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Sri Lanka Struggles with Fiscal Challenges: Verité Research Report

Sri Lanka continues to grapple with fiscal difficulties as it struggles to meet its revenue to GDP target for the 33rd consecutive year, according to the recently released “State of the Budget Report 2024” by Verité Research. This report underscores the persistent nature of the issue, offering a comprehensive analysis of Sri Lanka’s fiscal health. It serves as a crucial tool for informed engagement with the budget, providing objective insights into the country’s fiscal, financial, and economic estimates.

Verité Research’s analysis reveals a harsh reality: Sri Lanka’s tax revenue consistently falls short of expectations. In 2023, the government projected a significant 13% deficit in tax revenue. Despite the government’s optimism, projecting a revenue of LKR 4,164 billion for 2024—a 42% increase from the previous year’s revised projections—Verité Research presents a more conservative picture. Their projection anticipates a 14% shortfall, estimating revenue at only LKR 3,570 billion. The report highlights that the overestimation of revenue from Value Added Tax (VAT) accounts for 61% of the projected shortfall, with the remainder attributed to overestimations in corporate income tax, personal income tax, Social Security Contribution Levy (SSCL), and Customs import duty. This persistent pattern of overestimation underscores the need for more accurate fiscal planning and forecasting methodologies.

Beyond revenue projections, Sri Lanka faces another pressing issue: its soaring interest-cost-to-revenue ratio, the highest globally. While the government’s 2024 budget aims to reduce this ratio to 64%, Verité Research’s analysis, coupled with government calculations of interest costs, paints a bleaker picture. Projections suggest that this ratio will likely exceed 70%, hindering economic recovery and debt sustainability. Such a scenario not only falls short of expectations but also jeopardizes Sri Lanka’s adherence to its economic recovery plan agreed upon with the International Monetary Fund (IMF).

In conclusion, the “State of the Budget Report 2024” serves as a critical resource for policymakers, economists, and stakeholders, offering a sobering assessment of Sri Lanka’s fiscal challenges. Addressing these issues requires concerted efforts to improve revenue collection mechanisms, accurately forecast fiscal targets, and pursue prudent fiscal policies to ensure sustainable economic growth and stability.

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