration becomes essential. 

Most e-commerce platforms already tag products with HS codes. If Sri Lanka Customs’ Automated System for Customs Data (ASYCUDA) system is integrated with these platforms via API, tariff rates can be automatically calculated during checkout. 

The buyer would then see the full landed price, including taxes, before paying. The platform would act as a collection agent and remit the amount to Customs, minimising leakage and increasing transparency.

Simplify and rationalise tariffs

At the heart of the issue lies another critical challenge: Sri Lanka’s tariff structure is overly complex. We apply Customs duty, PAL, CESS, and VAT, often with wildly varying rates depending on product specifications. 

For example, tissue paper and wet wipes carry different rates, and the difference is even starker between wet wipes with fragrance and those without. This complexity makes compliance difficult and systems integration nearly impossible.

A long-term solution would be to rationalise and simplify tariffs, bringing rates down and harmonising classifications. Simpler tariffs would mean lower prices for consumers, less room for manipulation, and more efficient revenue collection. In fact, a digital tax model could bring in more transparent revenue over time.

Let the consumer decide

Some argue that e-commerce platforms threaten local manufacturers or offer low-quality goods. But quality is a judgement for the consumer to make. If an item is poor in quality, buyers won’t return to it. 

Attempts to block platforms in the name of protectionism will hurt entrepreneurs who use these platforms and rob consumers of choice. A better approach is to let competition and transparency decide what thrives in the market.

The real issue isn’t e-commerce; it’s outdated regulation. With the right legal and technological framework, Sri Lanka can embrace global trade, empower local businesses, and ensure fairness in taxation. It’s time to stop punishing what works and modernise the system that supports it.

Electricity reform: The battle between control and competitiveness

By Dhananath Fernando

Originally appeared on the Morning

The amendments to the Sri Lanka Electricity Act of 2024 have once again stirred public discourse, as key international development partners – namely the Asian Development Bank (ADB), World Bank (WB), and Japan International Cooperation Agency (JICA) – have raised serious concerns about their implications.

Sri Lanka’s power sector reform journey, particularly the unbundling of the Ceylon Electricity Board (CEB), has been a prolonged and often politically fraught conversation. The recent economic crisis made one thing clear: inefficiencies and structural rigidities in the energy sector are no longer sustainable. 

In response, a new bill was passed, aiming to restructure the sector by unbundling the CEB into generation, transmission, and distribution entities. This was intended to facilitate grid upgrades, improve renewable energy absorption, and lower costs while improving service delivery.

Yet, the devil – as always – is in the details. The accompanying table contains a summary of the four key concerns raised by development partners, along with the corresponding responses from the Director General of the Power Sector Reforms Secretariat.

On the surface, the responses summarised in the table seem to address concerns. But policy isn’t judged by intentions; it is judged by results. And to get results, legislation must be clear, enforceable, and resistant to misuse by future governments. Unfortunately, the Electricity Act still leaves many grey areas, which could cause more problems than it solves.

Take permanent Government ownership, for instance. The Government says it will only hold on to generation and distribution companies for now, but there is no clear legal path or timeline for opening up future entities to investment. Without clear guarantees, this could become a case of kicking the can down the road, keeping control within State hands while blocking much-needed capital and innovation. 

Then there is the issue concerning a National Transmission Network Service Provider (NTNSP). Even if the NTNSP won’t directly handle power generation, it will still own companies that do. This undermines the principle of unbundling, which is all about separating who generates power from who transmits it, so that the playing field is fair for everyone. You cannot say you are de-merging the system while letting one player wear two hats.

On the question relating to the Lanka Electricity Company (LECO), the response says only the CEB’s 55% stake is involved and that LECO will remain independent. But the act gives enough flexibility for future decisions that could quietly erode LECO’s autonomy. Without explicit protections written into law, these assurances are only as strong as the next government’s intentions.

Finally, on tariffs: while the regulator is supposed to have the final say, the phrase “in consultation with the Ministry of Finance” in legal terms can mean joint decision-making. That could politicise price-setting, delay reforms, and discourage private investment. What investors want is clarity; ambiguity is their biggest fear.

In public policy, it is not the intent but the outcome that matters.

At the heart of all four concerns lies a common thread – control over market dynamics and decision-making. Two underlying fears appear to drive the insistence on Government ownership: the fear of losing control over a strategic sector and the pressure from trade unions worried about losing the privileges that come from monopoly protection. These are not unfounded concerns, but they are not sufficient justifications to resist reform.

Strategic interest is best preserved not through outright ownership but through strong regulation. Maintaining Government ownership over generation and distribution does not guarantee better outcomes for consumers. Instead, a robust, independent regulator and a competitive market architecture are more likely to deliver efficiency, lower costs, and innovation.

