The Influence of Fiscal, Monetary, and Public Policies on Sustainable Development in Sri Lanka

Abstract

This study aims to determine the influence of the fiscal, monetary, and public policy environment in Sri Lanka and its impact on sustainable development before and after COVID-19. This study used the document analysis qualitative research method to obtain and analyse fiscal, monetary, and public policy data. It assigned and measured the 17 United Nations Sustainable Development Goals (UN SDGs) values and trends. The goals were clustered into social, environmental, and sustainability-related intellectual capital to measure their dimensional capital status values and trends. Despite the economic crisis, Sri Lanka has moderately progressed in sustainable development, with most improvements in social capital. The environmental and sustainability-related intellectual capital dimensions follow. The 17 SDGs were advancing at various levels. Two were on track (Goal 4: Quality education and Goal 9: Industry, innovation, and infrastructure). Five moderately improved goals (Goal 2: Zero hunger, Goal 3: Good health and well-being, Goal 6: Clean water and sanitation, Goal 12: Responsible consumption and production, and Goal 13: Climate action). Seven were stagnant (Goal 5: Gender equality, Goal 7: Affordable clean energy, Goal 8: Decent work and economic growth, Goal 11: Sustainable cities and communities, Goal 14: Life below water, Goal 16: Peace, justice, and strong institutions, and Goal 17: Partnership for the goals). Two showed a decrease (Goal 1: Poverty and Goal 15: Life on land). No data are reported for Goal 10 (Reduce inequalities). Fiscal and monetary policies were overly focussed on economic repair and reconstruction. Public policy has nevertheless contributed to sustainable development. This is the first study to examine the multidimensional policy environment and its impact on sustainable development in Sri Lanka.

1. Introduction

This research investigated the influence of fiscal, monetary, and public policies on sustainable development and compared such influence during pre-COVID-19 and post-COVID-19 periods. A policy is a standard set of principles that guide a course of action. Policies created by the government, once they become an Act, have the force of law (Pollack Porter et al., 2018) [1]. Policies support the vision and strategic path of the country. In the context of Sri Lanka, the 2030 vision and strategic path are to become a sustainable, upper-middle-income economy using resources within the capacity of the country, with a green flourishing environment with respect for nature, and an inclusive, harmonious, just, and peaceful society (Munasinghe, 2019) [2].

Fiscal policy aims to strategise revenue collection sources and expenditure targets to achieve economic policy goals, such as full employment and a high gross domestic product (GDP) growth rate (Yu., 2021) [3]. The Central Bank independently determines monetary policy and aims to stabilise the economy towards high employment and stabilise price levels through money supply to maintain credit, inflation, interest rates, and exchange rates (Li et al., 2020) [4]. Public policy coordinates public resources and services to maximise their value to the public (Zhou et al., 2022) [5].

The economic crisis from which Sri Lanka is recovering can be attributed to policy failures because successive governments have diminished the capacity to fulfil citizens’ claims and promises for social contractual promises. These claims take the form of delivering high-quality public goods and services while providing sovereign protection (Rotberg, 2016) [6]. Sri Lanka ranked high on the UNDP Human Development Index for a developing nation with 0.782 out of 1 maximum score in 2021 on the three basic dimensions of a healthy life, access to knowledge, and a decent standard of living for a small island nation with a population of 21.8 million (UNDP, 2022) [7]. However, the country showed a lacklustre performance on the Transparency International Corruption Index, with 36 out of the maximum 100 best scores in 2022, attributed to mismanagement and rampant corruption perceived by the public (Transparency International, 2023) [8]. The backdrop of these policy dilemmas and economic turmoil motivated this study. Sri Lanka is a signatory to the United Nations Sustainable Development Goals (UN SDGs) (UNICEF, 2023) [9]. Sri Lanka’s highly valued middle path to sustainable development is supported by religious beliefs, which promote the use of natural resources to support simple lifestyles (Ministry of Environment, 2012; Bandarage, 2023) [10,11].

Excess public debt and high inflation became the focal points of attention during the economic crisis in Sri Lanka. Increasing public debt has decreased economic growth and increased inflation (Lopes de Veiga et al., 2016) [12]. Multiple factors contributed to the massive economic crisis based on public debt, which became profoundly noticeable in 2019. Several factors added to the worsening public debt. In April 2019, the Easter Day bombing at targeted crowd-congregation sites instilled fear in the public, leading to a reduced flow of tourists and foreign exchange earnings and increased sectarian tensions (Imtiyaz, 2019) [13].

There was also a suite of concomitantly ill-considered policies. These included tax cuts without foresight of their impact on meeting government expenditures, which added to the burden of lingering reduced public revenue (Mudiyansalage et al., 2020) [14]. The onset of the COVID-19 pandemic exploded in 2020 and continued for two more years, adversely impacting people’s well-being and increasing healthcare costs that are much more dependent on imported medications (Gunarathna et al., 2023) [15]. The pandemic decreased the number of tourists coming to the country and the exports and low-skilled labour working in the Middle East. The COVID-19 pandemic reduced otherwise established foreign exchange inflows (Ranasinghe et al., 2021) [16]. Russians and Ukrainians were the most incoming tourists from outside Asia; Russia was the second largest tea export market and drastically diminished due to the war, as the exports brought sizeable foreign exchange into the country (Sooriyarachchi and Jayawardena, 2023) [17]. The finished agricultural products imported from Ukraine also decreased accordingly. All these events contributed to further reducing foreign currency reserves, along with burgeoning public debt. A total of 30% of the population has become food insecure and uses food coping strategies such as eating less, less preferred, and inexpensive foods, ignoring their nutritional values (Thibbotuwawa et al., 2023) [18]. The then government attempted to promote organic farming throughout the country, which was notable for driving sustainable development, but with an untimely and ill-prepared agenda with no clarity about the source of organic fertiliser, dealing with potential decreased crop yields associated with organic farming (Gamage et al., 2023; Malkanthi, 2020) [19,20].

COVID-19 is a systemic global risk with adverse economic and social impacts. For most countries, it was a transient risk bound to time (Kuzmenko et al., 2023) [21]. However, the impact of the pandemic highlighted structural and operational problems that had not been addressed in the Sri Lankan economic system, especially in forging economic growth with sustainable development. This study highlights lessons learned from them towards sustainable development using the policy environment.

To meet the aim of this study, the following section discusses the relevant literature to show that the research aims of this study are not satisfactorily addressed in the literature. Section 3 presents the theoretical framework and research questions. Section 4 explains the methodological approach used in the study, and the findings are presented in Section 5. Section 6 presents the conclusions.

2. Relevant Literature

2.1. Fiscal Policy

Fiscal policy develops the economy to increase the value of the gross domestic product (GDP) produced using government spending and taxation. However, its prominence has waned because of the increasing emphasis that the government must play a limited role and the market must drive resource allocation decisions to increase GDP value. Based on the factors that influence GDP, the taxation system indirectly influences private consumption and investment, exports, and imports (Horton and El-Ganainy, 2009, 2023) [22,23].

GDP = private consumption + private investment + purchases of goods and services by the government + exports − imports

Evidence from BRICS countries (Brazil, Russia, India, China, and South Africa) shows that fiscal policies encouraging more spending can increase carbon emissions, adversely influencing sustainable development (Christi et al., 2021) [24]. However, economic, social, and institutional contexts can influence fiscal policy choice (Nuță and Nuță, 2019) [25].

During economic crises, governments take an increasingly active role in revitalising and stabilising the economy to increase market activity and indirectly combat inflation but later reduce and recover expansive spending. Like other small developing countries, Sri Lanka had little liquidity to offer fiscal incentives, such as increased spending on health and prolonged tax payments, to revitalise the economy, as fiscal revenue collection was relatively small. Given its substantial debt servicing obligations, COVID-19 had a greater adverse impact on Sri Lanka. Additional spending due to the pandemic for Sri Lanka was 1.1% of GDP, compared with other neighbouring countries, Bangladesh (2.3% of GDP), India (4.4% of GDP), Maldives (8.0% of GDP) and Pakistan (2.0% of GDP). Expenditures on sustainable development became discretionary decisions to consider later (Central Bank of Sri Lanka, 2021, pp. 31–42) [26].

