Crisis-hit Sri Lanka’s interim budget aims ambitious revenue, debt cut targets
ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe presented an interim budget for this year with an ambitious government revenue and debt reduction targets as the economic crisis-hit island nation is struggling to get out of the worst economic crisis in its post-independence era.
The country, which has already defaulted its sovereign debts, is in the process of discussing an International Monetary Fund (IMF) loan amid debt restructuring talks with its bilateral and sovereign debt lenders for an amicable and feasible debt repayment schedule.
The budget aimed almost doubling the tax-to-GDP ratio to 15% by 2025 from 8.2% at the end of 2021. Wickremesinghe raised the value added tax to 15 percent with effect from Thursday, Sept. 31 from 12%. The increase comes after he raised the VAT to 12% on May 31 from an earlier 8%.
He also proposed to introduce compulsory tax registration for all residents who are above 18 years of age without considering their annual income and tax-free thresholds.
Wickremesinghe also said the government is targeting a primary surplus of more than 2% of GDP in 2025 and expects to improve upon thereafter.
“We aim to reduce public sector debt from around 110% of GDP as at end 2021, to no more than 100 percent of GDP in the medium term,” the President, who is also the country’s Finance Minister, said in his interim budget speech at the parliament.
Sri Lanka’s economic crisis turned into a political crisis after thousands of youth-led apolitical protesters started street demonstrations in March this year, demanding the then President Gotabaya Rajapaksa and his cabinet to resign after their failure in economic and fertilizer policies.
Analysts, however, see the budget as an “ambitious” target because of a contracting economy due to the ongoing crisis and politically unpalatable reforms in state-owned enterprises (SOEs).
“Selling and exiting of large SOEs would be the way to reduce debt-to-GDP levels and bring back debt sustainability, which would otherwise not possible only by the way of tax revenue which also dampens the growth and entrepreneurship in the economy,”Danushka Samarasasinghe CEO, Nation Lanka Equities, told EconomyNext.
“It’s a budget focusing on fiscal consolidation through easy to achieve actions. However, the revenue target seems ambitious specially during a period of economic hardship,” “Also, we would like to see more revenue generation plans by way of diluting state ownerships in many commercial institutions.”
The interim budget expects inflation which hit 66.7% last month, to be brought back under control to a mid-single digit level in the medium term. Wickremesinghe also expects interest rates also to reach a moderate level gradually in tandem with the decline in inflation.
Sri Lanka’s risk free interest rates in short term government securities are hovering around 30 percent after the central bank raised policy rates by record high level in April to curb inflation. However, inflation is yet to moderate as the central bank pumped money to finance the country’s bankrupted treasury.
Wickremesingeh said the adverse pressure on the exchange rate is also expected to abate once macroeconomic confidence is re-established and foreign exchange reserves are replenished through foreign financing,
“With the implementation of a series of growth enhancing structural reforms, the medium-term economic growth is expected to return towards 5%,” he said. (Colombo/Aug30/2022)
