A woman walks past graffiti on a wall along a main road in Colombo, Sri Lanka September 19, 2024. REUTERS/Dinuka Liyanawatte
COLOMBO: Sri Lanka’s new President Anura Kumara Dissanayake will outline the government’s revenue and policy goals in his first full-year budget today.
He is seeking to extend the country’s recovery from a financial crisis and signal its alignment with a US$2.9bil International Monetary Fund (IMF) bailout programme.
A severe drain in US dollar reserves plunged the island nation into turmoil three years ago, sending inflation soaring, depreciating its currency and forcing a US$25bil foreign-debt default.
Since locking down US$2.9bil in emergency funding from the IMF in March 2023, Sri Lanka has posted a faster than expected recovery.
Inflation has eased, the central bank has slashed interest rates to pre-crisis levels, and debt restructuring was completed in December.
Dissanayake, who is also the finance minister, is hoping to bolster the economic recovery by lowering taxes, increasing welfare and supporting local industries in line with his pre-election pledges.
But he faces the challenge of staying within the parameters set out by the IMF, which includes an ambitious deficit target of 5.2% of gross domestic product (GDP) and raising revenue to 15.1% of GDP this year to secure the next tranche of about US$333mil under the bailout.
Analysts said Dissanayake will likely have to impose fresh taxes and realign expenditures to increase public revenue.
“From this budget we will try to gauge the credibility of the medium-term fiscal plan, and the impact of policies on the debt and deficit going forward,” Sagarika Chandra, director of Asia Pacific Sovereigns at Fitch Ratings, told Reuters.
Meeting the IMF targets is crucial for Sri Lanka to improve its credit rating after exiting from default status.
This is so that the country can eventually return to the international financial markets to borrow and repay its debts from 2028 onwards.
Investors will also be looking for any plans on how to attract more foreign investment as the government tries to rebuild its reserves.
Sri Lanka’s current reserves are at US$6bil, enough to cover four months of imports, the latest central bank data showed.
In the depths of the crisis, reserves had shrunk to just US$1.9bil at the end of 2022.
“For a positive rating action, a trigger could be a sustained decline in the debt ratios over time, which is underpinned by a credible medium term fiscal consolidation strategy including an increase in revenues,” Chandra added.
“Historically, revenue build-up has been a weakness.”
Sri Lanka’s economy is expected to have grown by 5% last year after contracting 2.3% in 2023.
This is according to the latest central bank data.
The World Bank has estimated that Sri Lanka will grow by 3.5% this year. — Reuters
