The Looming Crisis: How Economic Hardship and Stifled Entrepreneurial Spirit threaten Sri Lanka’s National Security

• While there has been moderate growth in the economic front (2.2% growth in April 2024 reported from the World Bank), poverty remains at 25.9% as of 2023

Sri Lanka stands at a critical juncture in its post-independence history. The echoes of past upheavals, particularly the Janatha Vimukthi Peramuna (JVP) insurgencies of 1971 and 1987-89, resonate with chilling clarity in the contemporary socio-economic landscape. These past rebellions, often attributed to the explosive combination of unbearable cost of living and the widespread unemployment among educated youth, serve as stark reminders of how economic distress can swiftly transmute into a profound threat to national security and stability. Fast forward to 2022, the “Aragalaya” (the Struggle) – a spontaneous, nationwide protest movement – once again brought to the fore the deep-seated economic hardship faced by a significant majority of Sri Lankans, especially its youth. Despite the apparent calm that has descended since the immediate aftermath of the protests, the fundamental problems of persistent high cost of living, rampant youth unemployment, and a nascent, often unsupported, entrepreneurial ecosystem continue to fester, posing an existential challenge to the nation’s future.

Improvised Entrepreneurship: due to a lack of systematic measures to incentivise entrepreneurship and innovation, these individuals have been compelled to earn their incomes through informal means.  pix by Kushan pathiraja

The economic anxieties gripping Sri Lanka are multi-faceted and deeply interwoven. The cost of living remains prohibitively high for the average household, even with recent fluctuations in inflation. While the National Consumer Price Index (NCPI) in May 2024 showed a month-on-month decrease, offering some marginal relief in overall prices, the cumulative effect of years of surging inflation has eroded purchasing power significantly. World Bank reports from April 2024 indicate a projected moderate economic growth of 2.2% in 2024, suggesting a degree of stabilisation after the severe downturn of 2022. However, this growth has not translated into widespread relief for the populace, with an estimated 25.9% of Sri Lankans living below the poverty line in 2023 – a troubling fourth consecutive year of increase. Households continue to grapple with elevated prices, income losses, and underemployment, often resorting to debt to meet even basic needs such as food, medicine, and education. This persistent economic vulnerability directly impacts the social fabric, contributing to widespread discontent and a sense of hopelessness among large segments of the population.

Compounding the crisis of affordability is the intractable problem of unemployment, particularly among the youth and graduates. Macrotrends data reveals a youth unemployment rate of 22.33% in 2024, a slight decline from 2023, but still alarmingly high. This figure masks an even more critical issue: the significant number of educated individuals who find themselves without meaningful employment. Research from 2023 indicated over 50,000 unemployed graduates, with a disproportionate number stemming from Arts and Social Sciences disciplines. Ironically, individuals with the highest educational qualifications often experience the longest wait times for securing employment. The traditional avenue of state sector jobs, once a primary aspiration for many graduates, is no longer a viable solution given the sheer volume of graduates entering the workforce annually and the government’s fiscal limitations. This mismatch between educational output and market demand fuels frustration, disillusionment, and a sense of betrayal among the youth who have invested heavily in their education. As history has repeatedly demonstrated in Sri Lanka, a large cohort of educated, unemployed youth is a volatile ingredient in the national security calculus.

Lack of Robust Entrepreneurial Culture

The underlying issue, and indeed the most promising solution, lies in fostering a robust entrepreneurial culture. The observation that “No Government can provide state jobs to all the youth and graduates. The Answer lies in entrepreneurship, which no government in Sri Lanka has understood, including the present government” hits at the core of the problem. While recent government efforts, as highlighted in the Ministry of Industry and Entrepreneurship Development’s 2024 progress report and the Economic Transformation Act of 2024, indicate a recognition of entrepreneurship’s importance (with a goal to increase its GDP contribution to 10% by 2030), the tangible impact on the ground remains limited. The allocation of Rs. 2700 Mn for a revolving fund credit scheme and entrepreneurship training for 367 university students is a positive step. Still, they barely scratch the surface of the problem when faced with thousands of unemployed graduates.

