Modern economic discourse is often fractured by ideological debates that obscure a more fundamental, mechanical reality. Beneath the surface of political agendas and economic schools of thought lies an immutable operating system: the universal framework of double-entry accounting. This is not merely a corporate bookkeeping tool but the fundamental grammar of all economic activity. Every transaction, from a local purchase to a sovereign debt issuance, creates an inseparable duality—an asset for one entity is simultaneously a liability or claim for another.
Far beyond ideological slogans, the economy is a vast network of interconnected balance sheets, governed by the ancient and immutable laws of double-entry accounting. Like yin and yang, or day and night, assets and liabilities are two sides of the same coin, inseparable and mutually defining. This double-entry balance sheet framework provides an essential lens to understand why economies grow, contract, and sometimes collapse. Recognizing this is the first step toward a more coherent, less ideological understanding of why economies expand, contract, and experience crises. This balance sheet perspective provides a robust foundation for analyzing business cycles.
GDP Growth = Revenue Growth: The National Income Statement
While balance sheets provide a snapshot of wealth and obligations at a point in time, the income statement captures the dynamic flow of economic activity over time. From this perspective, a nation's Gross Domestic Product (GDP) is best understood as the aggregate revenue of the national economy.
GDP ≈ National Revenue = Domestic Sales + External Sales
This reframing is powerful. It shifts the policy focus from abstract aggregates to tangible drivers of revenue:
Internal revenue arises from domestic production and consumption: Domestic Revenue Growth is fueled by household consumption, business investment, and government spending—all transactions that represent revenue for another domestic entity, thus sustaining domestic debt servicing within the local currency balance sheet.
External revenue comes from exports and foreign earnings, including tourism and foreign investment returns: External Revenue Growth comes from a nation's ability to sell goods, services, and assets to the rest of the world, directly increasing its foreign currency income and addressing the foreign currency balance sheet deficit.
A nation's economic health is therefore a function of its ability to grow this top-line revenue sustainably, which in turn strengthens the asset side of its collective balance sheet. The national balance sheet records assets, liabilities, and equity much like a corporation. This revenue expansion is crucial because it underpins the balance sheet strength of a nation. The surplus generated by a country's net external earnings adds to its retained earnings, strengthening its financial position.
Balance Sheet Equilibrium: The National Accounts
A corporation is judged on quarterly earnings, but a nation's balance sheet must be managed across the longer term and over generations. Its balance sheet is not a snapshot for the next earnings call, but a foundation for long-term strategic sovereignty. Applying this logic to a nation's entire external balance sheet ensures pragmatic long-term capital formation needed for infrastructure development. Thus, a country must function as a single, large corporation, but with a multi-decade vision:
The Nation's "Assets" (External Assets): Claims on the rest of the world (e.g., foreign exchange reserves, strategic overseas investments, long-term infrastructure).
The Nation's "Liabilities" (External Liabilities): Claims the rest of the world has on the country (e.g., foreign-held government debt, International Sovereign Bonds).
The National "Income or Revenue": The net foreign currency earned to service these liabilities, primarily generated through a Net Current Account Surplus driven by net exports of merchandise goods and services.
This net Current Account balance reflects external revenue generation and is a fundamental measure of solvency. At the macro level, each country operates much like a company competing for global market share. This means every country's balance sheet is interconnected with others', creating a global web of matched assets and liabilities, where one country's debt is a foreign asset of another, and every export corresponds to an import elsewhere. Grasping this double-entry equilibrium is essential for effective policy and financial stability.
Sri Lanka's Economic Journey: Seventeen IMF Interventions
Sri Lanka's economic odyssey over the last five decades has been profoundly shaped by repeated interventions under the auspices of the International Monetary Fund (IMF). Since its first IMF arrangement in 1965, Sri Lanka has engaged in 17 formal programs, with the most recent Extended Fund Facility (EFF) program approved in 2023 and ongoing as of 2025.
It must be acknowledged that Sri Lanka sought these IMF programs during balance of payments crises when foreign exchange reserves were critically depleted, leaving few immediate alternatives. The programs provided emergency financing and helped restore market confidence at critical moments.
However, these engagements have invariably emphasized austerity, fiscal consolidation, and debt reduction, frequently at the expense of growth strategies and external revenue development. While such programs have sought to stabilize macroeconomic fundamentals, the cumulative effect over decades has been one of policy volatility, market losses, uncertainty, and constrained policy space—factors that have limited Sri Lanka's economic dynamism since 1965.
1. Constrained Policy Space and Sovereignty
Each IMF program comes with strict conditionalities geared toward reducing fiscal deficits by cutting public spending, increasing taxes, and liberalizing domestic markets. While these may seem prudent in isolation, in Sri Lanka's case, they have contributed to limiting control over its own industrialization strategy.
