Sunera Foundation

Sri Lanka’s government has revealed its fiscal strategy for 2021-2025. The plan aims to tackle the growing deficit and stabilize public finance. The Medium Term Macro Fiscal Framework sets key goals for the country.

The strategy focuses on tax increases and reforms to boost government revenue. It aims to raise the revenue-to-GDP ratio to over 14% by 2025. This will be done through tax policy changes and improved revenue administration.

The government targets 6% economic growth and low unemployment. It also wants to keep inflation under 5%. Public investment will focus on vital infrastructure projects like roads and water supply.

Despite COVID-19 challenges, the government is committed to its fiscal strategy. The plan seeks to address the deficit and promote sustainable growth for Sri Lanka.

Government’s Fiscal Strategy for 2021-2025

Sri Lanka’s government has outlined its fiscal strategy for 2021-2025 in the Medium Term Macro Fiscal Framework (MTMFF). Key objectives include achieving a primary surplus by 2025 and reducing the budget deficit. The plan aims to cut unproductive spending and create a sustainable budget.

Medium Term Macro Fiscal Framework Objectives

The MTMFF focuses on reforming state-owned enterprises to boost efficiency. Qualified professionals will be appointed to management boards to improve productivity. These changes aim to reduce the burden on the government’s budget.

Public Investment Focus and Financing

Public investment will prioritize road projects and increase access to pipe-borne water. These investments will boost productivity in agriculture and industries. They’ll also improve citizens’ quality of life.

Domestic financing will cover 75% of public investment. This approach complements private sector investments and stimulates economic activity.

Rationalizing Recurrent Expenditure

The government plans to reduce recurrent expenditure from 14.2% of GDP in 2021 to 12.3% by 2025. This strategy includes freezing spending on vehicles, buildings, and other assets.

Digitalizing key systems like e-procurement and e-National Identity Card will boost efficiency. These measures will help streamline government operations and cut costs.

Government Implements Tax Hikes to Boost Revenue Amid Fiscal Deficit

Sri Lanka’s government has launched a plan to tackle the fiscal deficit. They’re using tax policy reforms and revenue administration to increase income. These changes aim to improve tax collection and support fiscal consolidation efforts.

Comprehensive Strategy Linking Tax Policy and Revenue Administration Reforms

The government has made several tax policy changes. These include raising the PAL rate and removing the NBT rate. They’ve also simplified the tax system to make it more efficient.

These reforms are paired with improvements in revenue administration. The goal is to make tax collection more effective. These measures are expected to boost revenue and support fiscal consolidation.

Simplification of the Taxation System

The government has made the tax system simpler and more user-friendly. They’ve cut down the number of taxes people need to pay. This includes removing taxes like NBT, PAYE, and WHT.

These changes should make it easier for people to pay their taxes. The government hopes this will lead to better compliance and more revenue.

Capacity Enhancing Measures in Revenue Administration

New measures have been put in place to improve tax collection. The Inland Revenue Department now has a Large Taxpayers Unit. They’ve also introduced risk-based audits and improved their information system.

Sri Lanka Customs has launched a Single Window System. They’re also working on a National Single Window platform. These changes aim to make trade easier and improve revenue collection.

Despite the economic crisis, the government is investing in education. They’ve set aside Rs. 465 billion for education in 2024. This shows their commitment to creating a better education system for all students.

These reforms and investments are part of a larger plan. The government hopes to improve the economy and promote long-term growth.

Conclusion

Sri Lanka’s government aims to tackle its fiscal deficit and boost economic stability. They’re focusing on tax reforms and better revenue collection to increase income. Simplifying taxes and improving administration should help achieve this goal. The strong performance of the Colombo Stock shows investor faith in the economy.

Expenditure management is crucial for fiscal consolidation. The government plans to cut recurring costs while investing in key sectors. This approach should optimize resources and support growth.

