ECONOMYNEXT – Sri Lanka is presenting a budget which can help pass a review of the International Monetary Fund program, where vehicle imports are expected to help boost the revenue to gross domestic product ratio.
Sri Lanka has earned tax revenues of 3,708 billion rupees, and non-tax revenues of 353 billion rupees, according to preliminary data in 2024.
The collection is about 100 billion rupees below the target of 3,820 billion rupees, but would lift revenues to projected GDP by two percent from 9.8 percent of GDP to about 11.8 percent. With non-tax incomes revenues of 13 percent of GDP was aimed for in 2024.
Under an IMF program Sri Lanka is trying to raise revenues to around 15 percent of GDP. The national debt, however is driven by the overall deficit.
Sri Lanka’s President Anura Kumara Dissanayake has promised to raise the threshold for personal income tax to 150,000 rupees a month from 100,000. Welfare spending under the Aswesuma scheme is to be increased.
Taxes are also being spent on farmers for fertilizer subsidies.
In 2024 PAYE taxes earned 180 billion rupees, compared to 144 billion rupees in 2024.
Tighter tax administration and removal of exemptions among options. Stock market investors are also awaiting clarity of taxes.
Vehicle imports are expected to be a major contributor to the path to raise revenues to 15 percent but extremely high taxes have been imposed on cars to reduce demand.
Sri Lanka’s policy makers have fears over imports, due to balance of payments troubles coming from mis-targeting rates through a flawed operating framework of the central bank, which trigger forex shortages when private credit picks up.
Banning cars and ‘non-essential imports’, which have high rate rates is a ‘cascading policy error’ that reduces taxes and worsens currency crises after the original rate cuts trigger external crises, analysts have pointed out.
Other cascading policy error identified by analysts include forex surrender rules, banning forward sales and trimming overnight net open positions of banks, which reduces the depth of the market and its ability to match forex flows for short term differences in loan disbursements.
Sri Lanka’s central bank has printed money for various motives over its history, inflating reserve money and triggering depreciation, making it almost impossible to manage budgets.
The inability to manage budgets became acute from around 1980, after the IMF’s Second Amendment to its articles left the central bank without a credible anchor money and chronic depreciation started.
Since 2015, money has been printed to trigger 5 percent inflation, by suppressing rates to the middle of the corridor, and pushing up excess liquidity through an abundant reserves regime, analysts have shown.
The informal mid-corridor excess liquidity regime recently became a formal ‘single policy rate’.
In December 2024 imports surged to 1.9 billion US dollars, without car imports after the central bank printed 100 billion rupees through open market operations and kept the money sloshing around the banking system throughout the last quarter of 2024.
The excess liquidity has since been withdrawn.
Analysts have warned that the practice would lead to a second sovereign default, regardless of fiscal performance as happens in Latin American countries like Argentina, where revenues to GDP exceeds 20 percent.
Download Sri Lanka-2024 fourth quarter government financial report from here
Sri Lanka’s budget has to be according to a staff level agreement with the International Monetary Fund, struck after aggressive macro-economic policy involving sweeping rate cuts on top of tax cuts, led to a loss of market access and sovereign default.
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