In the long term, developed and developing countries can broadly vary regarding how government expenditure is used to support a sustainable economy, with developing countries using it to alleviate poverty and support primary healthcare, infrastructure, and education. Developed countries replace poverty alleviation with pension reforms to support ageing populations (Horton and El-Ganainy, 2023) [23].

Long-standing budget deficits, public expenditures, and external debts are characteristics of the Sri Lankan economy, and fiscal policy instruments are crucial for their management. Fiscal policy instruments used in the past in Sri Lanka have been ineffective, influenced by imprudent decisions that have led to lower productivity, such as overstaffing in the public sector, increasing expenditures, and lower accountability on financial management, outputs, and outcomes of public expenditures (Velnampy and Achchuthan, 2013) [27]. These expenditures have contributed to inflation because they added little to GDP (Maitra et al., 2022) [28]. Decreasing spending is not a politically popular option in a democracy such as Sri Lanka, which has periodic elections in which voter resentment can dislodge lawmakers from holding office. On the other hand, increasing debt to meet government expenditures can worsen the consequences of budget deficits (Adam and Bevan, 2005) [29].

Sustainable fiscal policy has been the forethought of Sri Lanka, given its continuously increasing public debt levels and service and budget deficits. It is a country with the largest debt financing ratio to GDP, more than 70%, with 60% considered a maximum threshold (IMF, 2018; Rathnayake, 2020) [30,31]. The weakening revenue levels in the past decade, with high GDP and debt servicing as the highest expenditure in the budget, made Sri Lanka unusually vulnerable to external shocks (Khatri et al., 2017) [32]. Its foreign debt has increased to unsustainable levels due to exchange and rollover risks. The debt levels, debt servicing, fiscal revenue, and foreign debt as parameters have revealed that Sri Lanka must exercise stricter fiscal discipline on expenditures and increase fiscal revenue, expanding the tax base (Rathnayake, 2020) [31].

2.2. Monetary Policy

The primary aim of Central Bank monetary policy is to bring price stability into the economy. Central Banks use various instruments, mostly interest rates, exchange rates, bank credits, and asset prices. Central Bank funds and changes to these funds were found to be very informative about monetary policy actions. It has also been found that monetary policy effectiveness depends more on bank loans than on bank deposits (Bernanke and Blinder, 1992) [33].

The Taylor principle states that increasing the nominal interest rate more than the inflation rate can reduce inflation. At the onset of the economic turmoil, the Central Bank responded to exchange rate depreciation by increasing interest rates to offset the depreciation; its effect had a positive but low impact. The strength was low because the Central Bank did not use instruments other than interest rates for a notable effect (Mayandy, 2019) [34]. Using other instruments must have been limited due to the magnitude of the economic crisis (Mohanty and Klau, 2004) [35].

A continuous increase in the money supply can contribute to inflation, and the Central Bank plays a crucial role in stabilising the economy by managing inflation. Data from 1990 to 2021 in the Sri Lankan context have found that increasing inflation in the short and long term hurts economic growth. The availability of money has a positive impact in the short run but an adverse impact on the economic growth rate (Madurapperuma, 2023) [36].

The Taylor curve notes that inflation variability (difference between actual and target) and GDP variability (difference between actual and target) have a permanent negative relationship; decreasing inflation supports economic growth (Taylor, 1979) [37]. Central banks can use the negative relationship between price stability by managing inflation and growth by GDP output to design monetary policy approaches and measure the efficiency or optimality of monetary policy approaches (Olson and Enders, 2012) [38].

Until 1997, Sri Lanka was largely a closed market economy. During that period, the Central Bank used direct monetary policy instruments to manage money supply (cash reserve ratio) and liquidity (statutory liquidity ratio). In 1997, the Central Bank moved to market-based monetary policy instruments to control the money supply with broad and reserve money. However, in 1980, Sri Lanka freely floated its currency, reducing the effect of the currency on price stability. The monetary policy was suboptimal from 1980 to 2000, with the Taylor curve showing a positive relationship, where the Central Bank placed greater emphasis on stabilising GDP rather than stabilising prices. Except for that, until 2016, the Taylor curve showed a negative relationship with optimal monetary policy efficiency, where price stability was the focus. From the third quarter of 2016, price stability became suboptimal. Furthermore, unexpected economic shocks such as COVID-19 can drastically increase inflation and decrease GDP (Mayandy and Middleditch, 2022) [39].

Developing countries such as Sri Lanka that focus on reducing inflation towards pricing stability can support increasing economic growth measured by GDP and enhance welfare (Mayandy and Middleditch, 2022) [39]. However, inflation-targeting monetary policy instruments can become ineffective under extreme external shocks and require integrated fiscal, monetary, and public policy approaches to recover from them (Madhou et al., 2021) [40].

Although exchange rate stabilisation is conducive to promoting trade and investment, developing countries have little control over it under globalisation. Instead, they focus on domestic price stabilisation through inflation management. However, rigidly adhering to inflation targeting with available domestically focussed instruments has not produced sustained benefits in increasing output. Hence, direct payments to households for using factors of production have not correspondingly increased to maximise welfare gains to people. External shocks to the economy are typically absorbed by exchange rate changes that then stabilise inflation and domestic output (Paranavithana et al., 2021) [41].

2.3. Public Policy

Public policy is defined as anything a government chooses to or does not choose to do, which is discretionary (Dye, 1972) [42]. Decisions are made on the national budget, which is the main document that shows the government’s revenue and expenditure plans. The deviation from the budget shows that public policies are ineffectively implemented. Overspending can increase public debt and lead to macroeconomic instability. Underspending saves money but could affect sustainable development activities as governments may consider such expenditures discretionary. Furthermore, even under conditions of underspending, governments may shift from planned spending projects; it can be such that sustainable development activities are overlooked or not prioritised (Lakin and Cho, 2019) [43].

Research shows that Sri Lanka is credited with meeting the basic needs of education and health standards because of its intrinsic and indirect public policies. Time series data analysis from Sri Lanka has shown that expanding health services has been more effective than subsidising food in mortality declines but was achieved with public policy intervention rather than GDP growth alone (Anand and Kanbur, 1991) [44]. Research also shows that the high GDP in the past has not been shared with the poor deserving targeted welfare and poverty alleviation programmes in Sri Lanka, with almost a quarter of the people living in poverty. It has been stated that target groups should be segregated as poor producers and consumers with an ongoing impact analysis of programmes. A two-pronged approach is recommended because most structural poverty arises from ownership, agrarian-related power structures at the local level, and access problems (Dunham, 2000) [45]. These large pockets of the neglected poor are found in tea estates and remote rural areas. Children living in monetary poverty are concentrated in seven of the 25 districts. However, low levels of funding have put the quality of intervention programmes at risk (UNICEF, 2023) [9].

2.4. Sustainable Development

There are contrasting differences between developed and developing countries regarding the status and priorities of the 17 United Nations Sustainable Development Goals (UN SDGs). The sustainability characteristics in developed countries support economic growth, with more to be done to protect the environment (Goal 13) and promote responsible production and consumption (Goal 12). Developing countries’ sustainability characteristics are yet to evolve to support economic growth. They focussed on health and well-being (Goal 3), clean water and sanitation (Goal 6), and reducing inequality (Goal 10) (Medina-Hernández et al., 2023) [46].

Of the 17 United Nations Sustainable Development Goals (UN SDGs), reducing poverty (Goal 1) and inequality (Goal 10) are crucial goals for Sri Lanka. Taxes and social spending facilitate wealth redistribution to reduce it. However, the low tax rates and narrow tax bases used to collect revenue have limited revenue collection to 0.5% of GDP, with the top decile paying 87% of taxes and the lowest decile paying none. There have been small direct transfers to poor households, and indirect transfers have been largely ineffective, with higher-income groups receiving more benefits than poor households (Martinez-Vazquez, 2008) [47]. Indirect transfers were provided to stabilise consumer purchasing power that otherwise fluctuates with currency fluctuations for energy imports (fuel and electricity). However, underserved target groups benefitted from it (Perera et al., 2020) [48].

Anomalies in deviations from the intended expenditures to target groups occur due to poor monitoring and evaluation. In 2018, Sri Lanka became the only South Asian country to endorse a National Evaluation Policy to ensure government development projects and achieve effective results. Although the institutional structures are in place, there have been limited evaluations undertaken, incomprehensive reports are prepared, evaluations undertaken are poorly communicated, and access to the reports is restricted. This has resulted in a weak evaluation of the operational aspects (Kalugampitiya et al., 2023) [49].

