Sri Lanka at the Crossroads

Rwanda’s remarkable transformation over two decades, achieving near-universal mobile phone access, doubling electricity coverage, and adding 20 years to life expectancy, was accomplished with relatively modest spending increases from $150 to $420 per person, still below the sub-Saharan African average. The critical factor was not the quantum of spending, but its efficiency.

This stands in stark contrast to Sri Lanka’s experience. Despite significantly higher per capita spending, Sri Lanka’s development outcomes have been inconsistent, with persistent inefficiencies in public investment and service delivery.

Sri Lanka’s Spending Dilemma: Contradictions and Consequences

The Asian Development Bank (2022) notes that Sri Lanka’s public sector employment as a percentage of total employment stands at approximately 13.5 percent, significantly higher than comparable economies like Vietnam (7 percent) or Malaysia (9 percent). This allocation crowds out productive spending on infrastructure and human capital development.

The Public Wage Bill Conundrum

Sri Lanka’s most glaring fiscal contradiction lies in its bloated public sector. While the IMF analysis shows that public wage bills account for about a quarter of total expenditure in most countries, Sri Lanka’s public wage bill has historically consumed nearly 30 percent of government revenue, far exceeding regional comparators.

Infrastructure Investment: Quantity Without Quality

The IMF research indicates that in most countries, public investment has declined by 2 percentage points of total expenditure over the past two decades. Sri Lanka has moved in the opposite direction, yet with troubling outcomes.

Between 2005 and 2019, Sri Lanka embarked on an infrastructure spending spree, with public investment averaging 6-7 percent of GDP. The Hambantota Port, Mattala Airport, and the Lotus Tower became symbols of this era, projects financed largely through commercial borrowing from China, with minimal economic returns.

While Sri Lanka’s infrastructure stock increased substantially, the productivity gains were negligible due to poor project selection, location inefficiencies, and limited integration with economic clusters. The public investment efficiency index, developed by the IMF, places Sri Lanka significantly below best-practice frontiers, suggesting that approximately 40 percent of potential infrastructure value is lost to inefficiencies (Figure 1).

Score Range

: 0–100, with concentric circles at 25-point intervals.

Figure 1: Multi-dimensional Efficiency Scorecard

The post-2022 reform period shows a sharp contraction in public investment, from 6.5 percent of GDP in 2019 to barely 2 percent in 2023, reflecting fiscal constraints rather than strategic reallocation. This reactionary approach risks undermining long-term growth prospects.

Education and Human Capital: Underinvestment in the Future

Education spending has remained modest at about 11 percent of total spending in most countries, and Sri Lanka follows this pattern, but with concerning qualitative outcomes. However, education spending as a percentage of GDP, Sri Lanka’s reported figure was about 1.83 percent in 2023, which is very low compared to the world average of around 4.4 percent, and well below the UNESCO-recommended 4-6 percent and significantly lower than regional leaders like Vietnam (5.7 percent) and Malaysia (4.8 percent).

Moreover, despite achieving impressive literacy rates (92 percent) and near-universal primary enrollment, Sri Lanka’s education system suffers from significant inefficiencies. More critically, learning outcomes have stagnated. The World Bank’s (2021) Human Capital Index reveals that a child born in Sri Lanka today will be only 60 percent as productive as they could be with complete education and full health, below Vietnam (69 percent) and Thailand (61 percent). This suggests that both the quantum and quality of education spending require urgent attention. The system suffers from misallocation.

Healthcare Efficiency: A Mixed Legacy

Sri Lanka’s healthcare system has historically been celebrated as a development success, achieving middle-income health outcomes with lower-middle-income resources. However, recent trends reveal emerging contradictions.

Public health expenditure remains around 1.7 percent of GDP, among the lowest in Asia. The system increasingly suffers from resource constraints, with frequent medicine shortages, deteriorating infrastructure, and so-called brain-drain of medical professionals. Meanwhile, out-of-pocket health expenditures have risen sharply, indicating declining efficiency and equity in service delivery.

The Path Forward: Evidence-Based Reform

Without reinventing the wheel, many frontier countries have already shown that smart spending hinges on three key strategies: merit-based recruitment, performance-linked compensation, and the strategic redeployment of public servants—from overstaffed administrative roles to critical service delivery functions in education, healthcare, and agricultural extension.

