Wickremesinghe’s offering may appease the IMF

The fiscal Budget, usually the subject of controversy, was submitted for the year 2023 to the legislature by President Ranil Wickremesinghe, with little backlash this time around. In his capacity as Finance Minister the Budget sought to increase taxes by 63% annually while making some major indications regarding fiscal consolidation. As expected, the people’s and market’s reaction were significant, as stocks that are most likely to be impacted contributed to a steep decline on Tuesday. Yet turnover increased and volatility died down as markets and investors began to progressively take in the effects of the measures. 

Analysts anticipate that some sectors, such as banking will remain pessimistic until the Government makes a decision regarding the restructuring of local debt. However, until such time the market and general economy alike, have clearly received the signs on policy from the Budget. A downward trend, but mostly dependent on the strings played by the IMF on account of the melancholic tune of the previous regime.

Analysts claim that as the market awaits a decision on a debt restructuring between the Government and its creditors prior to the acceptance of an IMF loan, investors are also worried about the impact of local debt restructuring on hazardous assets. However, while the rupee debt restructuring continues to be discussed, there is comfort in the form of the Government plan towards inefficiencies in the SOEs. 

President Wickremesinghe announced on Monday that the Government would “restructure” SriLankan Airlines, Sri Lanka Telecom and Sri Lanka Insurance and few others through a state business reform unit.

Another noteworthy change was the slashed expenditure on defence. Sri Lanka has an army that is much too large for its territory and population, and that is not equipped to satisfy the country’s current strategic demands. No significant actions have been done to rationalise the Army’s size and spending habits, since the end of the civil war. A 14% increase above the funding for 2021, Sri Lanka had proposed a defence Budget of Rs. 373 billion was proposed in 2022 accounting to 15% of all Government spending. Therefore, the slash should be a welcome change.

The expectations of the proposed additional taxes, such as a wealth tax, the beginnings of SOE reform, and plans to reduce Budget deficits with cuts to unnecessary sectors in accordance with the terms of the International Monetary Fund criteria for the $ 2.9 billion, four-year loan. 

The Budget also arrives at a time when more and more people are calling for a “system change” in terms of governance and parliamentary procedure improvements. People have been calling for a reduction in unnecessary Government spending and an end to the practice of funding white elephant initiatives with tax dollars. 

While these claims have been denied by the ousted powers, there is also a need to open these cases and ensure that such misallocation does not repeat itself, while Wickremesinghe rebuffed calls for such actions from the outraged public. Instead, protests are now being violently suppressed, according to rights organizations.

From Rs. 2,333 billion, the entire Budget deficit has increased slightly to Rs. 2,404 billion. However, due to the economy’s rapid inflation, it is anticipated that the deficit will decrease from 9.8% of GDP to 7.9%. These corrections, which are characterised by high inflation and financial repression, cause an increase in nominal tax collections but a decrease in the value of domestic debt. 

However, this year’s nominal rates are higher because of worries about domestic debt restructuring. Up until September, the rate of inflation was 70%, roughly double the interest rate. The primary deficit, which is the deficit before interest payments, will drop from 4% of GDP in 2022 to 0.7% in 2019 meeting the performance standards for IMF programs. 

The IMF typically has primary deficit or domestic debt caps and Budget deficit targets because interest rates must rise if a central bank starts a currency crisis. Therefore, while the 2023 Budget puts significant changes in change, the proverbial tongue must be bitten for the next year.