The staff-level agreement on extending crucial IMF assistance to Sri Lanka to deal with its biggest economic crisis since its independence from Britain in 1948 is expected to follow the interim budget for the rest of the l year, according to officials.
The island’s tourism-based economy has suffered from COVID-19, which has also reduced remittances sent by foreign workers. Rising oil prices, populist tax cuts and a restriction on chemical fertilizer imports for seven months last year, which ruined agriculture, all contributed to the damage.
As a result, there are continued shortages of essential goods, exorbitant prices and widespread protests. As a result, President Gotabaya Rajapaksa was forced out of the country, leaving Wickremesinghe in charge of restructuring the country’s massive debt to China and other countries while seeking an IMF bailout.
The finance ministry is owned by six-time prime minister Wickremesinghe, who told Reuters this month that the budget he will present to parliament will cut spending by “a few hundred billion” rupees, including on defence.
In its latest budget, unveiled in November, Sri Lanka sought to spend 3.9 trillion rupees ($11 billion).
In addition, Wickremesinghe is expected to present plans to help low-income areas that have been hardest hit by the crisis and propose new taxes to reduce the country’s budget deficit.
The interim budget is expected to lower the deficit target from around 12% of GDP to 9.9%, but analysts warn this is an ambitious target as the economy is expected to slump nearly 8% this year.
“A long-standing problem is that budgets are falling short of revenue and deficit targets, so this budget will really need to focus on proper revenue-based fiscal consolidation,” said Shehan Cooray, head of research at Acuity Stockbrokers.
“Key elements will be fiscal deficit and primary deficit targets, which will be in line with an IMF plan.”
According to ratings agency S&P Global, the country skipped 22 million interest payments due on June 3, June 28 and July 18, as well as a principal payment due on July 25.
Wednesday marks the end of a visit by an IMF team that came last week, and Sri Lankan officials hope to advance talks for an emergency loan of around $3 billion by then.
(With agency contributions)