The IMF's preconditions—such as floating the currency and external borrowing frameworks—can compound balance sheet vulnerabilities and exacerbate debt instability. The structural nature of exchange rates becomes a critical factor affecting the national balance sheet, with each currency depreciation increasing the domestic currency value of foreign-denominated liabilities. The translation risk inflicted by currency depreciation is a moving, unpredictable variable that creates fiscal uncertainty.
Concurrently, these macroeconomic prescriptions filter down to the corporate level. Firms face heightened currency risk and financing costs, with liabilities denominated in foreign currency while asset values and revenues are largely generated in depreciating local currency. This mismatch pressures corporate balance sheets, reducing retained earnings and resiliency. Profit squeezes limit firms' borrowing capacity and investment ability, weakening their contribution to export growth and job creation.
According to analysis based on Central Bank Annual Report data, currency depreciation has imposed substantial additional debt servicing costs on Sri Lanka, estimated at approximately 1,860 billion rupees in incremental tax revenues required from 2002 to 2024. [Editor's note: This figure requires independent verification and source documentation.]
Without greater monetary and fiscal policy flexibility to manage exchange rates and smooth shocks, Sri Lanka faces volatile currency markets, supply-cost-induced inflation spikes, and unpredictable financing costs—conditions that challenge the building of competitive export industries.
Creating fiscal space is therefore an important prerequisite for implementing supportive policies for companies that must compete in demanding global markets. When policy levers are constrained, both public and private sectors face difficulties, and the economy's overall growth potential may diminish.
2. Rising Cost Burdens and Their Impact on the Private Sector
One significant legacy of recent reforms has been surging input costs for domestic firms, notably stemming from currency depreciation and energy price adjustments affecting the Ceylon Petroleum Corporation (CPC) and electricity sectors. Market-based pricing and the removal of fuel subsidies have passed global price volatility directly onto Sri Lankan businesses.
At the microeconomic level, firms encounter escalating operational expenses, forcing them to absorb or pass on cost increases. The double-entry accounting framework captures these dynamics:
• Increased operational costs raise corporate expenses recorded on income statements
• Reduced profitability simultaneously lowers retained earnings, weakening firms' equity and financial stability
This cycle diminishes investment capacity as firms tighten cash flow and borrowing to maintain operations. Exporters, burdened by rising costs, may lose price competitiveness in global markets, potentially shrinking their market share and foreign exchange earnings. As corporate retained earnings erode, balance sheets weaken, affecting creditworthiness and the ability to innovate and grow.
At the macroeconomic scale, a weakening corporate sector translates into lower tax revenue, slower GDP growth, and reduced export performance. The negative feedback loop between corporate balance sheets and government finances intensifies fiscal pressures and debt risks.
3. The Negative Net International Investment Position: Reflecting Structural Weakness
Sri Lanka's national balance sheet reflects these systemic pressures. The Net International Investment Position (NIIP)—the broadest measure of external financial health—stood at approximately negative USD 53 billion as of mid-2025, a dramatic increase from USD 44.3 billion in March 2020. This means Sri Lanka's external liabilities have far outstripped external assets, exposing the country to heightened currency risk, funding costs, and potential financial stress.
This imbalance arises in part from the continued accumulation of foreign debt to cover fiscal deficits and support debt servicing. Despite efforts to restore macroeconomic stability, including fiscal consolidation and monetary tightening, the growth of liabilities has outpaced asset growth.
Moreover, the floating currency regime affects the domestic currency valuation of foreign liabilities, amplifying balance sheet stress for both government and corporates. Firms exposed to foreign exchange risk experience inflated debt burdens, threatening solvency.
The policy-driven liberalizations in petroleum, energy, and electricity sectors, while easing fiscal burdens by removing subsidies, increase corporate cost structures. The resultant compression in firm profitability further weakens retained earnings and limits balance sheet rebuilding, constraining the nation's capacity to improve its net asset position.
The Interconnection of Corporate and National Balance Sheets
Sri Lanka's corporate balance sheets and its national balance sheet are deeply interconnected. When policies increase input costs through liberalization and exposure to volatile global prices, raise borrowing costs through exchange rate depreciation and higher interest rates, and limit fiscal space via austerity, they directly compress corporate profits.
Reduced corporate profits weaken retained earnings, impairing firms' ability to invest in new revenue-generating assets that grow exports and generate taxable income. This shrinking private sector growth reduces foreign exchange inflows from exports and remittances, lowering government tax revenues and worsening the fiscal deficit.
