Sri Lanka’s 2023 budget aims to get crisis-hit economy back on track

COLOMBO (Reuters) – Sri Lanka’s new government will release the 2023 budget on Monday focused on boosting revenue, implementing tax reforms and fiscal consolidation to secure an IMF bailout to help the country to recover from its worst financial crisis in decades.

Rampant inflation, a weakening currency and low foreign exchange reserves have left the island of 22 million people struggling to pay for essential imports such as food, fuel and medicine.

The budget is also expected to include measures to help Sri Lanka restructure its debt as it tries to finalize a $2.9 billion bailout package from the International Monetary Fund. Sri Lanka owes investors about $30 billion in bilateral and bond debt.

“Markets will look for reforms in the budget to move the country forward,” said Dimantha Mathew, head of research at First Capital Holdings.

“We expect the IMF program to be finalized in January and debt restructuring to be in place from mid-2023.”

President Ranil Wickremesinghe’s first annual budget since taking office in July comes as Sri Lanka grapples with a declining economy and fears of a global recession.

The World Bank estimates that Sri Lanka’s economy will contract by 9.2% in 2022 and 4.2% next year.

The government has already made proposals to raise personal and corporate income tax from 24% to 30% and possibly change tax brackets to boost incomes despite criticism from businesses and political parties. opposition.

However, cutting spending is likely to be tricky, given Sri Lanka’s large public workforce and high debt.

Recurrent expenditure in 2023 is listed at 4.6 trillion rupees ($1.3 billion) in the Appropriation Bill, a precursor to the budget, with interest payments accounting for 36.5% of that expenditure. This would represent 2.1 billion rupees in interest payments, a jump of 55% from 2022 levels.

Total expenditure is expected to reach 5.9 trillion rupees in 2023, with capital expenditure expected to account for 20.9% of this total.

Social spending should also increase.

The United Nations this week expanded its appeal for $70 million to help the people of Sri Lanka, 28% of whom face food insecurity. Food inflation in Sri Lanka reached 85.6% in October.

“This means the budget deficit will remain at 9%-10% (of GDP). It will be difficult to reduce it unless interest rates come down,” said Udeeshan Jonas, chief strategist at the research firm on CAL Group shares.

Sri Lanka’s economy could recover in the “last part of 2023”, the central bank said recently, adding that it would depend on the unwavering commitment of policymakers to implement policy reforms in a timely, holistic and timely manner. efficient.

(Editing by Swati Bhat and Ana Nicolaci da Costa)

Copyright 2022 Thomson Reuters.

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