The Government is grappling to save the country’s economy from a possible US$10 billion contraction amidst an impending recessionary period, according to econometric models and provisional data of the Finance Ministry.
Due to rising inflation and lower growth, the Sri Lankan economy is approaching stagflation. Growth expectations for the country have nosedived after the sovereign default with the economy projected to decline by -7.8 per cent in 2022 and -3.7 per cent in 2023.
The International Monetary Fund (IMF) this week forecasted a lower contraction of the Sri Lankan economy than the World Bank.
In its World Economic Outlook (WEO) released this week IMF estimated Lankan economy to contract by 8.7% this year and by 3% next year. However, the World Bank in its forecast released last week estimated a contraction of 9.2% this year and 4.2% in 2023.
The rising prices have compelled the Central Bank to increase the interest rates to face the country’s impending recession with 85 per cent probability, official sources revealed.
The World Bank estimated that over 500,000 people in Sri Lanka had fallen below the poverty line. The country was experiencing food, medicine and fuel shortages as well as daily blackouts and an economy in freefall, a senior Finance Ministry official divulged.
The Government’s move to increase taxes would intensify the rate of economic shrinking and places the whole economic system and other connected financial institutions including banks at a great risk, Head of the Department of Business Studies at the University of Sri Jayewardenepura Prof. Janak Kumarasinghe warned.
The shock caused by the increasing of interest rates up to over 25 per cent and taxes would exert an impact on business enterprises big or small as well as MSMES depriving them of obtaining loans from banks and financial institutions to tackle their liquidity issues, he pointed out.
While a fiscal stimulus package is not possible at present, the government has to meet the needs of the most vulnerable groups in providing emergency subsidies, as rising inflation and job losses have led to lower standards of living, State Minister of Finance Ranjith Siyambalapitiya disclosed.
Due to financial constraints, Sri Lanka will have to look for further bilateral and multilateral aid in securing funding for short-term, targeted “in-kind” transfers such as food stamps for the poorest of the poor.
It is also important to look at bridge financing arrangements to import essential commodities like fuel so that supply shortages reduce. This should help in keeping productivity intact and inflationary pressure in check, he added.
As of August 31, 2022, the total income of the country was recorded as Rs. 1.23 trillion, while the total expenditure of the country was Rs. 3.54 trillion, the minister said, adding that government revenue this year should reach Rs.2.47 trillion.
He also stressed that the relevant austerity procedures should not cause any additional pressure on the low-income families of the country.
According to the draft Appropriation Bill, the estimated total expenditure is Rs.7.92 trillion in the budget 2023 to be presented in Parliament under the theme of ‘making a transformative change via minimum inputs’ in line with the 2023-2025 medium-term fiscal policy framework
