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Sri Lanka faces uphill battle in meeting 2024 budget targets: Fitch

16 November 2023 01:46 am - 4     - {{hitsCtrl.values.hits}}

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  •  Sees significant risks to government’s revenue goal for 2024
  •  Says Sri Lanka has a history of fiscal slippage; highlights 29% shortfall in revenue collection over first 9 months of 2023
  •  Anticipates a weaker boost to govt. revenue from inflation in 2024
  •  Projects consumer prices to rise 8.7%, compared to 22.1% in 2023  
  •  Says economic growth, projected at 3.3% in 2024, is expected to provide only a modest lift to revenue 

The targets laid out in Sri Lanka’s 2024 budget, particularly with regards to revenue and fiscal defect, would be challenging to meet even with the economic recovery that is expected to continue next year, Fitch Ratings yesterday said. 

“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,” Fitch Ratings said. “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.

The government is targeting a budget deficit of 9.1 percent of GDP in 2024, wider than a revised estimate of 8.5 percent in 2023. However, without the bank recapitalisation costs, the deficit in 2024 would be a narrower 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.

“The fiscal deficit is set to be wider than our current forecast of 7.1 percent of GDP in 2024 in light of the new data, even after excluding the bank recapitalisation costs and the revenue/GDP ratio will be lower than we had assumed,” the rating agency said.

Fitch noted that the primary surplus goal for 2024, excluding bank recapitalisation, is broadly in line with the 0.8 percent of GDP projected by the International Monetary Fund (IMF) in March, when it approved Sri Lanka’s US $ 3 billion Extended Fund Facility (EFF). 

“We also see the revenue target as relatively aligned. However, the government’s expenditure target for 2024 at 22.2 percent of GDP is somewhat higher than the 19.7 percent the IMF had envisioned and well above the revised budget estimate of 18.7 percent for 2023,” the rating
agency noted.

The release of the next tranche of the EFF financing, worth around US $ 330 million, will depend partly on the IMF’s assessment of Sri Lanka’s progress in securing financing assurances from official creditors. Fitch believes there has been some progress since March but the timeline for a restructuring deal with the official creditors remains unclear.

Meanwhile, the rating agency said the downside risks to revenue could be offset by lower than budgeted spending. 

“We think the presidential election in late 2024 will incentivise the government to keep to its spending plans, which include a 14 percent increase in spending on salaries and wages. Nevertheless, if revenue falls short, there may be some room to trim capital expenditure, which amounts to almost 20 percent of total planned spending and is budgeted to rise 55 percent in 2024, excluding bank recapitalisation,” it said.
The government’s efforts to implement governance reform after a recent diagnostic study by the IMF is also expected to support revenue collection. 

“The budget proposes to establish a new revenue authority under the Finance Ministry to improve tax collection and a new investment law will look to establish a National Economic Commission to promote investment. However, it will take time to assess these bodies’ effectiveness,” the rating agency said. 

Fitch rates Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘RD’ (Restricted Default). 

The rating agency said it may move the IRD out of ‘RD’ upon the sovereign’s completion of a commercial debt restructuring that it judges to have normalised the relationship with the international financial community. Fitch upgraded Sri Lanka’s Long-Term Local-Currency IDR to ‘CCC-’ in September, reflecting the completion of the local currency portion of Sri Lanka’s domestic debt optimisation plan.


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  Comments - 4

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  • Jude Thursday, 16 November 2023 08:19 AM

    SL on its way to become next Zimbabwe, yeah!! The economy has collapsed, garment factories to all other manufacturing sectors are going out of business!! Businesses are closing down at a alarming rate!! The only way out is REDUCE the elected politicians from over 10,000 to 100 MP'S. Then STOP maintenance by government of Over 100,000 vehicles!! If you implement these 2 things then the government GONNA save over 5 Trillion rupees, people it's not billions it's Trillions yeah in another words 5,000 billion rupees. Will never have to borrow money. Country like SL who practically imports every thing must make this happen immediately. Previously SL had only 151 MP'S in 1960, 1965 and 1970. And in 1977 it was 168. This country country had ONLY that few amount of elected representatives. Sri Lanka government cannot maintain Over 10,000 politicians and Over 100,000 vehicles. I hope some day soon some leaders GONNA change this and change it fast.

    Sam Silva Thursday, 16 November 2023 06:51 PM

    Jude your comment makes so much of sense. But our hard headed governments doesn't not want to make any changes as you suggested because of their life style. Also any leader comes to power fear he will not have the support. Instead of reducing the expenditure he will glorify with more fringe benefits. This is the down fall of our country.

    Indra Dasa Tuesday, 21 November 2023 05:03 AM

    Yes this is very correct . Sri Lanka does not need 10,000 elected politicians to govern . Now it is evidenced even having this big numbers of Politicians country is gone down on the hill . Yes, very soon Sri Lanka will be next Zimbabwe if not changed this system of having so many politicians and spending to maintain them very big amounts of tax payers money . Look at huge countries geographically like India Australia ,Canada , USA ,UK ,Russia and China , those countries maintain less than half of Politicians to govern such a big nations . Also their perks are minimum and do not maintain such a big number of government vehicles for politicians . This became a norm in Sri Lanka and that is one of the main reasons politicians want to stay in politics after 70 or 80 years old and waisted tax payers money . This must be changed if Sri Lanka to avoid being next Zimbabwe .

    KP Friday, 17 November 2023 06:12 AM

    @ Jude, Can you please give the breakdown of how you came up with the figure of 5 trillion rupees? Facts and figures matter. According to your figures every government vehicle costs about 500 lakhs or every politician gets a monthly income of 500 lakhs. The devil is in the details. Ignoring facts and mindlessly spouting popular nonsense is one reason we are where we are.


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