Direct taxes have been progressive, and indirect taxes have been regressive towards income redistribution. Income redistribution to poor households has been low, marginally contributing 0.004% to redistribution. Increases in indirect taxes, such as value-added taxes (VAT), can increase hardships for the poor and require careful selection and targeting of beneficiaries to ensure they receive the benefits. However, external pressures from the IMF to receive debt financing can leave little alternative to collect VAT taxes. The VAT rate was increased from 15% to 18%, reducing the VAT threshold to LKR60 million and removing VAT exemption from 97 out of 138 items, effective 1 January 2024, which can increase inflation unless monetary policy instruments take care of it (Public Finance, 2023) [50]. Tax reforms also require distributional analysis to reduce poverty and inequality (Arunatilake et al., 2017) [51].

Although industry-specific taxes to combat products with harmful health effects are achievable with higher taxes, increases from such revenue bases alone are too small to support poverty reduction and inequality. Furthermore, such industry-specific taxes are passed on to a largely loyal consumer base to the products with higher prices, which then behaves like an indirect tax rather than a direct tax (Perera et al., 2020) [48].

The literature illustrates that fiscal policies to generate revenue, monetary policies to stabilise the economy, and public policies to manage and govern the country’s expenditures are crucial for sustainable development. Most studies have investigated the context before the Sri Lankan economic turmoil and COVID-19. There is a lack of understanding of how these three suites of policies have contributed to sustainable development.

3. Theoretical Framework

The theoretical framework and the research questions that evolved from it are shown in Figure 1. Next, the three theoretical models of neoclassical, ecological, and political economies are discussed. The research questions are then stated.

3.1. Neoclassical Economics

Economic theories help us understand the economy through its discourses. These discourses have implications for economic objectives and preferred approaches towards their pursuit. One such approach is the neoclassical economic approach, the dominant contemporary economic paradigm, in which the economy is understood by efficiently allocating scarce resources (Brand-Correa et al., 2022) [52].

The dominant view is that market forces can direct such efficiency to the resources available in a country. Governments support efficient market operation through monetary policies by indirectly monitoring money supply by adjusting interest rates, bank reserve requirements, and trading government securities and foreign exchange (Horton and El-Ganainy, 2009) [22].

Monetary policy with such instruments is designed to provide price stability and an extended level of certainty for goods and services transactions (Curwen and Fowler, 1976) [53]. The monetary policy aims to stabilise prices and long-term economic growth, but it cannot stimulate demand directly, which fiscal policy can do (Reserve Bank of Australia, 2023) [54].

However, some authors in this contemporary economic paradigm believe that efficient allocation requires government intervention through fiscal policies to achieve desired outcomes. Fiscal policies through taxation determine revenue collection; by interfering with market forces, fiscal policies attempt to achieve sustainable growth outcomes and reduce poverty. Although much responsibility is assigned to market forces, the role of fiscal policy becomes prominent during financial turmoil. These events have shown that the market cannot correct efficient resource allocations under certain circumstances (Horton and El-Ganainy, 2009) [22].

In such times, governments directly intervene in the marketplace with fiscal policy to influence spending on goods and services to change aggregate demand for goods and services by encouraging increased or reduced spending. It supports private investments that typically produce goods and services. Excessive spending through private consumption during financial turmoil increases the demand for goods and services. For example, the Australian government used fiscal policy to create expansionary (excessive) spending during COVID-19 through a home builder programme to stimulate housing construction. Created a demand to purchase eligible home buyers by offering them government grants (Yu, 2021) [3].

In a country, the instruments classified as fiscal and monetary policies play a singular and combined role in achieving its set economic outcomes, such as full employment, an equilibrium balance of payments, stable price levels, and decent economic growth (Curwen and Fowler, 1976) [53]. Contextual factors in a country can influence the effectiveness of the instruments used under the combined policies, and the policy settings for using the instruments change over time.

Economic development benefits all countries. Increase resource availability to support social development and environmental protection; a 10% increase in GDP can reduce infant and child mortality rates by 3–5%. Stable and low budget deficits and government debt are associated with higher economic growth. Stable and low debts also decrease the requirement to create money by printing to meet unmet expenditures, which can otherwise hurt the economy with increased inflation (Gupta et al., 2002) [55].

3.2. Ecological Economics

Hotelling (1931) [56] showed that renewable and non-renewable resources could behave with pricing mechanisms similar to physical and human capital, with each sector offering prices to optimise resources. It assumes that markets efficiently determine prices and that owners decide whether to convert physical assets into resources to invest in financial assets. Hence, resource extraction by owners depends on the interest rates at that time. Fundamental issues here are the assumption of market efficiency and, more importantly, the non-renewable resources that should be extracted to produce social and environmental benefits. In 1972, a simulated computer modelling of global subsystems identified population, food production, industrial production, pollution, and non-renewable energy consumption; the limits to economic growth could occur 100 years later, manifested as decreased population and industrial capacity because natural resources are depleted (Meadows et al., 1972) [57]. The subsystems dynamically change with time. A later study using identical subsystems and approaches to the analysis of the earlier study has shown that the previous predictions have changed, and the neoclassical economics-based market system can lead to adverse effects on the environment, and the technology cannot stabilise or reduce the harmful effects (Turner, 2008) [58]. Renewable and non-renewable natural resources limit growth if they are not used where resources can maintain ecological balance (Hahn and Stavins, 1992) [59]. Through market mechanisms, neoclassical economics does not address decreasing fossil fuel consumption, which contributes to increased carbon dioxide emissions, and alternative non-polluting energy sources can replace it (Neck, 2022) [60].

The ecological economics paradigm argues that neoclassical economics focuses too narrowly on gross domestic and national production. It can become a concern for sustainable development because measuring and evaluating ecological benefits and costs is imperfectly accurate. For example, the measurement bases for biological diversity as an ecological benefit and the use of renewal and non-renewable resources as costs are poorly defined. They also argue that neoclassical economics treats renewable and non-renewable costs as equivalent cost units (Goodland and Ledec, 1987) [61].

Based on ecological economics lines of argument, neoclassical economics can pose crucial challenges to the five principles underlying sustainable development. They are (1) intergenerational equity (peoples of different generations have the same advantages from resources); (2) intragenerational equity (peoples of the same generation have the same advantages from resources); (3) the importance of diversity (diverse processes are required for economic, social and environmental development towards diverse life); (4) interconnectedness (economic, social and environmental systems are interconnected and cannot be treated in isolation); and (5) taking precautions against human actions that can lead to irreversible results on sustainability (Abeysekera, 2022; Throsby, 2017) [62,63].

3.3. Political Economy

Neoclassical economics has transformed because of recent and contemporary global changes. There is a paradigmatic shift in the political economy in which sustainable development is a crucial global agenda for long-term human survival and well-being. The political economy is about how politics affects the economy and how the economy affects politics. In this context, political will and courage are paramount with a suite of fiscal, monetary, and public policies aimed at sustainable development.

The marketplace may become unwilling participants but may not want to consider investments in sustainable development projects because they can introduce long payback periods, lower returns, and higher risks by increasing the variability of returns. In these circumstances, governments must intervene with policies to redirect marketplace activities, and they must also look at redirecting their sources of revenues and expenditures. Various models have been proposed on who pays for sustainable development as it is a global agenda. It is an ongoing dialogue, and these challenges are faced at the country level (should the rich pay the poor), regional level (should more developed ASEAN countries pay less developed ASEAN countries), and global level (should developed countries pay developing countries) (Frieden, 2020) [64].

The United Nations has set 17 sustainable development goals (UN SDGs). However, those who influence such political economy decisions are those with concentrated interests regarding which goals take priority. For example, at a global level, permanent member countries of the UN Security Council have concentrated political influence over other countries to impose political will on the global economy (Frieden, 2020) [64].

Regardless of such a globalised prioritised agenda, each country has priority SDGs. Prioritising country-specific SDGs requires each country to attain persistent fiscal stability with sustained low budget deficits and debts and prudent tax revenue and expenditures. Countries can then continue with public policies for a sustainable development agenda even in severe economic downturns with considerable budget deficits, such as government spending for poverty reduction programmes with incentives leading to favourable outcomes (Gupta et al., 2002) [55].

