Rebuilding without derailing reforms

By Dhananath Fernando

Originally appeared on the Morning

The Government is proposing an additional Rs. 500 billion supplementary budget for 2026 to manage expenditure linked to Cyclone Ditwah.

Obviously, we have to spend money to restore damaged civil infrastructure, livelihoods, and businesses. But we also need to remember that some reforms were already delayed, and now the cyclone has arrived on top of that.

The economic stability we have achieved, including 5.4% growth and the performance of the stock market, rested on five key pillars of reforms. We cannot compromise those reforms on one side. On the other, we must actively push the next set of reforms needed for growth. The cyclone should not become an excuse to pause the growth agenda.

The Central Bank independence law, the Public Financial Management Act, the Anti-Corruption Act, the setting up of the Public Debt Management Office, and cost-reflective pricing for fuel are five pieces of key legislation that helped rebuild stability. Now, with a new Rs. 500 billion supplementary budget, we are looking at amending the Public Financial Management Act and the 13% primary expenditure limit as a percentage of GDP.

Yes, we need to spend. But before we go to the full stretch of a supplementary budget, we must first be serious about repurposing existing allocations and redirecting budgets to rebuilding priorities. With higher expenditure being planned, revenue performance in 2026 may also weaken.

The main tax measure announced was to bring the Value-Added Tax threshold down, which may broaden the base. Still, the cyclone will affect consumption, production, and compliance in ways that are hard to predict. If revenues underperform while spending expands, we risk a wider budget deficit at the very moment we thought we had regained control.

We also need to be careful about what it means to relax the primary expenditure limit from 13% to 14.4%. This does not mean we should never amend the limit. Exceptional events require flexibility. But once we loosen a fiscal anchor, we should be clear-eyed about the political economy.

If another unexpected event happens within the next few months, the risk is that expenditure drifts further and discipline becomes harder to restore. The right sequence matters: repurpose first, tighten implementation, and then expand only what is absolutely unavoidable.

A wider budget deficit will also create pressure on other safeguards. When fiscal policy slips, monetary credibility comes under strain. The temptation then is to reopen backdoors, delay hard decisions, and use inflation as a silent tax. Even when intentions are good, this is often how political systems behave during shocks.

That is why defending the credibility of the Central Bank independence framework and the fiscal rules-based approach is not a technical obsession. It is the firewall that prevents emergencies from becoming permanent instability.

At the same time, we must move ahead with the reforms that were already pending: strengthening the social safety net through better targeting, land reforms, public transport reforms, and, most importantly, State-Owned Enterprise reforms. These reforms can unlock existing assets, reduce losses, and lift growth without continuously leaning on taxpayers.

Alongside this, trade and investment reforms are necessary for sustained growth. Simply lowering tariff rates, simplifying the tariff structure, and fixing Customs processes are not optional anymore. In fact, the cyclone opens a reform window for the Government, but the reforms must aim beyond merely returning to where we were before the disaster. Rebuilding should mean building better systems, not just repairing broken structures.

The immediate risk is that the national conversation narrows to cyclone recovery and, conveniently, forgets recovery from the economic crisis. Of course, if we fail to recover from the cyclone, another economic crisis is inevitable. But the reverse is also true. If we recover from the cyclone but abandon the economic reforms, we may still slide back into crisis, only with a different trigger.

The only way out is economic reform-led recovery, and we need to move quickly.

At the moment, there is talk of an international donor conference and an International Monetary Fund (IMF) Rapid Financing Instrument to support recovery. These can help, and Sri Lanka should pursue them with urgency and credibility. But the real game changer is defending the reforms that brought stability and executing the reforms that generate growth.

Donor support works best when paired with reforms, because the donor community understands our real weakness: after every external shock, we struggle not because we lack sympathy or even financing, but because we delay hard economic reforms once the immediate pressure eases.

Let us hope this cyclone becomes a turning point not only for relief and reconstruction, but also for the fundamentals of growth. And let us hope the donor community connects its support to long-delayed reforms that can prevent the next shock from becoming the next crisis.

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.