PREVIEW-Sri Lanka’s 2024 budget to see new welfare, revenue goals amid political concerns

• Meeting IMF deficit target key to continue recovery
• Tax on capital gain, primary dealings likely
• Measures to expand tax net will be a focus in the budget
• Surprise Parliament polls could be in second quarter

ECONOMYNEXT – Sri Lanka’s 2024 budget which will be presented to the parliament on Monday (13) is likely to focus on new welfare measures amid steep fall in government’s popularity among the public while new revenue measures are expected in line with meeting IMF targets, government officials say.

President Ranil Wickremesinghe will present a tough budget that has least room for maneuvering as his hands are tied with the commitments the government has made for the economic recovery program with the International Monetary Fund (IMF).

The 2024 budget presentation comes as the island nation is waiting for the second tranche of the IMF’s $3 billion loan. Though both the IMF officials and Sri Lankan authorities have concluded the staff level agreement, the global lender’s executive board is yet to approve the disbursement of around $330 million second tranche.

“The budget will be an acid test for this government. If it is completely going with the IMF targets, then people will have to pay more taxes on the one hand.  On the other hand, it will have to reduce taxes to reduce cost of living,” a senior government official who has knowledge of the 2024 budget policies told EconomyNext.

“President Wickremesinghe might lose his government if he leans too much to IMF policies and he might lose his fight against economic war if he is going to satisfy the public sentiment. It is really tough.”

AMBITIOUS TARGETS

According to Sri Lanka’s commitment to the IMF, the government will have to raise the state revenue to 13.3 percent of the Gross Domestic Product (GDP) from this year’s estimated 11 percent, an IMF March 2023 Staff Report showed.

The public debt, which was at 128.1 percent of the GDP last year is expected to be reduced to 108.5 percent in 2024 from this year’s estimated 111.2 percent.

Government officials said the budget will include enough measures to achieve revenue targets agreed with the IMF next year and Wickremesinghe’s digitalization strategy will help boost the tax revenue further.

“Tax on capital gain and transaction of primary dealers are likely. Some of the tax exempted sectors and industries will be brought into the tax net. A new strategy will be introduced to coordinate the three tax collecting bodies,” a senior government official who is in the close circle of the 2024 budget formulation, said.

“This country is doomed to plunge further if there are not tough measures on increasing tax revenue and eliminating corruption. We cannot go forward with them.”

REVENUE TO PICK UP IN MARCH 2024

President Wickremesinghe has said the revenue will see a boost by March next year when the digital payment system starts to take of the ground.

Wickresimghe’s government is in the process of external debt restructuring, though no pressure is expected on the 2024 budget because foreign bilateral and commercial creditors are likely to grant some grace period before Sri Lanka starts to repay defaulted sovereign debts, analysts say.

However, the government’s commitment towards an IMF loan and bringing down the country’s debt to a sustainable level are the key factors keenly watched by the island nation’s creditors.

The budget also is likely to introduce some practical measures on Sri Lanka’s governance-related issues, anti-corruption policies, and targeted subsidies in line with the IMF conditions, the senior government official said.

Sri Lanka’s stabilization process after the country declared bankruptcy in April last year has seen some recovery, but at the expense of higher taxes for a small group of taxpayers.

“But this time, the expansion of the tax net will be a reality. The government is already working on property, wealth, and inheritance taxes. Now it’s a matter of data collection and digitization before implementing them,” the senior official said.

POLITICS BEHIND THE BUDGET

Many officials said President Wickremesinghe is likely to focus on channeling the subsidies and the government’s transfer payment like Aswesuma to the people who are really in need of them.

And the move is an unpopulour measure among some of the ruling Sri Lanka Podujana Peramuna (SLPP) legislators, who are divided on backing Wickremesinghe’s 2024 budget.

The SLPP officially has written to the President of its demands to support the budget.

Sources close to the President said the demand include continuation of the Samurdhi program, which is also given to more affordable people by the previous governments led by current SLPP politicians, continuation of fertilizer subsidy, resuming to grant the decentralized fund for legislators, and not laying off state sector staff reforming state-owned companies.

Wickremesinghe, however, has yet to accommodate the SLPP demands, his close allies say.

“This is the reason he may go for a parliamentary poll in March or April next year,” a presidential source said.

“The SLPP might not agree with the whole budget. But the president is more focused on the overall economy than his future politics. So, he may not give into all SLPP demands.” (Colombo/Nov 13/2023)