Sustainable development requires re-examining economic growth, where the economy, society, and environment are dimensions that support each other in their growth. These are three diverse dimensions, and paying attention to them brings together a balanced, long-lasting growth in resource allocation decisions based on the five underlying principles of sustainable development (Brand-Correa et al., 2022; Common and Perrings, 1992) [52,65].

Much of the discussion about ecological economics shows that markets do not show justice because they are not interested and do not know how to measure and value resources related to society and the environment (Blis and Egler, 2020) [66]. Various global environmental protection agreements, such as the Kyoto Protocol and the Paris Agreement, have focussed on climate change as a global political economy agenda by agreeing to a plan to reduce global greenhouse gas emissions (United Nations Climate Change, 2023) [67]. Based on research evidence, carbon dioxide and methane from humans are the main causes of global warming because these gases trap excess radiation in the atmosphere without allowing them to return to space (Stips et al., 2016) [68].

Since then, governments have developed financial instruments backed by monetary policies to reduce GHG emissions through credit allocations, funding low-carbon projects through development and retail banks, and Central Banks purchasing low-carbon bonds issued by development banks (Omam, 2019) [69]. Governments can reorient and strengthen the fiscal policy of taxation and government spending towards the sustainable development objectives of economic development, social development, and environmental protection. Hence, re-oriented neoclassical economics has weakened the arguments of ecological economics.

3.4. Research Questions

The economic crisis that took full effect in 2022 due to a shortage of foreign currency reserves led to defaults of foreign debts, compelling the printing of local currency to meet government expenditures (Leanage and Saito, 2023) [70]. This led to excessive inflation rates and further depreciation of the Sri Lankan rupee (LKR). The low foreign reserves and depreciation of LKR began to hurt Sri Lanka, which was dependent on imported energy resources such as fuel and gas; the lack of these led to power cuts (Jayasuriya, 2022; Mehta, 2022) [71,72]. Monetary policy was challenged as an economic stabilisation set of instruments when market forces could not moderate exchange and interest rates (Musthafa et al., 2023) [73]. Economic turmoil brought the implementation of public policies to a standstill. The sustainable development agenda requires a long-term focus, but the economic crisis has turned policy attention to a short-term reactive mode (Jayasinghe et al., 2022) [74]. Based on the discussion, the following six research questions (RQ) are explored in the context of the economic crisis and readjustment during COVID-19.

RQ1: How did the fiscal policy approach before COVID-19 influence sustainable development?

RQ2: How did the fiscal policy approach after COVID-19 influence sustainable development?

RQ3: How did the monetary policy approach before COVID-19 influence sustainable development?

RQ4: How did the monetary policy approach after COVID-19 influence sustainable development?

RQ5: How did the public policy approach before COVID-19 influence sustainable development?

RQ6: How did the public policy approach after COVID-19 influence sustainable development?

4. Methodology

The methodological framework is presented in Figure 2. The policy framework comprises fiscal, monetary, and public policies. The UN sustainability agenda comprises 17 goals. Contributions to these goals strengthen the social aspects with social capital, the environmental aspects with environmental capital, and the intangible aspects with sustainability-related intellectual capital (Abeysekera, 2021) [75].

The social capital comprises eight goals: (1) Goal 1—No poverty; (2) Goal 2—Zero hunger; (3) Goal 3—Good health and well-being; (4) Goal 4—Quality education; (5) Goal 5—Gender equality; (6) Goal 8—Decent work and economic growth; (7) Goal 10—Reduced inequalities; and (8) Goal 16—Peace, justice, and strong institutions.

The environmental capital comprises five goals: (1) Goal 6—Clean water and sanitation; (2) Goal 7—Affordable and clean energy; (3) Goal 13—Climate action; (4) Goal 14—Life below water; and (5) Goal 15—Life on land.

Intellectual capital comprises four goals: (1) Goal 9—Industry, innovation, and infrastructure; (2) Goal 11—Sustainable cities and communities; (3) Goal 12—Responsible consumption and production; and (4) Goal 17—Partnership for the goals.

The policy framework comprising fiscal and monetary policies influences sustainable development and is identified as contributing to the three aspects of capital, collectively known as sustainability capital. Just as financial capital increases financial wealth, sustainable development is increased by sustainability capital, which is an outcome of engaging in sustainable development (Abeysekera, 2023) [76].

This study conducted document analysis to discover answers to the six research questions. The documents included the annual reports of the Central Bank of Sri Lanka, the Sri Lanka Inland Revenue, World Bank documents, and the literature on developing countries and Sri Lanka’s fiscal and monetary policy responses. Document analysis is less time consuming, documents are publicly accessible, cost-effective for conducting research, unobtrusive, non-reactive, and can provide sufficient coverage based on researcher judgement (Bowen, 2009) [77].

This study focussed on the extent and trend of achievement of each SDG. The Sustainable Development Report for Sri Lanka 2022 measured the trend of UN SDG performance and was another critical document in the study. The report shows each SDG achievement trend. This study assigned ordinal values to the trends shown for each SDG as follows: it is on track for achievement (=2), moderate improvement (=1), stagnation (=0), decrease (=−1), or trend information is not available (no value assigned). The report had a web diagram that assigned a value to achieve each SDG with a maximum value of 100. These values were used to determine the achievement of the dimensions of social, environmental, and intellectual capital towards the SDG (Sustainable Development Report, 2023) [78].

5. Findings

This section reports the findings by policy type (fiscal, monetary, and public) and pre- and post-COVID-19 periods.

5.1. Fiscal Policy Approach during the Pre-COVID-19 Period (RQ1)

GDP is economic activity, the value of all goods and services produced. The Keynesian economic philosophy supports government spending to increase demand for the value of goods and services and GDP due to increased money supply. GDP is measured as private consumption + private investment + government spending + (exports − imports). Although GDP is an inaccurate measure of inequality, pursuing it is essential because it increases overall economic wealth (Kuznets, 1955; Thornton, 2019) [79,80]. However, reducing inequalities and achieving sustainable development requires proper collection of government tax revenue.

As shown in

Table 1. Total revenue collection by the Inland Revenue Department in Sri Lanka (LKR million).

Pre-COVID-19 Period
Tax or Levy	2017	%	2018	%	2019	%
Income tax	229,842	27.48	257,367	30.37	371,796	36.26
Capital gains tax			104	0.01	602	0.06
Value-added tax	443,740	53.05	461,651	54.48	443,877	43.29
Tax on voluntary disclosure
Debt repayment levy			4501	0.53	28,673	2.80
Betting and gaming levy	1929	0.23	2470	0.29	2436	0.24
Share transaction levy	1334	0.16	1196	0.14	1023	0.10
Migrating tax	4	0.00	17	0.00	5	0.00
Stamp duty	11,377	1.36	12,026	1.42	14,863	1.45
Economic service charge	44,720	5.35	52.979	0.01	55,301	5.39
Nation building tax	101,825	12.17	105,691	12.47	105,186	10.26
Turnover tax	21	0.00	89	0.01	17	0.00
National security levy	16	0.00	41	0.00	9	0.00
Vehicle entitlement levy	1651	0.20	2192	0.26	1499	0.15
Construction guarantee fund levy	53	0.01	26	0.00	1	0.00
Remittance fee
Land tax	7	0.00
Social security contribution levy
Casino licence fee
Total	836,519	100	847,424	100	1,025,288	100

Source: author-developed and compiled from data reported by Sri Lanka Inland Revenue (2017; 2018; 2019) [81,82,83].

, the two most crucial sources of tax revenue in Sri Lanka are income taxes and value-added taxes (Sri Lanka Inland Revenue, 2017; 2018; 2019; 2020; 2021; 2022) [81,82,83,84,85,86]. In the pre-COVID-19 period, indirect taxes through value-added tax (VAT) contributions accounted for nearly half of the tax revenue. Research shows that VAT as an indirect consumption-based tax does not reduce consumption inequality. Instead, it increases income-based inequality (Alavuotunki et al., 2019) [87]. Such evidence shows that reducing inequality is counterproductive (SDG 10). VAT is a convenient tax instrument to administer, as businesses must collect it from consumers on behalf of the Inland Revenue and remit it back to them. It reduces the cost of tax collection for the government. However, Sri Lanka has a substantial cash-based informal economic system outside of the tax collection base, which can reduce tax revenue collection (Joshi et al., 2014) [88]. Efforts to expand VAT on micro, small and medium-sized enterprises face technical and political challenges (Dom and Prichard, 2022) [89].

