IMF’s Senior Mission Chief to Sri Lanka Peter Breuer told the media from Central Bank Headquarters on Thursday (1) that “Budget 2023” should be consistent with the IMF’s expectations.
On the same day, the IMF issuing a statement said that a USD 2.9 billion staff level agreement with Sri Lanka was reached. Disbursement however is subject to China, one of Sri Lanka’s largest lenders, agreeing to restructure its loans. All other lenders are amenable to such an arrangement other than China.
Coincidentally, IMF’s Thursday’s briefing and the release of its above statement took place two days after President and Finance Minister Ranil Wickremesinghe presented “Interim Budget 2022,” i.e. on Tuesday (30 August).
A key IMF requirement is fiscal consolidation. A possible direction of “Budget 2023,” generally presented in November, may be gleaned from “Interim Budget 2022.” Wickremesinghe presenting “Interim Budget 2022”said, “This Interim Budget speech, the IMF agreement and Budget 2023 will set the framework for Economic Stabilisation and Revival. Within it, we will set the Road Map.”
He further said, “Our fiscal stabilisation programme envisages Government revenue increasing to around 15 per cent of GDP by 2025, from 8.2 per cent at end 2021. We aim to reduce public sector debt from around 110 per cent of GDP as at end 2021 to 100 per cent in the medium term.”
Nonetheless, Interim Budget 2022 aims at a budget deficit of 9.8 per cent of the GDP compared to the original estimate of an 8.8 per cent deficit leading to the envisaged deficit in Interim Budget 2022 to be one per cent of GDP more than “Original Budget 2022.” Howbeit, Budget 2021 made an 11.6 per cent GDP deficit, whereas “Interim Budget 2022” aims to reduce it to 9.8 per cent.
“Original Budget 2022” was presented by then Finance Minister Basil Rajapaksa in November 2021. The main reasons behind the expansion of the budget deficit in “Interim Budget 2022” over “Original Budget 2022” are envisaged revenue declining by 5.8 per cent (Rs 129 billion) to Rs 2,094 billion and expected expenditure increasing by 14.96 per cent (Rs 576 billion) to Rs 4,427 billion.
The key mover in revenue decline is taxes on external trade expected to fall by 30 per cent (Rs 138 billion) to Rs 322 billion and the increase in expenditure, envisaged expenditure on “Subsidies and Transfers” up 54 per cent (Rs 358 billion) to Rs 1,021 billion. However, IMF favours increasing targeted welfarism in the context that the economy is expected to suffer a record high contraction of 8.7 per cent this year according to it.
The decline in “taxes on external trade” in “Interim Budget 2022” is led by import controls and bans to conserve the country’s spartan US dollar reserves, anathema to the IMF. IMF’s Mission Chief to Sri Lanka Masahiro Nozaki who also participated at Thursday’s briefing responding to a question of a closed exchange rate (ER) regime being in operation since May, said that they are for a flexible ER regime. A flexible ER regime needs to be complemented by a liberalised trading regime.
In fact, the soft tissues manufacturing industry in a statement on Monday (29 August) regarding this import ban said, “The hygiene soft tissue paper industry established in 1982 manufactures products like toilet rolls, paper serviettes, hand paper napkins, facial tissues, paper hand towels, industrial towels and rolls.
Some local manufacturers also export these products to countries like Maldives, generating employment and income to over 700 people and their families, directly and indirectly benefiting more than 5,000 families including distributors, their employees and families.
But recent raw material import restrictions are a major setback to households and businesses in the hospitality and tourism, apparel and food industries, including hospitals and medical centres. The current raw material stock to manufacture such tissues is sufficient only up to the middle of this month.”
However, Wickremesinghe in his “Interim Budget 2022” speech said, “The Government will gradually phase out high trade barriers in the form of para-tariffs.” Though unsaid, this may also include the phasing out import bans. Sooner done the better, especially as one of Wickremesinghe’s key targets is to uplift tourism.