Moreover, modernising our grid is critical not just for absorbing renewable energy but also for positioning Sri Lanka to eventually export electricity, especially through grid connectivity with India – a long-term but strategic goal.

Another key principle is that legislation should be designed not just for today’s leaders but to guard against potential misuse by future actors with less noble intentions. A vague clause, even with the best current leadership, can become a tool for rent-seeking or manipulation down the line. 

The ambiguity around the Ministry of Finance’s involvement in tariff setting, for instance, opens the door for potential political interference, even if unintentional.

The political economy of reform is such that ambiguity breeds resistance, from investors and insiders alike. Leaving grey areas in legislation invites both capital flight and capture by vested interests.

Ultimately, the Electricity Act must be evaluated on its ability to foster competition that is regulated, not ownership that is politicised. The objective should be clear: maximise consumer benefit in terms of price, reliability, and national security. In chasing control, we risk losing all three. 

Concerns and responses 

Summary of concerns by WB, ADB, and JICA

Response by Director General of the Power Sector Reforms Secretariat

1. Permanent Government ownership

Legislating 100% permanent State ownership for key electricity entities limits flexibility, deters private investment, and increases the long-term burden on the Government.

The Government of Sri Lanka will retain 100% permanent ownership only in the generation and distribution companies created through the preliminary transfer. Further unbundled entities, except for hydropower, will not be subjected to this restriction.

2. Concerns with National Transmission Network Service Provider (NTNSP) structure

Including LTL Holdings and Sri Lanka Energies under the NTNSP undermines unbundling, risks conflicts of interest, and reduces transparency.

The CEB’s stakes in these entities are classified as assets to be transferred to the NTNSP. The NTNSP will be limited to transmission functions. No re-bundling will occur, and power purchase agreements will be managed competitively by the National System Operator (NSO).

3. Distribution company risks

Merging LECO into the new distribution company disregards operational and governance structures, risking reversal of previous efficiency gains.

Only the CEB’s 55% stake in LECO will be affected. LECO will remain a separate legal entity, with the freedom to pursue private investment. There will be no full absorption.

4. Tariff-setting ambiguity

Changing “after consultation” to “in consultation” with the Ministry of Finance in tariff-setting risks undermining regulatory independence.

Although tariffs are now to be set “in consultation with the Ministry of Finance,” the regulator retains final authority, in accordance with national tariff policy.

Milking the Tax System: Why VAT Exemptions Sour the Market

By Tormalli Francis, Research Analyst at Advocata Institute

A VAT-free litre of milk or cup of yoghurt may feel like relief at the checkout, which is in fact a silent distortion of lost revenue, stifled competition, and a marketplace where not all producers compete on an equal playing field. The government’s VAT exemption on locally produced milk and yoghurt is presented as a move to improve child nutrition and support local dairy farmers. On the surface, it appears humane and sensible — after all, what government wouldn’t want to make nutritious food more affordable while reducing dependence on imports?

But public policy, like milk, can curdle if left unchecked.

Milk production in Sri Lanka is a long-standing traditional industry that has endured for thousands of years producing over 500 million litres of milk [1] annually (Figure 1) with more than 130,000 farmers [2] (Figure 2) contributing to the production of milk islandwide. Yet this exemption, packaged with its good intentions highlights a recurring policymaking problem in the Sri Lankan economy: sacrificing long-term efficiency for short-term optics. In reality, VAT exemptions — however well-intentioned often distort the tax system, weaken the fiscal base, and may ultimately harm both consumers and the very farmers they are meant to protect.

Figure 1: Trend of total annual local milk production (Million Litres), 2015 - 2024

Source: Livestock Statistics, Department of Census and Statistics.

Figure 2: Number of dairy farmers by district, 2024

Source: Livestock Statistics, Department of Census and Statistics.

Equal Tax, Equal Opportunity

In a sound tax system, neutrality is essential — similar goods should be taxed in similar ways, and the system should not favor one product or producer over another. Exempting only locally sourced milk and yoghurt breaks this principle. It grants preferential treatment to domestic producers, while imported milk powder which is still a staple in many urban Sri Lankan households remains subjected to VAT. This selective exemption can hinder fair competition, discourage innovation, misallocate resources, ultimately compromising market efficiency.

This distorts market dynamics. Producers of other dairy products such as cheese, butter especially curd face a cost disadvantage, not because of inefficiency, but because of policy. The exemption becomes a de facto subsidy, not through open direct government expenditure but through hidden distortion in the tax system.