In December 2019, the government reduced individual, corporate, and value-added taxes to increase domestic production and reduce the cost of living. The changes occurred with personal income tax thresholds increasing from LKR 500,000 to LKR 3 million and decreasing the top marginal tax rate from 24% to 18%. The corporate tax rate decreased from 28% to 24%, increasing exemptions for various industry sectors. It also eliminated the miscellaneous nation building tax, economic service charges, and debt repayment levy. It mainly relied on the goods and services tax, or VAT, which is a consumption-based taxation (Jayasinghe et al., 2022) [74].

In 2020, Sri Lanka had the world’s lowest 8.1% tax-to-GDP (IMF, 2022) [30]. GDP decreased by 3.6%, producing fewer goods and services, the country’s highest economic decrease. The tourism industry was the most adversely affected of the four key sectors, with the others being agriculture, construction, and apparel. Tourism is the most disaster-prone and volatile sector in Sri Lanka, as it was the most financially weak sector before the COVID-19 pandemic and had a strong dependence on the global market (Jayasinghe et al., 2022) [74]. Although the total revenue collected increased over the years, economic setbacks reduced redistribution to address social and environmental issues.

The fiscal features from Table 1 towards sustainable development show that during the pre-COVID-19 period, no new international tax cooperation was introduced or implemented to reduce tax avoidance, illicit financial flows related to taxation, and harmful global tax competition (Goal 17). Fiscal revenues are crucial for meeting sustainable development-related expenditures. Fiscal revenue increased mainly because of the income tax collected from individuals and the debt repayment levy introduced in the 2019 fiscal year. Research shows that increased tax on personal income has little effect on sustainable development. The increase in effective tax on corporate profits and average taxation in the country is positively associated with sustainable development (Rahman, 2023) [90]. The contrary occurred as the government decreased taxation to various sectors during the pre-COVID-19 period. The introduction of the debt repayment levy signifies an overly focussed focus on tax revenue collection to repay government debt and a propensity to delay and reduce expenditures on sustainable development.

5.2. Post-COVID-19 Fiscal Policy Approach (RQ2)

Sri Lanka enjoyed a living standard with excess expenditure beyond its revenues over decades. Unassumed such practises caused dire economic consequences to being unable to meet living standards and pay bills due. COVID-19 accelerated the eventful highlight and compelled Sri Lanka to look for a lender, often the last resort, the International Monetary Fund (IMF), for refuge to pay for such bills. The IMF is politically unfavoured because such money is offered under fiscal austerity and discipline conditions. Increasing revenues through taxes and spending cuts are unpopular with the citizenry and can have personal costs to politicians of winning votes to stay in government and be re-elected (Thornton, 2019) [80].

The post-COVID-19 period saw a direct increase in the tax base, contributing one-half of the tax revenue. The compiled data are shown in

Table 2. Total revenue collection by the Sri Lanka Inland Revenue Department (LKR million).

Post-COVID-19 Period
Tax or Levy	2020	%	2021	%	2022	%
Income tax	252,942	49.22	300,545	47.49	524,534	49.58
Capital gains tax	358	0.07	668	0.11	5135	0.49
Value-added tax	223,786	43.54	308,213	48.71	463,072	43.77
Tax on voluntary disclosure			175	0.03	3970	0.38
Debt repayment levy	3002	0.58	8	0.00	82	0.01
Betting and gaming levy	1428	0.28	1939	0.31	5245	0.50
Share transaction levy	2347	0.46	6944	1.10	4216	0.40
Migrating tax	6	0.00	17	0.00	11	0.00
Stamp duty	11,355	2.21	12,950	2.05	12,720	1.20
Economic service charge	14,950	2.91	728	0.12	202	0.02
Nation building tax	3740	0.73	599	0.09	585	0.06
Turnover tax	16	0.00	19	0.00	7	0.00
National security levy	2	0.00			11	0.00
Vehicle entitlement levy
Construction guarantee fund levy
Remittance fee			5	0.00
Land tax
Social security contribution levy					36,111	3.41
Casino licence fee					2000	0.19
Total	513,932	100	632,810	100	1,057,901	100

Source: author-developed and compiled from data reported by Sri Lanka Inland Revenue (2020; 2021; 2022) [84,85,86].

. From 1 October 2022, a Social Security contribution levy of 2.5% on liable turnover payable on an accrual basis was introduced. The tax was payable by importers, manufacturers (85% turnover), service providers (100% turnover), wholesalers, retailers (50% turnover), and distributors (25% turnover) to rebuild the country under the Social Security Contribution Levy Act, Number 25 of 2022, accounting for it on an accrual basis (Sri Lanka Inland Revenue, 2023) [91].

To adhere to an anticipated IMF bailout package and economic repair, Sri Lanka adopted fiscal austerity to decrease domestic outflows of fiscal revenue to reduce the government deficit and substantially stabilise its debt (IMF, 2022) [92]. Austerity measures are three-fold: increase revenue from direct taxes, increase revenue from indirect taxes, and reduce expenditures. Increasing revenues through indirect taxes can slow economic growth by decreasing output, but decreasing expenditures cannot hurt output (Beretta, 2020) [93].

The government decreased expenditures by freezing public sector hiring and stopping rehiring to fill vacant positions to reduce the budget deficit (IMF, 2022) [92]. The GDP of Sri Lanka in 2022 was USD 74.4 billion, and it was the 76th country of the 130 countries listed, the first being the United States, which had the highest GDP of 25,463 billion (World Bank, 2022) [94]. The GNP, calculated as GDP + net foreign inflows, was USD 19.38 billion in 2023 (CEIC, 2023) [95]. The GNP being less than GDP shows a high net foreign payment owed to foreign parties.

Taxes on individuals were reintroduced, and corporate tax was increased as a direct taxation measure. Increases in direct taxes contributed to decreased inflation. During the post-COVID-19 period, the focus was on revitalising the diminished tax revenue collection due to the pandemic. The economic turmoil prompted attention to reduce expenditures. These measures left little discretionary income to address social and environmental issues.

In 2022, the Sri Lankan government increased VAT from 8% to 12% and corporate taxes from 24% to 30% (IMF, 2022) [92]. In the 2023 budget, the government passed increases in the average tax rate and taxation of corporate profits that are positively associated with sustainable development (Rahman, 2023) [90]. The fiscal features in Table 2 show that such tax increases are aimed at meeting mounting debt payments. There are no dedicated taxes on levies introduced to support sustainable development.

5.3. Pre-COVID-19 Monetary Policy Approach (RQ3)

Table 3. Macroeconomic performance.

Pre-COVID-19 Period
	2017	2018	2019
Real sector
Real GDP growth %	3.4	2.3	−0.2
GDP per capita in USD	4106	4372	4082
External sector
Trade balance percentage of GDP	−10.9	−10.9	−9.0
Current account balance percentage of GDP	−2.6	−3.0	−2.1
External official reserves in USD	7959	−1103	377
Fiscal sector
Overall fiscal balance percentage of GDP	−5.5	−5.0	−9.0
Central government debt percentage of GDP	76.9	78.4	81.9
Monetary sector and inflation
Broad money growth %	16.7	13.0	7.0
Private-sector credit growth %	14.7	15.9	4.2
Annual average inflation %	6.6	4.3	4.3

Source: author-developed and compiled from data from the Central Bank of Sri Lanka Annual Reports (2017; 2018; 2019) [96,97,98].

shows macroeconomic data on stabilising the economy using monetary policies with data obtained from the Central Bank Annual Reports (Central Bank of Sri Lanka, 2018) [96]. Economic growth expressed as a percentage of the value of the gross domestic product after adjustment for inflation showed a decreasing trend, with 2019 showing an economic contraction associated with a decrease per capita of the shared GDP. The data were obtained from the Central Bank of Sri Lanka Annual Reports.

The trade balance was negative, as a percentage of GDP indicates more imports than exports in terms of value. The country’s current account balance, the country’s net income, was negative, indicating that the country earned less than the amount due to other countries. External official reserves decreased dramatically just before COVID-19, demonstrating that the country had low foreign currency reserves. The fiscal balance as a percentage of GDP was negative before COVID-19, indicating that the government could not meet its financing needs.

