In a speech on February 17, Sri Lanka’s President Anura Kumara Dissanayake offered the 2025 budget – the primary finances of his authorities, which took workplace in September 2024. As Sri Lanka continues below an IMF-supported Extended Fund Facility (EFF) – initiated in response to the nation’s macroeconomic disaster in 2022 – it’s essential to look at how the proposed finances aligns with the IMF program’s necessities and what potential challenges could come up in attaining its targets.
Given {that a} nationwide finances primarily displays how the federal government manages public funds, it’s important to match the 2025 finances proposals in opposition to the general public monetary administration goals outlined within the IMF-supported program. One of many central fiscal targets within the ongoing EFF is attaining a main finances surplus of two.3 p.c of GDP from 2025 onwards. The 2025 finances goals to fulfill this surplus goal in alignment with the IMF program. The determine under illustrates the trajectory of Sri Lanka’s main finances steadiness since 2021, the yr earlier than the nation entered its worst-ever financial disaster. (The finances deficit complete additionally elements in Sri Lanka’s ongoing debt service funds.)
Sustaining this surplus is vital for Sri Lanka to scale back its public debt to under 95 p.c of GDP by 2032. Failure to maintain the first surplus would drive the nation to depend on additional borrowing, even for important public items and companies.
Moreover, the 2025 finances targets amassing 13.9 p.c of GDP in tax income, matching IMF expectations. With these revenue-based targets, the federal government demonstrates its dedication to the IMF program.
Nonetheless, a better have a look at the expenditure aspect reveals challenges. The determine under compares the IMF’s projections for presidency spending – together with complete expenditure, recurrent spending, capital expenditure, subsidies and transfers, and salaries and wages – as a share of GDP in opposition to the 2025 finances allocations. Notably, in all classes, besides capital expenditure, the federal government’s proposed spending exceeds IMF projections.
Consequently, the 2025 finances is about to document a finances deficit equal to 6.7 percent of GDP – greater than the 5 p.c anticipated within the IMF program. This alerts that Sri Lanka should train higher warning in rationalizing its expenditure.
Amongst its bills, the 2025 finances has proposed a wage enhance for public sector workers, offering a substantial allocation in comparison with the 2024 finances. Whereas this adjustment could purpose to protect the buying energy of workers affected by post-pandemic inflation, the federal government should concentrate on enhancing public sector productiveness alongside wage will increase. If wage development exceeds inflation, it might threat triggering additional inflationary pressures.
The 2025 finances allocates almost 4 p.c of GDP to capital expenditure, a big enhance from the earlier yr. Nonetheless, merely growing capital expenditure shouldn’t be sufficient. It’s important to make sure that this spending interprets into efficient public funding, as capital expenditure might also embody non-productive spending that doesn’t immediately enhance financial development.
Boosting public funding is essential for Sri Lanka’s medium- to long-term financial development. In response to the newest Global Economic Prospects report, scaling up public funding by 1 p.c of GDP may elevate output in rising markets and creating economies (EMDEs) by as much as 1.6 p.c over 5 years. For Sri Lanka, which continues to be recovering from the latest disaster and has not but regained its pre-crisis output stage, specializing in inclusive and transformative growth is essential.
Whereas the 2025 finances aligns with a projected 5 p.c GDP development charge, the federal government should stay vigilant in its development methods to maintain restoration.
Regardless of its commitments, the 2025 finances faces challenges from a slim income base and social pressures. In December 2024, the federal government raised the tax-free monthly income threshold from 100,000 to 150,000 Sri Lankan rupees and adjusted tax brackets, providing substantial financial savings for taxpayers. Nonetheless, this transfer successfully diminished the tax base, which had been expanded by way of latest reforms. If the federal government meant to offer aid to taxpayers, reducing tax charges – quite than increasing exemptions – might need been a more practical technique.
Moreover, in January 2025, the federal government lifted the import ban on vehicles imposed throughout the international reserves disaster. Whereas it expects elevated tax income from excessive excise duties (starting from 200 p.c to 300 p.c primarily based on engine measurement) and 18 p.c VAT on imported automobiles, the steep taxes may suppress demand, making it unlikely that the anticipated revenues will materialize.
The 2025 finances reveals a fragile balancing act between adhering to IMF mandates and addressing home financial realities. Whereas the federal government has made strides in attaining income targets, expenditure pressures, coverage missteps, and social constraints pose important challenges.
To make sure the success of the 2025 finances and meet IMF situations, the federal government should preserve worth formulation for electrical energy and gas, strengthen reforms in state-owned enterprises (SOEs), and rationalize its expenditure to align extra intently with IMF targets. Balancing IMF commitments with home wants will probably be key to making sure sustainable financial restoration and long-term development.