To cover these deficits, the government borrows more externally, adding to sovereign liabilities on the national balance sheet. Rising public debt increases debt servicing costs, diverting public resources from productive investment to interest payments, limiting asset growth on the national account.
This creates a challenging cycle: corporate balance sheets weaken, national debt rises, and macroeconomic vulnerabilities deepen. Instead of strengthening the economy, poorly designed reforms may lock Sri Lanka into deeper debt challenges and reduced economic policy space.
It should be noted that alternative economic perspectives emphasize that fiscal discipline, market-based pricing, and structural reforms are necessary foundations for long-term growth, and that subsidies and currency interventions can create unsustainable distortions. The debate between these approaches remains contested among economists.
Toward Reclaiming Policy Space and Sustainable Growth
The path forward for Sri Lanka rests on regaining greater monetary and fiscal flexibility to:
• Stabilize the currency and control inflation, reducing cost volatility for exporters and manufacturers
• Strategically use fiscal resources to invest in industries capable of expanding exports and generating foreign currency
• Drive management reforms in public enterprises like CPC, CEB, and Ports to balance operational cost recovery with supporting economic competitiveness
Controlling Costs and Competitive Prices
In a double-entry system, the cost structure of companies is reflected in their balance sheets and income statements. An increase in import or energy costs directly increases the operating costs of firms. Higher fuel costs lead to higher energy and logistic costs that reduce profits, compressing retained earnings and weakening corporate balance sheets. Weak corporate balance sheets reduce investment capacity, potentially hurting growth and export competitiveness.
Therefore, for Sri Lanka to grow GDP and increase its global market share, cost components within the economy must be carefully managed and controlled to maintain competitiveness.
Regaining Greater Policy Flexibility
To compete effectively on global markets and restore balance sheet strength, Sri Lanka should work toward:
• Greater control over monetary policy to stabilize exchange rates and manage inflation, reducing uncertainties for exporters, manufacturers, and importers
• Strategic use of fiscal policy to support domestic industries and export-oriented companies through targeted investment incentives, infrastructure development, and skill enhancement
• Expansion of physical infrastructure (expressways, ports, airports, road network) to support industrialization and stimulate external revenues through exports, tourism, and foreign investment—vital for strengthening retained earnings on the national balance sheet
The Path Forward: Applying Balance Sheet Economics
Sri Lanka should harness the principles of double-entry balance sheet economics in its policy framework, aiming for:
• Increasing external revenue to build the asset side of its international balance sheet
• Carefully managing liabilities to maintain sustainability without sacrificing growth
• Emphasizing external revenue growth as a key measure of GDP expansion
• Controlling cost structures throughout the economy to protect corporate profitability and market share
This holistic approach can enable Sri Lanka to regain its footing in the global economic arena, fostering balanced, inclusive, and sustained growth.
Conclusion: The Balance Sheet Framework as Economic Foundation
At its heart, the engine of economic growth and stability is grounded in the accounting principles of double-entry balance sheet economics. Every financial transaction, every asset recorded, has a reciprocal liability elsewhere. This framework ensures transparency, equilibrium (Assets = Liabilities), and ultimately, sustainability.
For Sri Lanka, the signs are urgent. The nation faces a stark negative net asset position nearing USD 53 billion, a figure that bears the weight of years of challenging policies and difficult trade-offs. But acknowledging this challenge is more than an accounting exercise—it is a vital step toward strengthening economic sovereignty and charting a future where growth is driven by developing a resilient external revenue platform.
To thrive, Sri Lanka must carefully balance its national monetary and fiscal policies, rigorously manage production costs to ensure competitive pricing that empowers companies to win market share globally, and foster revenue growth, especially from external sectors that feed the national income statement and build retained earnings on the balance sheet.
Failing to act decisively may condemn the country to cycles of debt distress and stagnation. But embracing the balance sheet economic paradigm offers a clear and measurable framework, one rooted in tangible accounting realities and competitive economics.
This framework is not just a tool for accountants; it is a guide for policymakers, business leaders, and citizens alike—a blueprint for transforming fiscal fragility into economic strength, uncertainty into growth, and challenges into opportunities. For Sri Lanka, this represents a pathway toward enduring prosperity.
Dr. Kenneth De Zilwa is a noted economist and senior banker in Sri Lanka.
Note: Opinion pieces appearing in Jaffna Monitor represent solely the views of their respective authors and should not be construed as reflecting the editorial position of the magazine.
The Jaffna Monitor invites responses from economists, policymakers, and analysts with alternative perspectives on Sri Lanka's economic recovery path. Submissions may be sent to editor@jaffnamonitor.com