The broad percentage of money growth decreased before COVID-19, indicating that limited liquid money was available in a crisis in which deposit holders wanted to withdraw it. Private-sector credit growth drastically decreased before COVID-19, resulting in fewer private investments. Pre-COVID-19 had a comforting single-digit inflation rate. However, the data show that 2019 showed economic distress. These data indicate that the country was not financially stable enough to implement impactful projects on sustainable development effectively.

5.4. Post-COVID-19 Monetary Policy Approach (RQ4)

Table 4 shows the macroeconomic performance in the post-COVID-19 period. The real GDP, adjusted for inflation, was negative throughout, became positive in 2021, was short-lived, and worsened in 2022 when the public protested to show their hardships. In 2022, this became more evident with the lower per capita GDP in USD.

Inflation is a continuing price increase for various goods and services over time. The Sri Lankan economy has a lower middle income; fewer people have discretionary choices about goods and services. Therefore, price increases in essential commodities are crucial to living standards (Atkinson, 1998) [99].

Table 4. Macroeconomic performance.

Post-COVID-19 Period
Sector	2020	2021	2022
Real sector
Real GDP growth %	−4.6	3.5	−7.8
GDP per capita in USD	3858	3997	3474
External sector
Trade balance % of GDP	−7.1	−9.2	−6.7
Current account balance % of GDP	−1.4	−3.7	−1.9
External official reserves in USD	−2328	−3967	−2806
Fiscal sector
Overall fiscal balance % of GDP	−10.6	−11.7	−10.2
Central government debt % of GDP	96.5	100.1	113.8
Monetary sector and inflation
Broad money growth %	23.4	13.2	15.4
Private-sector credit growth %	6.5	13.1	6.2
Annual average inflation %	4.6	6.0	46.4

Source: author developed and complied from Central Bank Annual Report, 2020, 2021, and 2022 [26,100,101].

Table 4. Macroeconomic performance.

Post-COVID-19 Period
Sector	2020	2021	2022
Real sector
Real GDP growth %	−4.6	3.5	−7.8
GDP per capita in USD	3858	3997	3474
External sector
Trade balance % of GDP	−7.1	−9.2	−6.7
Current account balance % of GDP	−1.4	−3.7	−1.9
External official reserves in USD	−2328	−3967	−2806
Fiscal sector
Overall fiscal balance % of GDP	−10.6	−11.7	−10.2
Central government debt % of GDP	96.5	100.1	113.8
Monetary sector and inflation
Broad money growth %	23.4	13.2	15.4
Private-sector credit growth %	6.5	13.1	6.2
Annual average inflation %	4.6	6.0	46.4

Source: author developed and complied from Central Bank Annual Report, 2020, 2021, and 2022 [26,100,101].

The trade balance was negative and decreased in 2022 because of restrictions imposed on imports. The current account balance showed that non-trade-related incoming receipts to the country cushioned it. There were deficits in foreign currency reserves in the post-COVID-19 period due to the inability to pay foreign currency debts.

The fiscal balance-to-GDP percentage showed that the government consistently spent more than it received, indicating that a fiscal deficit continued from pre-COVID-19. Central government debt as a percentage of GDP continued to increase.

The broad percentage of money growth increased during the post-COVID-19 period because of money printing to pay government bills, such as government employees’ salaries and purchase of goods and services by the government. The broad growth of money did not help expand the economy because it was achieved through money printing rather than releasing reserves into circulation. Lacklustre economic signs were also evident from low private-sector credit growth. The printing of money fuelled inflation to a staggering height in 2022.

Inflation can influence resource allocation because such periods can decrease money’s actual worth by decreasing purchasing power. Uncertainty about future inflation can distort savings and investments because they influence consumption, investment, and economic growth (Karahan, 2011) [102]. Political pressure to decrease inflation with nominal interest rates higher than the inflation rate can contract economic growth (Friedman, 1977) [103].

An effective economic growth response to high inflation is to increase output. If policymakers find it challenging to achieve higher output, an effective economic growth response is to decrease inflation. When there are high welfare costs to be met by the government, policymakers are more likely to aim for low, stable inflation (Holland, 1995) [104].

The response to the Sri Lankan situation was to decrease inflation through fiscal austerity through domestic activities. It responded by decreasing government expenditures by freezing future recruitment and not filling vacant positions unless they were essential. It reintroduced previously removed individual taxes and increased corporate taxes (Kanya, 2023) [105]. The monetarily difficult situation post-COVID-19 left little discretionary income for the government. The post-COVID-19 period became politically turbulent.

5.5. Pre-COVID-19 Public Policy Approach (RQ5)

Sri Lanka experienced domestic and foreign debt during pre-COVID-19, and the compiled data are shown in

Table 5. Central government debt during the pre-COVID-19 period.

% of GDP	2017	2018	2019
Domestic debt	42.5	42.5	45.3
Foreign debt	35.4	41.7	41.3
Budget deficit	77.9	84.2	86.6

Source: author-developed from Central Bank Annual Report, 2021, p. 14. [26].

. Domestic debts were slightly higher than foreign debts, but foreign debts gradually increased.

In 2017, the Sri Lankan parliament enacted the Sri Lanka Sustainable Development Act, No. 19 of 2017. It states that national policy and strategy must be consistent with sustainable development goals and valid until 2030. It requires using economic, social, and natural resources ecologically efficiently. The Act promotes the integration and equitable inclusion of economic, social, and natural factors in making decisions (Sri Lanka Sustainable Development Act, 2017) [106].

The Sustainable Development Council of Sri Lanka was established as a government institution responsible for coordinating, facilitating, monitoring, evaluating, and reporting on the UN SDG agenda for 2030 in Sri Lanka. The institution is responsible for developing policies and strategies and setting long-term direction for sustainable development in Sri Lanka, which is implemented through more than 400 government institutions (Sustainable Development Council of Sri Lanka, 2023) [107].

5.6. Post-COVID-19 Public Policy Approach (RQ6)

The economic crisis underlined by the sovereign debt crisis required an immediate fiscal and monetary policy response. Sri Lanka had a substantial systemic debt challenge before and after the COVID-19 period. Restoring and stabilising liquidity requires more than overcoming debt distress and its repayments. The excessive debts became unpaid, leading to debt defaults. This situation required an agreement with debt holders to write off a portion of the debt and an agreement on the new and revised principal amount on which debt interest is calculated. It has mainly brought an end to the public policies that occur in a stabilised economy. Restructuring the debt requires reducing the double-digit deficit into a single-digit economy that can embrace and propel sustainable development (Athukorala and Wagle, 2022) [108].

Sri Lanka continued to experience domestic and foreign debt issues after COVID-19, as evident from the compiled data reported in

Table 6. Central government debt during the post-COVID-19 period.

% of GDP	2020	2021	2022
Domestic debt	57.8	68.1	62.3
Foreign debt	38.6	37.0	51.6
Budget deficit	96.4	105.1	113.9

Source: auhor-developed from Central Bank Annual Report, 2022, p. 22 [101].

. Foreign debt increased because of LKR depreciation, and domestic debt increased because of the reclassification of SOE debt as owned by the central government.

Treasury bonds (bills) comprise a large portion of domestic debt, with a share of 57.9% by the end of 2022; however, investors had less appetite for longer-term debt due to the imminent debt restructure. The increase in domestic debt through treasury bills was issued at higher interest rates to attract investors and increase their appetite. Meeting central government expenditures necessitated printing (creating) money. The government found meeting foreign debt servicing falling due in the short and medium term with meagre foreign reserves impossible. This led to suspending debt servicing and calling for restructured debt (Central Bank of Sri Lanka, 2022) [96].

Economic repair constitutes restarting and reorganising 527 state-owned enterprises (SOEs), which are making substantial losses, a notable portion of the budget deficit. They comprise 55 strategic interests, 287 commercial interests, and 185 no commercial interests (Rodrigo, 2022) [109]. In 2017, the estimated losses from SOEs were LKR 87 billion (AUD 420 million, LKR 207 = AUD 1; USD 267 million, LKR 326 = USD 1, rates obtained from Oanda.com on 14 November 2023) (Ratnsabapathy et al., 2019) [110].

The 55 strategic SOEs (aviation, banking, construction, energy, insurance, ports, transportation, and water) are being reviewed for cost-effective operations. Non-strategic SOEs are being considered for public listing and divestments (Central Bank of Sri Lanka Annual Report 2021, pp. 197–201) (Central Bank of Sri Lanka, 2018) [26,96].

