Execution bottlenecks stall Sri Lanka capital spending

Sri Lanka’s persistent shortfall in capital spending is emerging as a key constraint on growth, with structural weaknesses in financing and project execution continuing to undermine public investment, the Asian Development Bank (ADB) said in its Asia Development Outlook 2026.

Capital expenditure averaged just 3.0 percent of GDP between 2022 and 2025, well below the typical 5 percent to 6 percent allocation, highlighting a widening gap between budgeted targets and actual delivery. In 2024, spending fell to 2.6 percent of GDP, less than half the 5.4 percent originally projected. While capital outlays are expected to rise to around Rs.1.37 trillion in 2026, the ADB cautioned that achieving this would require overcoming entrenched fiscal and institutional constraints.

The shortfall largely reflects financing pressures, with recurrent expenditure, particularly interest payments, crowding out investment. The interest costs averaged 17.8 percent of budgeted expenditure between 2020 and 2024, while revenue underperformance and rigid spending commitments limited fiscal space. As a result, the governments have relied on compressing capital spending to contain deficits, weakening medium-term fiscal planning.

Implementation constraints have compounded the problem. Project execution remains heavily back-loaded, with over half of disbursements occurring in the final quarter, reflecting delays in procurement, land acquisition and inter-agency coordination. Capacity gaps in preparing bankable projects and weak monitoring systems have further slowed execution, even when funding is available.

The ADB warned that persistent under-investment is constraining Sri Lanka’s growth potential, slowing infrastructure development and weakening the effectiveness of fiscal policy. The urgency has been heightened by climate-related shocks, including Cyclone Ditwah, which caused an estimated US $ 2 billion in damage and underscored the need for resilient infrastructure.

To address these gaps, the ADB called for more realistic capital budgeting aligned with implementation capacity, stronger project preparation, streamlined procurement and improved monitoring and accountability. It also highlighted the role of public-private partnerships in easing fiscal pressures and accelerating project delivery through private capital and expertise.