IMF Austerity Must Meet Welfare Pledges in Sri Lanka Budget

(Bloomberg) -- Sri Lanka is balancing competing demands going into Monday’s budget, as it seeks to finalize conditions for a $2.9 billion International Monetary Fund loan while buffering citizens from the island nation’s worst economic crisis in decades.

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President Ranil Wickremesinghe, who doubles as the South Asian country’s finance minister, is expected to lay a fiscal roadmap with measures to bolster tax revenues and announce reforms in the public sector aimed at trimming wasteful expenditure. In line with the IMF framework, the budget will focus on making the island nation’s debt sustainable to stabilize the crisis-hit economy and unlock more funding.

Authorities have already raised utility rates and brought fuel pricing under a formula to improve its finances. It also plans to raise corporate and personal income taxes to around 30%. In the interim budget announced in August, Wickremesinghe had raised taxes, including increasing the value-added tax to 15% from 12%, and proposed targets to lower debt in a bid to secure a preliminary agreement with the IMF.

“The fiscal consolidation needs to take into account that citizens are already squeezed,” said Dimantha Mathew, head of research at First Capital Holdings Plc in Colombo. “But unless Sri Lanka doesn’t push through necessary reforms, the country could find itself back in the same position.”

Sri Lanka earlier this year faced its worst economic and political crisis since gaining independence from the British, with a dearth of foreign exchange leading to a debt default, paralyzing shortages and Asia’s fastest inflation. While repurposed funds from multilateral lenders and assistance from friendly nations have provided temporary relief, the nation is still struggling to pay for imports like fuel.

The government has started the process to privatize and restructure the national carrier, Sri Lankan Airlines, as well as its subsidiary companies, by handing over a “considerable amount of shares and the management of the entity” to investors selected through a transparent process.

Sri Lanka is also seeking to privatize its oil industry, but has yet to make a deal. The government implemented a national fuel-management program that helped reduce consumption by 40%.

“Reforms need to be done to eradicate government inefficiencies, which would help trim prices and bring down inflation,” said Sanjeewa Fernando, strategist at CT CLSA Securities Pvt. The government, which has said it wants to exit non-strategic sectors including hotels, could also offer shares in the two biggest state banks, Fernando said.

Funding Welfare

Wickremesinghe, who in the August interim budget increased payouts to the poor and announced farm debt write-offs to support the vulnerable, may improve the “targeting of subsidies” in the 2023 budget, according to First Capital’s Mathew.

A wealth tax for the rich could also be considered to reach revenue targets, Mathew said. The move could help in pulling the economy out of a recession, while providing welfare for more than half of the island’s 22 million people.

Sri Lanka’s budget for 2023 will be in line with the IMF loan framework and the government wants to exceed program targets in order to accelerate development and attract more investment, Wickremesinghe told Parliament on Thursday.

“Blindly implementing revenue policies could hurt certain segments and prevent the economy from picking up,” Fernando said. “What needs to be done is taxing the rich, not killing the middle class.”

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