SOEs are currently governed by the Administer Part II of the Finance Act, No. 38 of 1971, and the Companies Act, No. 07 of 2007. The government is expected to announce an SOE Act shortly to achieve better performance-oriented fiscal and governance outcomes (Sirimanna, 2023) [111].

Despite the economic difficulties and the work to overcome them, Sri Lanka has committed to the Paris Agreement to reduce global warming to 1.5 centigrade. It is of national interest to do so given that it is an island nation and the coastline can take up land due to global warming. The country is very dependent on agriculture to meet the needs of its people, and the minor export crops sector generates foreign exchange. Long-term climate changes (sea level rise, higher temperature, and ocean acidification) associated with sudden weather events can introduce floods, storms, droughts, and landslides. The two monsoonal seasons, on which agricultural products are largely dependent, can be disrupted, creating crop damage and loss. In 2022, Sri Lanka produced a preliminary report of the Climate Prosperity Plan to contribute to 17 UN SDGs (CVFV20, 2022) [112].

5.7. Sustainable Development

The overall score for sustainable development assigned by the Sustainable Development Report is 69.4 out of a maximum of 100. It can be interpreted as a percentage of the achievement of the SDGs. The overall score for Sri Lanka is 92.7 out of a maximum of 100, showing that Sri Lanka positively affects the ability of other countries to achieve the SDGs. The over occurs in three dimensions: environmental and social impact integrated into trade, economy and finance, and security. The yearly scores before COVID-19 were 68.54 in 2017, 69.66 in 2018, and 69.58 in 2019. The annual SDG scores after COVID-19 were not different from those before COVID-19: 70.05 in 2020, 70.19 in 2021, and 69.40 in 2022. The values assigned to each SDG and their respective trends were clustered by dimensions of social, environmental, and intellectual capital (Sachs et al., 2023; Sustainable Development Report, 2023) [78,113].

The dimensions of social capital are listed in

Table 7. UN SDG values trends related to social capital.

Goal	Value	Trend	Trend Score
Goal 1: No poverty	85	Decrease	−1
Goal 2: Zero hunger	74	Moderately improving	1
Goal 3: Good health and well-being	76	Moderately improving	1
Goal 4: Quality education	98	On track to achieving	2
Goal 5: Gender equality	50	Stagnant	0
Goal 8: Decent work and economic growth	80	Stagnant	0
Goal 10: Reduce inequalities	76	Unavailable
Goal 16: Peace, justice, and strong institutions	51	Stagnant	0
Social capital	590/8 = 74	Moderately improving	3/6 = 0.5

Source: author-developed, compiled and estimated using the 2023 Sustainable Development Country Report, Sri Lanka [78].

. Quality Education (Goal 4) earned the highest score and is on track to achieve the set targets. No Poverty (Goal 1) earned the second-highest score. However, it shows a decreasing trend because of the economic hardships that have increased poverty. The third-highest earned score was Decent Work and Economic Growth (Goal 8), which shows a stagnant trend. Gender Equality (Goal 5) earned the lowest value, and Peace, Justice, and Strong Institutions (Goal 16) earned the second-lowest value. Their trends are stagnant, inviting the closer attention of policymakers to trigger a positive trend. The overall social capital value is 74, a percentage achieved that shows moderate improvement.

The SDGs related to environmental capital are shown in

Table 8. Trends in the UN SDGs related to environmental capital.

Goal	Value	Trend	Trend Score
Goal 6: Clean water and sanitation	50	Moderately improving	1
Goal 7: Affordable and clean energy	63	Stagnant	0
Goal 13: Climate action	95	Moderately improving	1
Goal 14: Life below water	74	Stagnant	0
Goal 15: Life on land	52	Decrease	−1
Environmental capital	334/5 = 66.8	Moderately improving	1/5 = 0.25

Source: author-developed, compiled and estimated using the 2023 Sustainable Development Country Report, Sri Lanka [78].

. The highest score is assigned to climate action (Goal 13) and is moderately improving. Sri Lanka has a low per capita carbon footprint. Life below water (Goal 14) has the second-highest score but is stagnant, and an economic crisis can decrease funding availability for welfare ocean and water management. The second-lowest score is assigned to Life on Land (Goal 15), which shows a decreasing trend that invites policymakers’ attention, such as biodiversity and wildlife management. Clean Water and Sanitation (Goal 6) has the lowest score. Although moderately improving, it is vital for human health and requires the attention of policymakers. The environmental capital interpreted as a percentage of achievement is 66.8% and shows a moderately improving trend.

The SDGs related to sustainability-related intellectual capital are shown in

Table 9. Trends in UN SDGs related to intellectual capital.

Goal	Value	Trend	Trend Score
Goal 9: Industry, Innovation, and infrastructure	52	On track to achieving	2
Goal 11: Sustainable cities and communities	75	Stagnant	0
Goal 12: Responsible consumption and production	85	Moderately improving	1
Goal 17: Partnership for the goals	50	Stagnant	0
Intellectual capital trend = 3/4	262/4 = 65.5	Moderately improving	0.25

Source: author-developed, compiled and estimated by the author using the 2023 Sustainable Development Country Report, Sri Lanka [78].

. Responsible consumption and production earn the highest score and are moderately improving. The multi-ethnic religious beliefs promoting simple lifestyles promote Sri Lanka’s middle path to sustainability development concept and approach (Ministry of Environment, 2012; Bandarage, 2023) [10,11]. The second-highest score was assigned to Sustainable Cities and Communities (Goal 11). However, the trend is stagnant, which may be due to the inactivity of the housing construction sector due to the economic crisis. The lowest score has been assigned to Partnership for the Goals (Goal 17) and is stagnant. It is where developed countries help countries such as Sri Lanka in economic distress with investments in SDGs and coping mechanisms. The coping mechanisms include strengthening healthcare systems, agricultural and cropping systems with improved seed varieties, information and telecommunication systems for biodiversity monitoring and management, and broader access to finance for sustainable development goals. Modelling shows that developing countries face the most significant risks from climate change and are less able to cope with them, causing disproportionate damage (Georgieva et al., 2021) [114].

Trends in the UN SDGs by capital dimensions are shown in

Table 10. Progress of the UN SDGs by Capital Dimensions.

Trend	Social Capital	Economic Capital	Intellectual Capital	Sustainability Capital
On track	1		1	2
Improving	2	2	1	5
Stagnant	3	2	2	7
Decreasing	1	1		2
Not reported	1			1
Total	8	5	4	17

. Despite economic hardship, evidence shows that Sri Lanka has made moderate progress towards sustainable development. Social, environmental, and sustainability-related intellectual capital dimensions show an upward trajectory. Social capital is the most achieved capital (74%), followed by environmental capital (66.8%) and social capital (65.5%) dimensions. All capital dimensions are moderately improving.

6. Conclusions

6.1. Concluding Remarks

The individual SDGs performed variously; two SDGs (Goal 4: Quality education and Goal 9: Industry, innovation, and infrastructure) are on track to achieve their targets. Goal 1—No poverty and Goal 15—Life on land fell behind in achieving their targets. Seven SDGs stagnated in their progress: Goal 5—Gender equality; Goal 7—Affordable and clean energy; Goal 8—Decent work and economic growth; Goal 11—Sustainable cities and communities; Goal 14—Life below water; Goal 16—Peace, justice, and strong institutions; and Goal 17—Partnership for the goals. The two decreasing and seven stagnant SDGs require policy attention, acknowledging that fiscal and monetary policy instruments are overly focussed on deep and prolonged economic repair. The public and non-profit sectors can lead in driving sustainable development, and policy recommendations based on the study findings are outlined below.

6.2. Policy Recommendations for the Capital Market

Sri Lanka’s capital market to GDP ratio is 15%, compared with India, which is 103%, Australia 100%, the United Kingdom 90%, and the United States 193%. This shows that the Colombo Stock Market in Sri Lanka is undercapitalised and has attracted less foreign funding for equity investments (Khilenko, 2023) [115]. Furthermore, the investments and contributions of private-sector companies to sustainable development depend on their business models, narrowing the scope of their involvement in sustainable development. It calls for greater dependence on public funds to propel sustainable development.

