Sri Lanka's 2024 budget, presented by President Ranil Wickremesinghe in November 2023, comes at a crucial juncture in the country's history. The island nation grapples with the aftermath of the 2022 economic crisis, a result of a decade of unsustainable fiscal policies, balance of payments challenges, and external shocks. This crisis has triggered widespread shortages of essential goods, escalated inflation, and contributed to political instability.
Against this backdrop, the 2024 budget aims to strike a delicate balance between reviving economic growth, alleviating the hardships faced by ordinary Sri Lankans, and maintaining fiscal discipline to meet the International Monetary Fund (IMF) program's targets.
The government has set a target for a budget deficit of 9.1 percent of GDP in 2024, which is wider than the revised estimate of 8.5 percent in 2023. However, excluding the bank recapitalization costs, the deficit in 2024 would narrow down to 7.6 percent of GDP. Excluding the recapitalisation costs, the budget targets a primary surplus of 0.8 percent of GDP in 2024, against a deficit of 0.7 percent in 2023. However, including the recapitalisation costs pushes the 2024 primary deficit target to 0.6 percent of GDP.
Meeting the ambitious revenue and deficit targets outlined in the 2024 budget poses a formidable challenge. The Sri Lankan economy continues to grapple with the lingering effects of the COVID-19 pandemic and the sustained global economic slowdown. Compounding these challenges is a severe debt crisis, with public debt soaring to 128.1% of GDP in 2022.
Despite the economic recovery anticipated for the coming year, the 2024 budget reflects an ambitious agenda with record-setting expenditures. Budgeted at 6.98 trillion rupees, a substantial 33% increase from the previous year, the allocation includes a noteworthy doubling of capital expenditure and a reserve of 450 billion rupees for bank recapitalisation.
Fitch Ratings, however, casts doubt on the feasibility of the targets set in Sri Lanka’s 2024 budget, particularly in relation to revenue and fiscal deficits. The economic recovery alone may not be sufficient to meet these challenging objectives, according to Fitch, signaling potential hurdles in the government's fiscal plans.
Fitch believes there are significant risks to the government’s revenue goal for 2024. Sri Lanka has a record of fiscal slippage and revenue collection fell 29 percent short of target over 9M23. The authorities aim to raise revenue by almost 45 percent in 2024, according to the Fitch Ratings. “This will be aided by a planned 3 percent increase in the Value-Added Tax to 18 percent but the boost to revenue from inflation is set to weaken in 2024. We project consumer prices will rise by 8.7 percent on average in 2024, compared with 22.1 percent in 2023. The lift from economic growth, which Fitch projects at 3.3 percent in 2024, will also be modest,” it added.
Meanwhile, Opposition Parliamentarian and economist, Dr. Harsha de Silva has proposed an amendment to impose limitations on the budget deficit in conjunction with the National Budget 2024. Speaking in Parliament, Dr. de Silva highlighted that the budget deficit, which is currently set at 5%, has not been adhered to in previous budgets except by the late Finance Minister Mangala Samamraweera. He argued that the Fiscal Management Responsibility Act provides guidance on the necessary extent of the budget deficit. Therefore, he suggested that an amendment be made under the purview of the Committee of Public Finance (COPF) to maintain a 6.5% or 7% budget deficit, which he deemed more practical.
The government's success in achieving its revenue and deficit targets holds the potential for a positive impact on the Sri Lankan economy. Attaining these goals may enable increased investment in essential services and infrastructure, while a reduction in debt could enhance the country's creditworthiness, facilitating improved access to international financing.
Balancing growth and fiscal prudence
The budget prioritizes economic growth, with an ambitious target of 3.3% for 2024. This growth is expected to be driven by a rebound in the tourism sector, increased agricultural production, and infrastructure investments. However, achieving this target will require a concerted effort to address the structural issues that led to the crisis, including improving tax collection, reducing government expenditure, and attracting foreign investment.
On the fiscal front, the government has proposed a number of measures to increase revenue, including raising taxes on goods and services, expanding the tax base, and improving tax administration. The cabinet had already approved raising Value Added Tax (VAT) by 3% from January 1 and broadening collection.
It has also committed to reducing wasteful government spending and streamlining public sector operations. Meeting the deficit target will be crucial for maintaining investor confidence and ensuring Sri Lanka's continued access to IMF funding.
Impact on ordinary Sri Lankans
The 2024 budget is poised to yield a mixed impact on ordinary Sri Lankans. On one hand, it earmarks substantial funds for enhancing the well-being of state sector employees, with notable provisions such as a 25% increase in the Cost of Living Allowance, a monthly pension increment, and the revival of the government's disaster loan facility. Additionally, there are significant boosts to social security programs, retroactive payments for eligible beneficiaries, augmented allowances for disability and kidney disease, increased monthly allowances for senior citizens, and a biannual review of insurance beneficiaries. These measures aim to provide relief to the most vulnerable members of society.
On the other hand, the increase in taxes and the government's commitment to fiscal prudence could put additional strain on household budgets. The government has also proposed a number of reforms to the public sector, including reducing the number of employees and privatizing some state-owned enterprises. These reforms could lead to job losses and further hardship for some Sri Lankans.
The government will need to carefully consider the impact of its policies on ordinary Sri Lankans and make adjustments as necessary to ensure that the benefits of the budget outweigh the burdens
Upcoming elections and political implications
President Wickremesinghe announced in Parliament on Tuesday (22) that both Presidential and Parliamentary elections are set for the upcoming year, with Provincial Council and Local Government elections likely in 2025. The 2024 budget, anticipated to have substantial political implications, precedes the late 2024 presidential elections. The government's success in fulfilling economic promises and providing relief will play a pivotal role in its electoral prospects.
Opposition parties have criticized the budget, contending it falls short in addressing the root causes of the economic crisis and imposes an unwarranted burden on ordinary citizens. The approaching elections are poised to serve as a referendum on the government's crisis management and its vision for Sri Lanka's future.
In conclusion, Sri Lanka's 2024 budget represents a delicate balance between economic recovery, fiscal responsibility, and political considerations. The government's ability to navigate these challenges while addressing the concerns of the public will shape the country's trajectory post-economic crisis. The imminent elections stand as a critical test of the government's performance and its capacity to fulfill its commitments.