A country case example of a similar situation is seen in Georgia [3], where VAT exemptions apply to domestically produced milk and dairy products, but not to imported or reconstituted alternatives.  While intended to support local farmers and consumers, this approach creates an uneven competitive environment. Producers who rely on imported inputs including those making value-added dairy products face rising costs without benefiting from the exemption. 

Such policies also break the VAT chain, as inputs are subjected to VAT and outputs are exempted. This raises production costs, especially for downstream manufacturers, distorts price signals, and leads to inefficient resource allocation across the sector. 

Undermining Revenue for Reform

In the context of Sri Lanka's fiscal challenges and commitments to international financial institutions like the IMF, the Advocata institute emphasizes the importance of broadening the tax base. VAT exemptions reduce potential government revenue, which could otherwise be allocated to essential public services or targeted welfare programs. Maintaining a wide array of exemptions complicates tax administration and undermines efforts to achieve long-term fiscal sustainability.

When tax revenue is eroded by such sector-specific exemptions, this shifts the burden elsewhere — either to other goods or services or to government borrowing. Sri Lanka is in a period of fiscal crisis, with IMF-backed reforms requiring revenue generation. Exemptions reduce tax income from a high-volume essential product, limiting funds for healthcare, education, or infrastructure. Ad hoc policy changes and weak tax administration have been the major contributors towards the decline in tax revenue which have brought in fiscal challenges. A well developed tax system is an efficient revenue instrument, but exemptions and reduced rates erodes its performance. Basic commodities as milk and yoghurt are often the options for exemptions or reductions in most Low Income Developing Countries (LDICs), in 2020 the VAT exemptions in these countries amounted to 1.3 percent of GDP [4]. Revenue loss from such policies tends to outweigh the actual gains for the vulnerable groups.

Better Tools for Better Targets

A key justification for exemption on milk and yoghurt is to improve nutrition and support dairy farmers — by making these products more affordable for vulnerable groups and increasing farmer incomes. The dairy industry has been identified as the priority sector for development among the other livestock sub sectors in the country [5] for its crucial role reducing nutritional deficiencies across all age groups, and serving as a key source of affordable, high-quality nutrition for the population. 

But VAT exemptions are an imprecise way to deliver support. While they aim to make basic commodities more affordable, the Advocata institute highlights that such blanket policies often result in an imbalance as higher-income households benefit more than the intended low-income groups. As a greater proportion of basic commodities are consumed by the richer households, with greater purchasing power as they are likely to capitalise on these tax breaks. This misalignment highlights the inefficiency of VAT exemptions as a tool for social welfare. It is, in essence, a regressive subsidy disguised in the language of progressivism.

With exemptions having a progressive impact, they are poorly targeted ways to help low-income households, showcasing that directly targeted mechanisms will be better tools to address distributional concerns [6]. If the goal is to improve nutrition among the most vulnerable and farmers' livelihoods – Sri Lanka should focus on strengthening targeted, transparent support systems. Direct transfers to low-income households, investment in school milk programs, input subsidies to farmers, and upgrading the dairy industry infrastructure would deliver an efficient and equitable alternative. These measures ensure that support reaches those who need it most—without distorting market signals or undermining long-term efficiency.

Conclusion

Sri Lanka’s VAT exemption on locally produced milk and yoghurt may feel like a compassionate move — and in some ways, it is. But ultimately, it’s a fiscal quick fix, not a structural solution. A neutral tax system with broad based rates and minimal carve outs helps maintain fairness, supports productive specialisation and sustains government revenue. 

If we want to nourish our economy as well as our children, we must move from tax distortion to targeted policy. Milk can be good for the bones, but only when it doesn’t weaken the backbone of the economy.

[1]  Milk Production Statistics. Livestock Statistics. Department of Census and Statistics. Available at: https://www.statistics.gov.lk/Agriculture/StaticalInformation/MilkProduction#gsc.tab=0

[2] Milk Producing Farmers. Livestock Statistics. Department of Census and Statistics. Available at:https://www.statistics.gov.lk/Agriculture/StaticalInformation/MilkProducingFarmers#gsc.tab=0

[3]  Study of Value Added Tax (VAT) Exemption Impact for Increasing the Competitiveness of the Georgian Dairy Sector. Available at: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://iset-pi.ge/storage/media/other/2021-10-06/32dcec80-2670-11ec-9a47-851d3f3d5dcf.pdf

[4] The Global Tax Expenditures Database (GTED) Companion Paper. A. Redonda et. al. Available at: https://www.researchgate.net/profile/Christian-Von-Haldenwang/publication/352539392_The_Global_Tax_Expenditures_Database_GTED_Companion_Paper/links/61291b602b40ec7d8bca280d/The-Global-Tax-Expenditures-Database-GTED-Companion-Paper.pdf

