By: Staff Writer

April 21, Colombo (LNW): Having hit a roadblock with international bondholders, uncertainty looms over the economy of crisis-hit Sri Lanka and an upcoming review by the International Monetary Fund (IMF), experts warn.

Colombo-based economist Talal Rafi explained that with Sri Lanka still in default status and facing uncertainty regarding credit ratings and foreign investment, the economic fallout could be significant. “The larger impact is the uncertainty as no one knows what the deal will be for them to plan anything,” he said.

However Sri Lanka remains steadfast in its commitment to reaching the debt restructuring targets and is confident of smooth progress in the continued good-faith engagements for a speedy debt resolution that will ensure debt sustainability and comparability of debt treatment, State Minister of Finance Shehan Semasinghe said.

The South Asian island country announced on Tuesday that it has failed to strike an agreement with international bondholders on restructuring more than US $12 billion in debt, a mandatory requirement set out by the IMF.

 In March last year, the IMF’s board approved a $2.9 billion bailout package under a 48-month arrangement under the Extended Fund Facility (EFF) to support Sri Lanka’s economic policies and reforms.

Sri Lanka is currently on its second review and is awaiting board approval for a staff-level agreement reached in March this year. Since 1965 to 2016, Sri Lanka has had a total of 16 programs with the IMF and the current program with IMF is the seventeenth.

The delay in reaching an agreement could also affect Sri Lanka’s upcoming IMF review, which is scheduled for June, Rafi said. “As debt restructuring is a key condition for the IMF, it would have an impact on the time taken for board approval.”

 But State Finace Minister further stated, it was heartening to note the widespread appreciation and support for Sri Lanka’s debt restructuring process.

“We remain steadfast in our commitment to reaching the restructuring targets and confident of smooth progress in the continued good-faith engagements for a speedy debt resolution that will ensure debt sustainability and comparability of debt treatment,” he added.

The program specifically supports Sri Lanka’s efforts to restore macroeconomic stability and debt sustainability, safeguard financial stability, and enhance growth-oriented structural reforms.

In April 2022, the country defaulted on its foreign debt for the first time, triggering the worst economic crisis in its history. According to official data, Sri Lanka’s gross official foreign currency reserves inched up to $4.5 billion million in February.

Moreover, the nation’s impending presidential election piles pressure on the government to accelerate the negotiation process, raising concerns about the sustainability of any deal struck hastily under such circumstances.

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.

April 22, Colombo (LNW): The Sri Lankan Rupee (LKR) remains slightly steady against the US Dollar today (22) in comparison to last week, as per leading commercial banks in the country.

At Peoples Bank, the buying price of the US Dollar has increased to Rs. 296.60 from Rs. 296.40, and the selling price to Rs. 306.64 from Rs. 306.44.

At Commercial Bank, the buying price of the US Dollar has dropped to Rs. 295.28 from Rs. 295.70, and the selling price remains unchanged at Rs. 305. 

At Sampath Bnak, the buying and selling prices of the US Dollar remain unchanged at Rs. 296.50 and Rs. 305.50, respectively.

April 22, Colombo (LNW): The market’s pivotal lending rate, closely monitored for its influence on a spectrum of loans from small businesses to mortgages, has reached a two-year low, sustaining its downward trajectory, a report by Daily Mirror disclosed.

Last week, the average prime lending rate, indicating the rate at which banks lend to their most creditworthy clients for short terms, experienced a decline of 22 basis points, settling at 10.41 per cent.

This marks a significant decrease from its level of 9.85 per cent observed on April 1, 2022, just before the Central Bank of Sri Lanka (CBSL) implemented a substantial interest rate hike of 700 basis points to curb inflation.

Both government securities yields and market lending rates have been on a downward trend over the past ten months, following the Central Bank’s decision to initiate rate cuts for the first time in June of the previous year.

The prime rate had reached its peak at 29.67 per cent in November 2022 amidst notably tight monetary policy measures.

Furthermore, Treasury bill yields also saw a decrease last week across all three maturities, hovering slightly above 10.0 per cent, closely aligning with prevailing policy rates.

In late March, the Central Bank reduced its key policy rates by 50 basis points to 8.50 per cent and 9.50 per cent levels, citing subdued inflation.

However, concerns arose regarding the influx of funds into the real economy.

Despite a pickup in private sector credit, the pace of growth fell short of expectations, prompting calls for banks to swiftly and adequately adjust their lending rates to reflect the easing monetary policy.

The current lending rates are anticipated to provide support for the economy, fostering an acceleration in recovery as individuals and businesses seek financing for consumption, growth, and investment.

Sri Lanka stands at the brink of a new credit cycle, with banks poised to disburse a potentially record-breaking amount of credit in the coming months.

This influx could bolster individual incomes, partially restoring the purchasing power eroded during the heightened inflationary period of 2022 and most of 2023.

April 22, Colombo (LNW): Sri Lanka grapples with enduring fiscal hurdles, “State of the Budget Report 2024”, a recent report issued by local economic think tank Verité Research disclosed.

This annual analysis provides a comprehensive examination of the nation’s fiscal landscape, offering valuable insights for informed decision-making in budgetary matters.

Verité Research’s findings reveal a recurring pattern of shortfall in tax revenue, with the government consistently falling short of revenue targets for the past 33 years.

Despite an optimistic projection of Rs. 4,164 billion for 2024 – reflecting a substantial increase from the previous year – the report projects a more conservative estimate of Rs. 3,570 billion, highlighting a projected 14 per cent deficit.

A significant portion of this shortfall, particularly in Value Added Tax (VAT) revenue, underscores the need for more accurate fiscal planning methodologies.

The report identifies overestimations in various revenue streams, including corporate and personal income taxes, Social Security Contribution Levy (SSCL), and Customs import duty.

Compounding these challenges is Sri Lanka’s soaring interest-cost-to-revenue ratio, ranked as the highest globally.

Despite government efforts to reduce this ratio to 64 per cent, projections suggest it may exceed 70 per cent, posing obstacles to economic recovery and debt sustainability.

Such discrepancies not only hinder progress but also raise concerns about Sri Lanka’s adherence to its IMF-backed economic recovery plan.

In light of the Verité findings, the “State of the Budget Report 2024” serves as a vital resource for policymakers, economists, and stakeholders, offering a candid assessment of Sri Lanka’s fiscal predicament.

Addressing these challenges demands concerted efforts to enhance revenue collection mechanisms, improve forecasting accuracy, and pursue prudent fiscal policies to foster sustainable economic growth and stability.