Rebalancing the Expenditure Mix

IMF analysis demonstrates that shifting 1 percent of GDP from lower-impact government consumption into infrastructure investment raises output by about 1.5 percent in advanced economies and 3.5 percent in emerging markets over approximately 25 years. Redirecting the same amount toward human capital investment can yield gains of around 3 to 6 percent, respectively.

For Sri Lanka, this implies a fundamental reorientation: gradually reducing the public sector wage bill while simultaneously increasing productive spending on physical and human capital. The political economy challenge is formidable, civil service reform threatens entrenched interests, but unavoidable for fiscal sustainability.

Improving Investment Efficiency

The research shows that improving investment efficiency by 10 percentage points can boost output gains by 1.4 percent, with faster closure of these gaps yielding greater and quicker payoffs. Sri Lanka requires comprehensive public investment management reforms, including:

Rigorous project appraisal

: Implementing cost-benefit analysis for all major projects, with independent technical reviews before approval. The current practice of approving mega-projects through Cabinet decisions, without transparent feasibility studies, must end.

Competitive procurement:

Strengthening procurement frameworks to ensure value for money. The prevalence of single-source, government-to-government contracts, particularly with Chinese state enterprises, has contributed to inflated costs and poor quality.

Effective project management

: Establishing dedicated project management units with technical expertise, clear accountability structures, and real-time monitoring systems. The recent Public Investment Management Assessment (PIMA) by the IMF identified critical weaknesses in project implementation capacity.

Strategic prioritisation

: Focusing on high-return investments in economic corridors, export-oriented infrastructure, and climate-resilient projects rather than politically motivated white elephants.

Enhancing Human Capital Investment

Complementary policies matter significantly, in emerging and developing economies, combining infrastructure spending with education spending balances near-term and longer-term gains, as physical capital boosts output quickly while human capital builds future productivity.

Therefore, Sri Lanka must urgently:

Increase education spending

to at least 4 percent of GDP, with particular focus on STEM (Science, Technology, Engineering and Mathematics) and education, vocational training aligned with labour market demands, and digital literacy. The Skills Sector Development Programme, supported by the World Bank, provides a useful framework.

Reform education quality:

Move beyond enrollment metrics to learning outcomes. This requires comprehensive curriculum reform, improved teacher training and retention (possibly through performance-based incentives), investment in educational technology, and strengthened school-industry linkages.

Expand healthcare financing:

Gradually increase public health expenditure toward 3 percent of GDP while simultaneously improving efficiency through digital health systems, preventive care strengthening, and strategic purchasing mechanisms.

Leverage technology:

Digital platforms can dramatically improve service delivery efficiency, from online education resources to telemedicine to e-government services. Estonia’s digital transformation, achieved despite limited resources, provides an instructive model.

Political Economy Realities

The technical solutions are well understood; implementation is where Sri Lanka consistently falters. The fundamental obstacle is political, short electoral cycles incentivise visible consumption spending over long-gestation investments in efficiency and human capital.

Breaking this cycle requires institutional reforms: strengthening fiscal rules, enhancing transparency in budget formulation, empowering independent fiscal councils, and building cross-party consensus on development. Appointments such as Duminda Hulangamuwa and Professor Anil Fernando as senior economic advisors on an honourary basis to assist on economic and financial matters by President Anura Kumara Dissanayake, in late 2024, represent a small step in this direction, but much stronger institutional safeguards are needed.

Additionally, Dr. Hans Wijayasuriya was appointed Chief Advisor to the President on Digital Economy, in October 2024, which is a specific advisory role within the presidential secretariat framework rather than a separate office.

Civil society engagement is equally crucial. Public expenditure tracking initiatives, community scorecards for service delivery, and transparent disclosure of project details can create accountability pressures that complement formal institutional reforms.

Conclusion: Efficiency as Economic Strategy

The nation can no longer afford the luxury of inefficient spending, neither fiscally nor economically. The evidence is clear: spending smarter, not necessarily more, is the pathway to sustainable growth and improved living standards. Importantly, smarter spending allocation can also reduce income inequality, a critical consideration for Sri Lanka, where rising inequality threatens social cohesion.

The question is whether Sri Lanka’s political leadership possesses the courage and the will to choose long-term national interest over short-term political expediency. The answer will determine whether the current crisis becomes a catalyst for transformation or merely another missed opportunity in the nation’s troubled economic history.

The writerIS a senior Chartered Accountant and professional banker, is Professor at SLIIT, Malabe. The views and opinions expressed in this article are personal.)