Reporting climate-related disclosure by listed firms can be challenging to reduce human-induced carbon dioxide to net zero emission levels and strongly reduce methane emissions as part of the greenhouse gas portfolio. Scope 1 reporting about emissions from sources owned and controlled by the firm is where firms can take direct accountability, such as burning fuel by a company-owned or controlled vehicle fleet. However, scopes 2 and 3 concern emissions occurring because of firms’ activities that are unowned or controlled by the firm. Scope 2 is where the firm produces emissions because it purchased energy but has no control over the source of purchase, such as electricity consumed but sourced through a supplier. Scope 3 concerns emissions not produced by the firm source or activities undertaken by the firm. However, such emissions occur upstream (pre-production stage, such as suppliers sourcing and transporting them to the firm) or downstream (post-production stage, such as getting goods to customers) of the value chain where the business operates, such as buying, using, and disposing of products from suppliers. The challenges encountered include data collection, availability, measurement, and double counting under more than a single scope (Teske and Nagrath, 2022) [116].

The Colombo Stock Exchange can follow a voluntary approach as part of its continuing listing requirement. Firms report their economic, social, and environmental results to the public in sustainability reporting. These are accompanied by the requirement to follow the voluntary sustainability standards issued by the International Sustainability Standards Board (ISSB) with two International Financial Reporting Standards (IFRS): IFRS S1: General Requirements for Disclosing Sustainability-Related Financial Information and IFRS S2: Climate-Related Disclosure (IFRS Foundation, 2023) [117].

They are voluntary standards but recommend having at least a limited assurance on reporting information, which can later be lifted to reasonable assurance, engaging with International Auditing and Assurance Standards Boards (IAASB) to revise the International Standard on Assurance Engagement (ISAE); ISAE 3000 [118] Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, and ISAE 3000 (Assurance Engagements Other Than Audits or Reviews of Historical Financial Information ISAE 3410 [119] (Assurance Engagements on Greenhouse Gas Statements) (IAASB, 2023) [120].

6.3. Policy Recommendations for the Government

Weather shocks can result in low economic output, loss of tax revenue, and higher insurance premiums. At the country level, it can increase the cost of capital of sovereign debt, as GDP can vary. Adverse climatic trends can translate into trade imbalances, social conflicts, and displacements. It can adversely affect credit ratings (Buhr et al., 2018) [121]. Sri Lanka has some risk management schemes, including compulsory crop and national natural disaster insurance.

Sri Lanka is a low-carbon-emitting country with a per capita emission of 1.02 tonnes per person and has a culturally sensitive and environmentally sustainable development path. However, the country is among the top 10 most vulnerable to climate change-induced hazards because of its high temperature and unique complex hydrological regime (The World Bank Group, 2021) [122]. Climate- and weather-sensitive sectors contribute to GDP, including tourism, fisheries, tea plantations, and agriculture. Sri Lanka has also committed to achieving 70% renewable energy in electricity generation by 2030 (Ministry of Environment, 2021) [123].

Less than 1% of residential properties are insured against natural disasters. On the one hand, it creates opportunities for insurers. However, residential owners experience difficulties in taking insurance due to the current economic hardship, where the government can co-partner with subsidies to increase their natural disaster insurance coverage. Sri Lanka has not maintained a centralised damage and loss data collection system and has insufficient disaster risk management tools. However, it can improve its position by taking action to overcome them (The World Bank, 2016) [124].

In Sri Lanka’s economic recovery context, the government can consider passing legislation that mandates sustainable development expenditure accounted with outcomes and sustainability reporting for listed firms as a regulatory approach. On 1 April 2014, India became the first country to legislate for large firms to spend at least 2% of their average profits of the three previous years on corporate social responsibility (CSR) each year. Research shows that such expenditures negatively influence corporate performance, and managers ignore sustainable development projects that benefit society and the environment (Kofi Mintah Oware, 2022) [125]. Hence, the government must consider introducing private-sector sustainable development laws to invest a certain percentage of profits in long-term sustainable development projects subject to reasonable assurance.

The government can initiate public–private partnerships to facilitate sustainable development through consumer spending, similar to Alibaba’s Ant Forest concept of environmental protection in China (Xiong and Meng, 2018) [126]. Private firms and banks can adopt the Ant Forest concept, in which customers earn green points for spending on goods and services. For example, banks can use their debit and credit card portfolios to offer green points for spending using their debit and credit cards. Green points are provided free of charge to customers who elect the sustainable development agenda. Banks can nominate projects for which these credit points are expended, and customers can select their preferred project. For instance, the Alipay programme uses customer credit points to plant trees for customers in selected areas. The government can partner with banks to offer projects for sustainable development. The findings from this study show that Goal 1: Poverty and Goal 15: Life on land have shown a decreasing trend. The government can offer projects to banks to reduce poverty. To support Goal 1, for example, it could be stating a microbusiness by the poor. The bank can offer virtual microbusiness projects to customers. Once sufficient credit points are earned, the bank can transform the virtual microbusiness into an actual microbusiness by incurring the expenditure. The bank incurs expenditures on sustainable development programmes and invests in increasing corporate reputation. These must be outcome based, where poverty is transformed through a sustained income stream from starting a microbusiness rather than banks merely incurring the expenditure. To support Goal 15, the government could offer projects on reforestation, biodiversity and ecosystems, protecting mountains, and arresting landslides. The government can introduce tax incentive instruments for businesses to engage in such projects; however, expenditures become deductible on the basis of outcomes subjected to reasonable assurance. The government can contribute to public policy by broadening the scope of the Sri Lanka Sustainable Development Act No. 19 of 2017 to accommodate public and private sustainable development project partnerships. Monetary policy instruments can be introduced by issuing long-term green treasury bills in which funds are invested in sustainable development projects (Sri Lanka Sustainable Development Act, 2017) [106].

Human-caused climate change due to fossil fuel usage for energy-producing carbon dioxide. It is connected to advancing industrial production. Methane, the second most prevalent greenhouse gas emitted by humans, contributes to global warming. It is associated with primary production (Hellig, 1994) [127]. On a global scale, Sri Lanka is a low-greenhouse gas (GHG) emitter, sharing 0.08% of total emissions. However, the country is highly vulnerable to global warming, with a high score of 124 on the climate vulnerability index. The government has agreed to unconditionally reduce greenhouse gas emissions by 14.5% and 4% by increasing its forest cover by 32% by 2030 (UNDP, 2023) [128].

When Sri Lanka is working towards economic stability, SDG l7 (Strengthen the means of implementation and revitalise the Global Partnership for Sustainable Development) plays a crucial role in receiving bilateral and multilateral support to meet its commitments. Such support can be included in fiscal, monetary, and public policy instruments. At the 2023 First International Climate Change Forum, Sri Lanka affirmed its commitment to becoming a country with net zero greenhouse gas emissions by 2040. It noted that the transition requires technical and human capital expertise to produce excess green energy through solar, wind, and water. The country has allocated 600 acres overlooking the Kotmale Reservoir to build a multistakeholder International Climate Change University. Sri Lanka aims to develop these plans through multilateral banks and bilateral partners (Presidential Secretariat of Sri Lanka, 2023) [129]. The loss and damage fund was established by the United Nations Climate Conference (COP 27) to provide funding to developing nations affected by adverse climate effects. These include rising sea levels, prolonged heatwaves, desertification, acidification of the sea, and extreme events such as bushfires, species extinction, and crop failures (UNEP, 2023) [130]. Future research can investigate the factors that facilitate and constrain the translation of these initiatives into implementation from the national and global political economy context.

6.4. Limitations and Future Research

This study used the document analysis research method, which has inherent disadvantages that limit the analysis and findings. First, the documents used in this study were not produced to help this study directly but had their own research and compliance agendas. Second, there is a researcher bias in the judgements made on document selection (Bowen, 2009) [77].

Evidence shows that the need for sustainable development goals is localised in the country’s districts, provinces and regions. Research can investigate whether such localised welfare transfer programmes can contribute to SDGs such as poverty alleviation (Goal 1) and good health and well-being (Goal 3). This study limited its analysis to the macro level. Future research can investigate the impact of policies at the industry and organisational levels and the influence of policies at the policy level on contributing to sustainable development. There are no publicly available centralised SDG data at the country level. Research can investigate cost-effective ways to use information and communication technology to develop a centralised database.