ECONOMYNEXT – Sri Lanka’s tax revenues went up 25 percent from a year ago to 321.5 billion rupees in January 2025, while the overall budget deficit fell 28 percent, ahead of a state salary hike, official data show.
Non-tax revenues were marginally down at 25.1 billion rupees from 25.6 billion.
Total revenues grew 22 percent to 346.6 billion rupees.
Current expenditures grew 7 percent to 424.5 billion rupees, ahead of salary hike for state workers.
In addition to hiking wages, which is expected following a currency collapse, the government is also planning to hire 30,000 unemployed graduates in 2025.
In Sri Lanka unemployed graduates, protectionist oligarchs and the farming lobby which sell overpriced food and animal feed have been key beneficiaries of the tax system since 2004 in particular.
State salaries and pensions – which are unfunded – are the biggest cash flow item in the budget.
The current account deficit (total revenues less current spending) was 77.9 billion rupees, improving from 112.0 billion rupees last year.
Capital expenditure was down to 41.5 billion rupees from 55 billion rupees last year.
Capex is expected to pick up later in the year, with foreign funded projects re-starting adding to the deficit.
The overall deficit was 119.4 billion rupees, down from 166.9 billion rupees last year.
The deficit was fully financed domestically with borrowings of 130.3 billion rupees, down from 177.3 billion rupees. Foreign financing was a net repayment of 10.9 billion rupees, around the same as 10.5 billion rupees last January.
Interest costs were 238.7 billion rupees, marginally up from 237.6 billion last year, as interest rates continued to fall and debt foreign debt was restructured with lower coupons.
The primary balance (budget deficit less interest costs) was a 119.3 billion rupee surplus, up from a 70.7 billion rupee surplus in January 2024.
Sri Lanka hiked state salaries in April which will add to current spending. Sri Lanka private and state sector salaries after the currency collapsed in 2022 after rate cuts enforced with direct and open market operations.
The currency collapse bloated foreign debt and rates hiked to restore confidence in the rupee and preserve the money monopoly of the central bank led to an economic contraction (a stabilization crisis) which bloated debt to GDP ratio.
Sri Lanka’s budgets became unmanageable in the 1980s after the IMF Second Amendment led to severe currency depreciation and inflation. Strikes and social unrest as household budgets were also up-ended by bad money.
From around 2022, Sri Lanka’s central bank has provided monetary stability, keeping the exchange rate stable and undershooting its high inflation target with largely deflationary policy, giving a chance for both household and state budgets to improve.
However analysts have warned that a 5 percent inflation target as well as a ‘single policy rate’ which involves targeting a mid-corridor rate with large volumes of excess liquidity to push down interbank rates can lead to forex shortages or reserve losses from debt repayments as well as interventions.
At the moment the ‘signalled’ mid-corridor rate seems to be higher than the market rate amid unsterilized excess liquidity. Analysts have also warned that unsterilized excess liquidity can be turned into credit and imports.
(Colombo/Apr28/2025)
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