Current administration’s interim solution works

Ranil Wickremesinghe, the President and currently the Finance Minister of Sri Lanka, proposed the interim Budget on 30 August. While having previously asked for increased borrowing and spending limitations for his cash-strapped Government, the interim Budget came right before some very positive news. The administration has successfully negotiated a potential bailout package with the International Monetary Fund (IMF) to the tune of 2.9 billion dollars over the course of four years.

The Budget requested an additional Rs. 929.4 billion in addition to the Rs. 2,796.4 billion that was initially approved for 2021 due to the increasing cost of governance. According to Wickremesinghe, he was eager to help the people who have been suffering from regular power outages and shortages of essentials like fuel, food, and medications through the interim Budget.

The result was a pragmatic shift of policy where outside consultation has been noted. For example, the mandatory tax files opened for all persons above the age of 18, is a move to align our tax revenue collection not only to that of the US but also neighbouring India.

The interim Budget is expected to prioritise economic recovery while also attempting to provide as much assistance to the populace. However, it was stated that this Budget is only temporary. The correct budget for 2023 would be revealed in November when Sri Lanka›s worsening economic crisis is to be set straight; with high inflation and supply shocks expected to succeed.

The IMF has made debt restructuring a requirement for any facility that is approved. Following a bailout from the global lender, Sri Lanka is in desperate need of bridging finance.

The Sri Lankan Cabinet approved a budgetary framework on Monday that calls for the budget deficit in 2022 to be reduced to 6.9% of GDP by 2023. Sri Lanka also plans to reduce the primary deficit, or the deficit without interest charges, a crucial performance indicator in an IMF fiscal framework, from a deficit of 4% in 2022 to 1% in 2023 with a 3% GDP adjustment.

Due to the currency crisis, Sri Lanka declared its default on its international debt in mid-April. The nation has a foreign debt of $ 51 billion, of which $ 28 billion must be repaid by 2027. Sri Lanka generally prints money to keep the interest rate down, pushes up inflation, depreciates the currency, blames it on imports, and then gives ‘relief’ through ‘people-friendly’ budgets, creating more poverty and hardships.

However, taxes are expected to be raised this year. The previous Budget presented to Parliament anticipated Rs. 2.3 trillion in revenue, but the actual revenue forecast was only Rs. 1.6 trillion. Total expenditure was projected to be Rs. 3.3 trillion in 2022, but it is now expected to rise to Rs. 4 trillion due to higher interest and other costs.

According to him, the deficit is expected to be Rs. 2.4 trillion or 13% of GDP. The original budget projected a Rs. 1.6 trillion-deficit or 8.8% of GDP. While revenue collection is also to be improved by the 3% increase in VAT, and other such measures.

Markets too reacted quite positively to the budget, with the All-Share Price Index on the CSE increasing by 2.02% yesterday - more to the news of the IMF reaching Staff-Level Agreement, albeit IMF imposed austerity in the long-term, is not bullish to market performance.

In conclusion, the success of this budget can only be determined next year with the loan repayments and collections being put to test. This is indeed just an interim sigh of relief.