Crisis-Hit Sri Lanka's 2023 Budget Targets Economic Revival

Sri Lanka will unveil its 2023 budget on Monday with a focus on putting its crisis-hit economy back on track.

Measures will focus on implementing tax reforms, boosting revenue and the reduction of government debt.

Sri Lanka will also look to restructure its debt as it tries to finalise a $2.9 billion bailout from the International Monetary Fund (IMF). Sri Lanka owes investors around $30 billion in bilateral and bondholder debt.

Soaring inflation, a weakening currency and low foreign exchange reserves have left the island of 22 million people struggling to pay for import essentials such as food, fuel and medicine.

Spending Cut Dilemmas

The government has already spelt out proposals to increase personal and corporate income tax to 30% from 24% and possibly change tax brackets to boost revenue despite criticism from corporates and opposition parties.

However, reducing expenditure is likely to be tricky, given Sri Lanka’s large public workforce and high debt.

Recurrent spending in 2023 is listed at 4.6 trillion rupees ($1.3 billion) in the Appropriation Bill, a precursor for the budget, with interest payments seen making up 36.5% of that expenditure. That would amount to 2.1 billion rupees in interest payments, a 55% jump on 2022 levels.

Total spending is expected at 5.9 trillion rupees in 2023, with capital expenditure likely to make up 20.9% of that total.

Welfare spending is also seen rising.

International Help

The United Nations this week expanded its funding appeal by $70 million to help Sri Lanka’s population, 28% of which is facing food insecurity. Sri Lanka’s food inflation reached 85.6% in October.

“This means the budget deficit will remain at 9%-10% [of GDP]. It will be hard to shrink unless interest rates come down,” said Udeeshan Jonas, chief strategist at equity research firm CAL Group.

“Markets will be looking for reforms in the budget for the country to move forward,” said Dimantha Mathew, head of research at First Capital Holdings.

“We are hopeful of the IMF programme being finalised in January and the debt restructuring to be in place from mid-2023.”

The World Bank estimates Sri Lanka’s economy will contract by 9.2% in 2022 and 4.2% next year.