To truly ignite an entrepreneurial revolution, Sri Lanka needs a paradigm shift in its approach. The current climate discourages innovation and risk-taking, largely due to systemic impediments and a lack of a comprehensive, supportive ecosystem. Comparing Sri Lanka to a nation like China, which graduates over 7 million students annually – nearly one-third of Sri Lanka’s entire population – reveals a stark contrast. China manages its massive labour force through a dynamic and multifaceted approach, with entrepreneurship playing a pivotal role. The Chinese government actively cultivates an environment conducive to startups, offering a range of incentives, streamlined regulatory processes, access to capital, mentorship programs, and a massive domestic market. While direct replication may not be feasible, the core principle of government-led facilitation and encouragement of entrepreneurship is a lesson Sri Lanka must internalise.

• Youth unemployment rate was 22.33% in 2024, a slight decline from 2023, but still alarmingly high
• The current attitude towards entrepreneurship discourages innovation and risk-taking, largely due to systemic hindrances and a lack of a comprehensive ecosystem

The Effect of Increased Taxation and 

Rising Electricity Costs

The current economic policies, regarding taxation and essential services, actively work against the establishment of a thriving entrepreneurial ecosystem and the broader business community. The recent significant increases in electricity tariffs, for instance, have placed immense pressure on businesses, particularly the industrial and hotel sectors. As noted by the Ceylon Electricity Board (CEB) Chairman himself, a 15% hike has a disproportionate impact on large and medium-scale enterprises, significantly increasing their production costs. When input costs rise sharply, businesses face an agonising dilemma: absorb the costs and erode profit margins, or pass them on to consumers. Given the already diminished purchasing power of the majority of the local population, increasing prices further is often not a viable option for local sales. This leaves businesses struggling to compete both domestically and internationally, as their products become uncompetitive. The “distorted tariffs” and “cross-subsidies” within the electricity pricing structure, as critiqued by the Advocata Institute, further exacerbate this problem, misallocating capital and disincentivising innovation.

Furthermore, the government’s drive to increase revenue through higher taxation on the business community, while understandable given the need to service state expenses and maintain a large public sector, risks becoming counterproductive. PublicFinance.lk highlights a substantial 65% increase in government revenue between 2021 and 2024, largely fuelled by tax reforms, especially the Value Added Tax (VAT). While this signals a recovery in the state’s coffers, an excessively burdensome tax regime can stifle growth, discourage investment, and ultimately lead to a contraction of the tax base itself. Businesses, facing increased production costs from high electricity tariffs and a weakened domestic market due to diminished consumer purchasing power, are less likely to expand or even sustain operations under punitive tax conditions.

This creates a dangerous feedback loop: high costs and taxes lead to reduced profitability, which in turn discourages investment and job creation. The ultimate consequence is a “brain drain” and capital flight. Evidence suggests a substantial escalation in the migration of skilled professionals from Sri Lanka since 2020, directly linked to the economic crisis. Attractive salary packages and better opportunities abroad, often tax-free, act as powerful “pull factors” that drain the country of its most valuable human capital. While the focus is often on professionals, the business community is also susceptible to this phenomenon. If the operating environment becomes untenable, local entrepreneurs and established businesses may choose to close down or relocate overseas, seeking more favourable conditions for growth and profitability. This would leave future governments facing a truly disastrous scenario: a shrunken private sector, an inability to collect sufficient tax revenue, and a further exacerbation of unemployment.