COVID-19 has created significant challenges for Sri Lanka’s fiscal targets. The pandemic caused job losses and economic shrinkage. Sri Lanka’s economy shrank by 7.8 percent in 2022 and 7.9 percent in early 2023.

Despite setbacks, the government remains committed to reforms. The IMF’s approval of a US$3 billion Extended Fund Facility demonstrates this commitment. Success depends on implementing reforms and managing debt restructuring effectively.

The government must stay alert and flexible to achieve its fiscal goals. By doing so, they can work towards sustainable economic growth in the coming years.

Sri Lanka faces its worst economic collapse since 1948. The country’s financial woes have led to sky-high inflation and depleted foreign reserves. Essential goods are scarce, and basic commodity prices have soared.

The crisis has sparked nationwide protests and resulted in Sri Lanka’s first sovereign debt default. Prime Minister Ranil Wickremesinghe admitted in parliament that the economy had collapsed.

Political turmoil and poor economic choices have worsened the situation. The Sri Lankan Rupee hit a record low of LKR 368.50 against the US dollar in November 2022.

This represents a 555% annual depreciation. By May 24, 2023, the currency had improved to LKR 305.00. However, economic recovery remains a distant goal.

The country’s heavy reliance on foreign debt and dwindling reserves have contributed to the crisis. Policy missteps have also played a role. These factors have left Sri Lankans bearing the brunt of economic hardship.

Background of Sri Lanka’s Economic Crisis

Sri Lanka’s economic crisis has been brewing for over a decade. The country’s debt-to-GDP ratio has been rising since 2010. Foreign debt skyrocketed from $11.3 billion in 2005 to $56.3 billion in 2020.

The debt as a percentage of GDP jumped from 42% in 2019 to 119% in 2021. This massive debt, along with policy confusion and political turmoil, led to economic collapse.

The Institute of Policy Studies of Sri Lanka warned about economic risks in 2014. However, the government ignored these economic warnings. Political chaos in 2018 made things worse.

A new government in 2019 scrapped the Central Bank Bill. This bill aimed to free the bank from political meddling and stop money printing.

Mounting Debt and Dwindling Reserves

Sri Lanka’s foreign currency reserves have fallen drastically. They dropped from $7.6 billion in late 2019 to $250 million in early 2022. The country owes $7 billion to China and $1 billion to India.

Sri Lanka faces a yearly deficit of $3 billion due to import-export imbalance. This has made it hard for the country to pay its debts.

Year	Foreign Debt (US$ billion)	Foreign Debt as % of GDP
2005	11.3	–
2019	–	42%
2020	56.3	–
2021	–	119%

In 2019, the government slashed taxes, losing $1.4 billion in yearly revenue. This put more strain on the country’s finances. Sri Lanka’s external debt kept growing, with $8.6 billion due in 2022.

These factors pushed Sri Lanka to the edge of bankruptcy. The country now faces a severe economic crisis.

Causes of Sri Lanka’s Economic Collapse

Sri Lanka’s economy crumbled in 2022 due to several factors. Large tax cuts, excessive money printing, and growing foreign debt were key issues. The Gotabaya Rajapaksa government’s tax cuts slashed revenue and worsened fiscal policies.

To cover spending, the Central Bank printed money at record levels. This ignored advice from the International Monetary Fund (IMF). The excess cash led to higher purchasing power and import demand.

As a result, the balance of payments deficit grew. The gap was filled with costly loans from international commercial markets.

Sri Lanka’s Foreign Debt Burden

Sri Lanka’s foreign debt skyrocketed from $11.3 billion in 2005 to $56.3 billion in 2020. It rose from 42% of GDP in 2019 to 119% in 2021. By 2024, external debt reached $37,040 million, 43% of GDP.

The mounting debt and dwindling foreign reserves led to a crisis. In April 2022, Sri Lanka defaulted on its foreign debt obligations.

