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Sri Lanka fiscal constraints continue amidst missing 2024 revenue targets

By: Staff Writer

April 22, Colombo (LNW): Sri Lanka’s financial constraints   are to be continued in 2024, with the nation on track to miss its budget revenue target for the 33rd consecutive year with fundraising issues mainly from borrowings and taxation becoming increasingly difficult, according to a new report by Verité Research.

The Verité Research report, titled “State of the Budget Report 2024,” paints a concerning picture for Sri Lanka’s financial health.

While the government’s official 2024 budget sets an ambitious revenue target of Rs 4.164 trillion, Verité Research estimates a significant shortfall of 14%.

This leaves a projected revenue of only Rs. 3.57 trillion – a stark contrast to the government’s optimistic projections.

The treasury will have to raise revenue up to Rs.125 billion by year-end with the current compliance rate or a substantial Rs.178 billion with full compliance to maintain cash flows without the bank bailout, it added.

The budget 2024 estimates a record expenditure of Rs 6.98 trillion, a 33 per cent increase from 2023, with a focus on doubling capital expenditure and allocating 450 billion rupees for bank recapitalisation.

To accommodate this, President Wickremesinghe proposed raising Sri Lanka’s debt ceiling by Rs 3.45 trillion to Rs 7.35 trillion rupees

The government is resorting to domestic borrowing of around Rs. 5 trillion to meet heavy expenditure in the forthcoming budget 2024, Finance Ministry estimates revealed.

The Central Bank‘s inability to print money to meet the government expenditure under the new CB act and very limited foreign finance mobilisation from the World bank and other donor agencies and countries were among the reasons for the impending financial crisis.    

Verité Research identified overestimated tax revenue as a major source of the projected shortfall. Their analysis suggested that the government has significantly overestimated revenue from Value Added Tax (VAT), with a potential gap of 61%.

The report also warned that projections for other major taxes such as corporate income tax, personal income tax, Social Security Contribution Levy (SSCL), and customs import duty are also likely too optimistic.

The report added that Sri Lanka currently grapples with the highest interest-to-revenue ratio globally, a key indicator of debt sustainability. Reducing this ratio is crucial for ensuring economic stability.

According to Verité Research, the government’s plan to lower the ratio to 64% in the 2024 budget appears overly optimistic.

The Central Bank‘s inability to print money to meet the government expenditure under the new CB act and very limited foreign finance mobilisation from the World bank and other donor agencies and countries were among the reasons for the impending financial crisis.    

The “uncertainty” over the impending elections in Sri Lanka will cause a possible downward trend in the country’s economic outlook, the Asian Development Bank (ADB) has said recently.

Delays in the completion of a debt restructuring agreement and any barriers to passing key legislation could dampen sentiment and derail growth, the ADB report highlighted.

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