A Strong Economy is Indispensable for Safeguarding National Security

The solution is not simple, but it is clear. Sri Lanka’s national security, broadly defined to include economic stability and social cohesion, hinges on a fundamental reorientation of economic policy towards nurturing entrepreneurship. The Government of Sri Lanka needs to understand the need for a strong economy to ensure National security. Neither national security nor national economy can be isolated. This requires a balanced approach that understands the delicate interplay between revenue generation, cost of living, and business viability. Firstly, the government must prioritise creating a genuinely enabling environment for entrepreneurs. This goes beyond mere rhetorical support or small-scale training programs. It necessitates:

• Streamlined Regulations and Bureaucracy: Reducing red tape, simplifying business registration, and ensuring transparent regulatory processes are crucial for fostering new ventures.
• Access to Affordable Capital: The current revolving fund schemes are a start, but a more comprehensive system of accessible, low-interest loans, venture capital, and grants is needed, particularly for innovative startups and SMEs.
• Tax Incentives and Smart Taxation: Rather than solely focusing on increasing the tax burden, the government should explore targeted tax holidays or reduced rates for new businesses in strategic sectors, especially those with export potential or high job creation capacity. A gradual, predictable tax structure that encourages growth, rather than penalises it, is essential.
• Infrastructure Development: Consistent, affordable, and reliable electricity supply is non-negotiable. Reforming the CEB and ensuring cost-reflective, yet supportive, tariffs for industries is paramount. Investment in digital infrastructure is also critical for modern businesses.
• Skill Development and Market Alignment: Bridging the gap between educational output and market demand requires continuous dialogue between academia, industry, and government. Entrepreneurship education should be integrated into curricula across all disciplines, encouraging creative thinking and problem-solving. Vocational training and reskilling programmes for unemployed graduates should be scaled up and linked to emerging industries.
• Mentorship and Networking: Establishing strong mentorship programmes, incubators, and accelerators can provide invaluable guidance and support for nascent entrepreneurs. Building strong industry networks can facilitate knowledge sharing and collaboration.
• Promoting Local and Foreign Investment: Creating clear, consistent, and attractive policies for both local and foreign investors is vital. This includes ensuring policy stability, protecting property rights, and offering competitive incentives that do not disproportionately favour large foreign enterprises over local startups.

Secondly, addressing the cost of living requires a multi-pronged strategy that goes beyond short-term fixes. This involves:

• Boosting Domestic Production: Reducing reliance on imports, particularly for essential goods, through enhanced local agricultural and industrial production can help stabilise prices and reduce vulnerability to global supply chain shocks.
• Controlling Inflationary Pressures: While recent deflation might offer temporary respite, a sustainable approach involves prudent monetary policy and fiscal discipline to maintain price stability over the long term.
• Targeted Social Safety Nets: While long-term solutions are pursued, robust social safety nets are needed to protect the most vulnerable households from the immediate impacts of high prices.

Finally, the connection between economic hardship and national security must be explicitly acknowledged and addressed at the highest levels of governance. The JVP insurgencies and the Aragalaya are not isolated incidents but symptoms of deep-seated economic grievances. Ignoring the widespread frustration of an educated, unemployed youth and a struggling populace is a recipe for instability. Entrepreneurship offers not just economic opportunities but also a sense of agency, purpose, and hope, which are crucial ingredients for social stability and national resilience. By empowering its citizens to create their own livelihoods and contribute to the national economy, Sri Lanka can transform its demographic challenge into a demographic dividend.

The Time for Reactive Measures is Over

Sri Lanka’s path to enduring national security is inextricably linked to its ability to foster an environment where entrepreneurship flourishes. The government must move beyond superficial gestures and implement a holistic, visionary strategy that addresses the root causes of economic hardship. This means striking a delicate balance between fiscal responsibility and economic growth, ensuring that policies designed to generate revenue do not inadvertently stifle the very businesses that create wealth and jobs. The lessons from past insurgencies and the recent Aragalaya are clear: a frustrated and economically disenfranchised populace is a threat to national security. The time for reactive measures is over; a proactive, bold embrace of entrepreneurship is the only sustainable path to a secure and prosperous Sri Lanka.

The writer is an Infantry officer who served the Sri Lanka Army for over 36 years, a former Security Forces Commander of the Wanni Region and Eastern Province, and he holds a PhD in economics. He can be reached at: [email protected]