Sri Lanka’s budgeted expenditure for 2025 will likely lead to a wider fiscal deficit and slower-than-expected fiscal consolidation, Moody’s Ratings said on Tuesday, a day after the island nation unveiled its budget.

Sri Lanka aims to transform its crisis-hit economy to prepare to resume debt repayments from 2028, President Anura Kumara Dissanayake said on Monday while announcing the budget which is seen as a key step towards returning the country to durable, long-term growth.

The budget is mostly in line with targets set under a $2.9 billion International Monetary Fund (IMF) programme, including a key 2.3% primary account surplus goal.

Expenditure is estimated at 21.8% of GDP as Sri Lanka directs more resources towards welfare and infrastructure development, analysts said, while revenue will be 15.1% of GDP.

The budget has set a deficit target of 6.7% of GDP, which falls short of a 5.2% goal for 2025 preferred by the IMF.

“The budget underscores the challenge that Sri Lanka’s fiscal authorities will continue to face because of its still weak debt affordability, still narrow revenue base, and underlying social constraints,” said Christian Fang, vice president - senior analyst at Moody’s Ratings.

Sri Lanka is aiming to grow 5% this year, Dissanayake told parliament, emphasising the need to support small businesses and key economic sectors such as tourism and tea to put the island nation’s economy on a sustainable recovery.

Sri Lanka’s economy went into freefall three years ago after running precariously low on dollar reserves, leaving it unable to afford essentials such as fuel, medicine and cooking gas.

Helped by the IMF bailout secured in March 2023, the island’s economy has partly recovered and completed a $25 billion debt restructuring with bilateral creditors and bondholders last December.

Sri Lanka is awaiting IMF approval for a fourth tranche of about $333 million.

Source: Reuters
--Agencies