[5] Sri Lanka’s Dairy Sector: Where to Move and What to Do – Prediction and a Trend Analysis. D. A. P. R. Damunupola. Available at: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://sljae.sljol.info/articles/74/files/submission/proof/74-1-413-1-10-20220706.pdf

[6] VAT Exemptions, Embedded Tax,  and Unintended Consequences. World Bank Group. Available at: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.joserobertoafonso.com.br/wp-content/uploads/2025/05/IDU-8b2c8bb9-1d8f-4d67-b704-8dec2f14a832.pdf

When goods don’t cross borders, soldiers will

By Dhananath Fernando

Originally appeared on the Morning

• The hidden costs of the Israel-Iran war for Sri Lanka

The escalating conflict between Israel and Iran carries serious repercussions for Sri Lanka on multiple fronts. 

In economic terms, there is no winner in any war; all parties, including those not directly involved, will suffer. Unfortunately, Sri Lanka is likely to be one of those casualties.

Humanitarian impact

An estimated 20,000 Sri Lankans live and work in Israel. If the conflict escalates and lives are lost, the Government will be under pressure to intervene and repatriate citizens. 

This would strain an already tight budget and add pressure to the national balance sheet. However, human life must take priority and any necessary rescue operations must be conducted swiftly.

Beyond the immediate human toll, loss of life could trigger political tensions at home, affecting community relations and domestic stability.

Exports and trade

Both Israel and Iran are key export markets for Sri Lanka. In 2023, exports to Israel were valued at approximately $ 90 million, with key products including bulk tea, rubber products, seafood, and coconut-based goods. Meanwhile, Iran accounted for $ 67 million in Sri Lankan exports, primarily bulk tea.

However, the bigger risk lies beyond these direct trade flows. As major markets like the US, UK, and European Union (EU) align themselves with different sides of the conflict, global trade dynamics could shift dramatically. Increased military expenditure, market polarisation, and slower consumer demand in Western economies could impact Sri Lanka’s export growth across the board.

Meanwhile, our imports from Israel – mainly tech products, plastics, and precious stones – amount to roughly $ 100 million annually. Some of these are intermediary goods essential for local production. 

Imports from Iran are smaller (about $ 25 million), largely fertilisers and food items, but equally vulnerable to disruption. War-driven supply chain breakdowns and rising costs will further strain sectors already under pressure.

Fuel prices and economic slowdown

Middle Eastern instability typically drives global oil prices higher. Already, crude and refined oil prices are rising – the Murban crude variant used at our Sapugaskanda Refinery is up by nearly 10%. Higher global prices must be transparently reflected in local pump prices to avoid market distortions.

It is vital that the Government allows these price signals to flow through while maintaining prudent monetary policy. Artificially low interest rates could lead to currency depreciation, accelerating inflation and further compounding the fuel price shock. If managed correctly, we can minimise the fallout. If not, we risk another wave of inflation at a critical juncture.

In addition, falling remittances and a global economic slowdown will directly impact one of the most critical requirements for Sri Lanka’s debt sustainability – economic growth. Weak growth could force the country into a second round of debt restructuring, and even a modest external shock could be enough to trigger a crisis, given the fragile fundamentals of our economy. 

The only solution is to accelerate economic reforms – removing trade barriers, restructuring State-Owned Enterprises (SOEs), and pursuing sound monetary policy – to build resilience and minimise risks.

Remittances

Sri Lanka receives about $ 40 million in remittances from Israel per quarter. Any major disruption to employment in Israel could directly impact these inflows. 

Moreover, broader instability in the Middle East could affect other labour markets where Sri Lankans are employed, reducing remittance income – a crucial source of foreign exchange for debt servicing and stabilising the currency.

Geopolitical risks

As global powers take sides, Sri Lanka faces new geopolitical challenges. The late Iranian President Ebrahim Raisi visited Sri Lanka last year to inaugurate the Uma Oya project, funded by Iran. Iran also donated the Sapugaskanda Refinery, a longstanding symbol of economic ties.

Israel, in turn, remains an important partner, offering employment opportunities and a growing trade relationship. But with key allies like the US and UK backing Israel, and powers like China and Russia leaning towards Iran, Sri Lanka risks being caught between competing camps.

We must now carefully manage these pressures. Maintaining neutrality while safeguarding national interests will require skilled diplomacy.

A wake-up call

This war is a stark reminder of the importance of global trade and the value of building strong, diversified economic relationships. The situation echoes the famous quote: “When goods and services do not cross borders, soldiers will.”

For Sri Lanka, the lesson is clear: deeper economic engagement and robust reforms are not just about prosperity, they are essential to protecting national stability in an uncertain world.