Year	Foreign Debt (USD Billion)	Foreign Debt as % of GDP
2005	11.3	–
2019	–	42%
2020	56.3	–
2021	–	119%
2024	37.04	43%

Credit Rating Downgrade

The economic crisis led to a downgrade in Sri Lanka’s credit rating. International agencies lowered it to default grade. This made it harder for the country to borrow more money.

The credit downgrade worsened Sri Lanka’s economic troubles. It limited access to global financial markets and increased borrowing costs.

These issues played a major role in Sri Lanka’s 2022 economic collapse. Addressing these problems and implementing reforms is crucial for recovery and future stability.

Sri Lanka Declares Bankruptcy Amidst Severe Economic Crisis in 2022

In 2022, Sri Lanka faced a dire financial situation. Prime Minister Ranil Wickremesinghe declared the country “bankrupt” during an unprecedented economic crisis. The nation’s foreign exchange reserves dropped to $2.31 billion by February.

Sri Lanka owed around $4 billion in debt repayments that year. This included a $1 billion international sovereign bond due in July. The country struggled to meet these obligations.

Foreign reserve depletion left Sri Lanka with less than a day’s worth of fuel. Schools suspended operations, and citizens faced severe fuel shortages. Food insecurity became widespread due to the economic collapse.

Sri Lanka defaulted on its debt for the first time since 1948. The country spent 9.2% of its GDP on foreign debt payments in 2022 alone.

Inability to Pay Foreign Debt Obligations

Sri Lanka’s total debt burden reached $51 billion. The nation owed about $29 billion from July 2021 to 2026. It couldn’t meet debt repayments, including a $78 million coupon payment on two bonds.

Prime Minister Acknowledges Economic Collapse

Wickremesinghe’s bankruptcy statement highlighted challenges in IMF negotiations. Sri Lanka entered talks as a bankrupt nation, not a developing one. This made economic recovery uncertain and difficult.

The crisis deeply affected Sri Lanka’s 21.8 million people. The UN reported that four out of five people now skip meals. Sri Lanka has South Asia’s second-highest child malnutrition rate, after Afghanistan.

Conclusion

Sri Lanka’s financial crisis stems from years of economic mismanagement, excessive debt, and global crises. The country’s GDP shrunk by 7.1% in 2022’s first three quarters. Inflation peaked at 70% in September 2022 but dropped to 54% by January 2023.

The government seeks IMF and international aid to tackle the crisis. Sri Lanka owes $51 billion externally, with 13 banks on rating watch negative. It’s among the world’s biggest loan defaulters, making the IMF bailout crucial.

The UN warns of a looming humanitarian crisis in Sri Lanka. About 500,000 more people now depend on aid. The country faces severe shortages of essentials like food, fuel, and medicine.

The financial crisis has pushed many into poverty. Predictions suggest a 10.9 percent poverty rate by 2021, equal to $3.20 per day.

Sri Lanka must prioritize its citizens’ well-being and address the crisis’s root causes. This includes reforms, improving transparency, and working with international partners. Only then can Sri Lanka build a more stable and prosperous future.

Sri Lanka’s foreign reserves have bounced back to $5.5 billion by April 2024. This signals a positive trend for the nation’s economic stabilization efforts. The recovery in currency reserves is expected to boost the country’s financial stability.

The World Bank and Asian Development Bank predict positive growth for Sri Lanka in 2024. They project a moderately optimistic outlook over the medium term. The current account may show a slight surplus.

This surplus is likely due to controlled import growth. The revival of tourism and remittances inflows also plays a key role. These factors are vital for strengthening foreign reserves and improving import coverage.

The International Monetary Fund (IMF) has supported Sri Lanka’s economic recovery. Their Extended Fund Facility has helped build up foreign reserves. The government’s debt restructuring efforts have also been crucial.

These actions have created a more stable financial environment. They have boosted confidence among investors and international partners.

Economic Recovery and Stabilization

Sri Lanka’s economy is showing signs of recovery. GDP growth is projected to turn positive in 2024. The World Bank forecasts a 2.2% growth rate for 2024.

