Sri Lanka’s President, Ranil Wickremesinghe, also the country’s Finance Minister, is set to unveil a pivotal budget on Monday as he grapples with the challenging task of boosting tax revenue and streamlining government spending while keeping an eye on upcoming elections. The budget announcement comes at a crucial juncture for the nation, which faced its worst financial crisis in over seven decades last year, with the economy shrinking by 7.8% in 2022, leading to a default on foreign debt.
Despite these dire circumstances, Sri Lanka’s economy has gradually stabilized in 2023, thanks to a substantial $2.9 billion bailout from the International Monetary Fund (IMF) in March. The World Bank has consequently raised its growth forecast to 1.7% in 2024, up from its earlier projection of 1%. The Central Bank anticipates even more substantial growth at 3.3% in 2024, following an economic contraction of 2% this year.
President Wickremesinghe faces a dual challenge in his budget proposal: generating much-needed revenue to support the four-year IMF program while also maintaining public support as he prepares for upcoming presidential elections. In October 2023, the government’s approval rating plummeted to 9%, down from 21% in June, primarily due to multiple rounds of fuel, water, and power tariff hikes necessary to align public finances with the IMF program.
The budget presentation is scheduled for Monday at 12 noon (IST). Raynal Wickremeratne, co-head of research at Softlogic Stockbrokers, noted, “In an ideal world, it would be a tighter budget, but realistically, this budget can go either way since it’s coming from a political climate.” He added that while income or corporate tax increases are unlikely, potential consumption-oriented tax hikes that could impact economic growth would be closely monitored.
Sri Lanka faces further challenges with a delay in its second IMF tranche, as the lender calls for a “strong budget” with a projected 2024 deficit of approximately 12%, against a 15% shortfall for 2023.
In a historic move, Sri Lanka’s budget expenditure in 2024 will exceed Rs. 6.5 trillion (US$ 19.8 billion), marking a 12% increase compared to the previous year, according to the Appropriation Bill. Interest payments, amounting to Rs. 2.6 trillion, constituting more than a third of total spending, while capital expenditure will remain largely unchanged from 2023 at Rs. 1.2 trillion.
This budget announcement will also be closely observed by bondholders and bilateral creditors as it provides signals regarding Sri Lanka’s adherence to IMF targets, including achieving a primary surplus of 2.3% by 2025 and reducing the debt-to-GDP ratio to 95% by 2032.
Source – Reuters
