President Ranil Wickremesinghe will seek to boost tax revenue and rationalise spending in the government’s second full-year budget on Monday, targeting a return to growth for the crisis-hit economy while keeping an eye on elections.
Sri Lanka tipped into the worst financial crisis in over seven decades last year with the battered economy shrinking 7.8 percent in 2022, forcing it to default on its foreign debt.
However, this year the island’s economy has gradually stabilised, helped by a US$ 2.9 billion bailout from the International Monetary Fund (IMF) in March, prompting the World Bank to raise its growth forecast to 1.7 percent in 2024 from an earlier projection of 1 percent.
Central Bank expects growth of 3.3 percent in 2024 after an economic contraction of 2 percent this year.
But Wickremesinghe, who is also the country’s finance minister, will have to contend with the dual challenges of raising revenue, essential to taking forward the four-year IMF programme, while also maintaining public goodwill as he prepares to face presidential elections next year.
The approval rating of the government fell to 9 percent in October 2023 from 21 percent in June, according to a poll by Colombo-based think tank Verité Research, partly due to multiple rounds of fuel, water and power tariff hikes needed to put public finances on track under the IMF programme.
Wickremesinghe will present the budget on Monday at 12 noon (IST).
“In an ideal world it would be a tighter budget, but realistically this budget can go either way since its coming from a political climate,” said Raynal Wickremeratne co-head of research at Softlogic Stockbrokers.
“When it comes to more market impact, we are unlikely to see income or corporate tax increases. But consumption oriented tax increases that could hit growth is what we would keep an eye on.”
Sri Lanka is already grappling with a delay to its second IMF tranche, with the lender calling for a “strong budget” with a projected 2024 deficit of about 12 percent amidst an estimate for a 15 percent shortfall for 2023.
For the first time ever Sri Lanka’s budget expenditure will exceed Rs. 6.5 trillion (US$ 19.8 billion) in 2024, an increase of 12 percent when compared with the previous year, according to the Appropriation Bill, a precursor for the budget.
Interest payments of Rs.2.6 trillion make up more than a third of total spending, while capital expenditure will stay largely unchanged from 2023 at Rs.1.2 trillion.
Bondholders and bilateral creditors will also be watching the budget for signals on how closely Sri Lanka will adhere to IMF targets, which include reaching a primary surplus of 2.3 percent by 2025 and reducing debt to GDP to 95 percent by 2032.
