Sri Lanka Budget seeks to balance poll pledges with IMF demands – Report

Sri Lanka President Anura Kumara Dissanayake will need to walk a tightrope in his budget Monday, seeking to reduce the economic burden on the poor while taking steps to keep a $3 billion International Monetary Fund bailout on track.

Dissanayake, who is also the South Asian nation’s finance minister, is expected to lower income taxes and boost welfare spending when he delivers his first full budget since sweeping into power last year, providing some relief to citizens following an economic crisis in 2022. At the same time, he’s expected to outline policies to boost revenue and build fiscal buffers to bolster the $85 billion economy.

Investors are closely monitoring the budget speech for clarity on the government’s fiscal consolidation path, especially measures to trim public-sector spending, privatization of state assets, and policies to attract investments.

The IMF has projected Sri Lanka’s budget to hit a primary surplus of 2.3% of gross domestic product in 2025, from a target of 1% last year. To achieve that, the government will look to boost revenue from excise duties and lifting of restrictions on imported vehicles, while cutting wasteful spending. Meeting the IMF targets will help the government secure more funds and aid faster debt reduction. The lender expects the island nation to narrow its fiscal deficit to 5.2% in 2025 from 7.6% last year.

“The budget will set the economic roadmap for Sri Lanka in the coming years,” said Saurav Anand, an economist at Standard Chartered Plc. in Mumbai. “Foreign investors are likely to continue looking favorably at Sri Lanka if the authorities adhere to the IMF targets on fiscal consolidation and revenue generation, while pushing for an increase in capital spending,” he said.

Dissanayake, a leftist political outsider, won overwhelming support in the presidential election in September, followed shortly after by a historic super-majority victory by his National People’s Power in the parliament, a rebuke to the nation’s political elite. His party has pledged to shore up anti-poverty programs and clamp down on corruption.

Despite initially wanting to rewrite the IMF loan program, the new administration has so far avoided a clash with the Washington-based lender, saying a prolonged renegotiation would make it impossible to rebuild the economy. Sri Lanka secured initial approval for $333 million in funds from the IMF in November last year.

Increased inflows from tourism and remittances have also aided Sri Lanka’s turnaround, with economic growth estimated at about 5% last year, and foreign foreign exchange reserves climbing to $6.1 billion from around $1.8 billion during the height of the crisis. The government also concluded a debt restructuring worth $12.6 billion, resulting in credit rating upgrades.

The Sri Lankan rupee was Asia’s best performing currency last year, gaining over 10% in 2024, while the benchmark Colombo Stock Exchange All Share Index rose 53% since the new president took office in late September, outperforming more than 90 global stock indexes tracked by Bloomberg.

Dissanayake’s poll pledges would lower the primary balance surplus this year, wrote Bloomberg Economics’ Ankur Shukla in a note last week. “Even so, he will likely remain mindful of meeting the revenue and primary balance targets set by the IMF.”

Source: Bloomberg
--Agencies