Sri Lanka's 2024 budget aims to revive economy, fulfill IMF objectives

Sri Lanka faces a challenging balancing act as it prepares to unveil its 2024 budget plan, aiming to sustain an IMF-led bailout programme by increasing revenue through tax hikes while also striving to revive its crisis-ridden economy. President Ranil Wickremesinghe, who serves as both the nation's president and finance minister, will present the annual budget to parliament today.

Wickremesinghe is tasked with the delicate mission of boosting tax revenue and streamlining expenditures in the budget while concurrently supporting an economic recovery, seen as crucial to enhancing his prospects in the 2024 presidential elections. 

Sri Lankan authorities must adhere to stringent targets set by the International Monetary Fund (IMF) under a $2.9 billion bailout programme, a portion of which has already been allocated and contributed to a gradual rebound in an economy that is expected to contract by 2 per cent this year.

The IMF has cautioned about revenue shortfalls and endorsed a 12 per cent budget deficit for 2024 as part of its four-year programme.

In an effort to increase revenue, Sri Lanka's cabinet has approved a 3 per cent increase in the Value Added Tax (VAT) effective from January 1, along with an expansion of VAT collection. 

Wickremesinghe is also anticipated to outline additional revenue measures, such as new taxes like wealth and inheritance taxes, as proposed by the IMF.

State Minister of Finance Ranjith Siyambalapitiya emphasized that this budget is not designed with short-term political gains in mind. Instead, the primary focus is to ensure that Sri Lanka maintains its path to recovery and does not plunge back into crisis.

Bondholders and bilateral creditors will closely monitor the budget announcement to gauge Sri Lanka's commitment to IMF targets, which include achieving a primary surplus of 2.3 per cent by 2025 and reducing the debt-to-GDP ratio to 95 per cent by 2032.

The preliminary budget figures indicate that Sri Lanka's budget expenditure for 2024 will exceed a record Rs 6.5 lakh crore ($19.8 billion), marking a 12 per cent increase from the previous year. 

Interest payments account for over a third of total spending at Rs 2.6 lakh crore, while capital expenditure is expected to remain largely unchanged from 2023 at Rs 1.2 lakh crore.

Sri Lanka endured a 7.8 per cent economic contraction last year, leading to a default on its foreign debt and its most severe financial crisis since gaining independence in 1948. The nation's central bank anticipates a growth rate of 3.3 per cent in 2024 following a 2 per cent economic contraction this year.

(With Reuters Inputs)