This recovery is backed by the IMF’s $2.9 billion bailout package. The package aims to stabilize the economy and promote reforms.

Inflation Expected to Remain Benign in Medium Term

Inflation in Sri Lanka has dropped significantly. Year-on-year headline inflation fell to 1.3% in September 2023. It rose to 4.0% by the end of 2023 due to supply factors.

Core inflation also decreased, showing low demand pressures. Inflation may change due to new VAT rules in January 2024. However, it should stay low as demand remains weak.

Current Account Surplus Driven by Tourism and Remittances

Sri Lanka’s current account surplus is growing. This is due to strong tourism and remittance inflows. Tourism arrivals topped 700,000 in the first 14 weeks of 2024.

Remittances increased to $572 million in March 2024. These inflows are vital for the country’s balance of payments and foreign reserves.

The boost in tourism and remittances helps offset the economic damage. The long crisis has hurt household finances and business activity. As the economy stabilizes, confidence is expected to grow.

Indicator	2023	2024 (Projected)
GDP Growth	-3.5%	2.2%
Inflation (Year-end)	4.0%	4.5%
Tourism Arrivals (Jan-Mar)	270,000	700,000
Remittances (March)	$475 million	$572 million

Foreign Reserves Rebound to $5.5 Billion by April 2024

Sri Lanka’s official reserves have shown a remarkable recovery. They rose from $1.9 billion in late 2022 to $5.5 billion by April 2024. This excludes a swap facility from the People’s Bank of China.

The IMF Extended Fund Facility of $2.9 billion has played a key role. Approved in March 2023, it has greatly boosted the country’s reserve position.

Improved Balance of Payments Position

Sri Lanka faces a growing trade deficit due to rising import spending. However, net inflows from the services sector, especially tourism, have helped offset this.

A new e-visa system and the Pekoe Trail are set to boost tourism. These initiatives, backed by the EU and USAID, should improve the balance of payments.

IMF Extended Fund Facility Supporting Reserve Buildup

The IMF Extended Fund Facility has been crucial for Sri Lanka’s reserve buildup. The country’s commitment to economic reforms has secured this vital support.

Sri Lanka continues to work with the IMF and other partners. This collaboration is expected to strengthen its reserve position and enhance economic stability.

Debt Restructuring Efforts Paving Way for Financial Stability

Sri Lanka is negotiating debt restructuring with international bondholders. These talks are key to restoring debt sustainability and regaining market access.

The government is working hard to reach agreements with creditors. These efforts are creating a better environment for economic growth and investment.

Indicator	Value
Foreign Reserves (April 2024)	$5.5 billion
IMF Extended Fund Facility	$2.9 billion
GDP Growth Forecast (2024)	2.6%

Conclusion

Sri Lanka’s economy is looking up. Foreign reserves are expected to reach $5.5 billion by April 2024. This signals a positive shift in the nation’s economic outlook.

The country’s GDP growth forecast for 2024 has been revised to 2.6%. This contributes to the South Asian subregion’s expansion. The subregion is projected to grow by 6.3% in 2024 and 6.5% in 2025.

However, risks remain. These include the need for deep debt restructuring and potential reform fatigue. Upcoming elections and the recent economic crisis also pose challenges.

These risks are high in Sri Lanka and other South Asian economies. They face high public debt, weak external reserves, and geopolitical tensions.

Implementing the IMF’s structural reform program is crucial. It will boost investor confidence and attract fresh capital inflows. This will support a stronger economic recovery in the medium term.

The Central Bank of Sri Lanka has kept the policy rate at 6 percent. Their medium-term inflation target is 5 percent. Private sector credit growth and lower non-performing loans show a stabilizing financial sector.

The current account deficit is narrowing. Foreign exchange reserves now cover over 4 months of projected imports. Sri Lanka’s economic prospects are improving, despite challenges on the road to recovery.