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Monday April 15th, 2024

Crisis-hit Sri Lanka targets more tax revenue in 2023 budget; concerns on SOEs, spending remain

ECONOMYNEXT – Sri Lanka has aimed at increasing tax revenue by 69 percent to fund government spending in the crisis-hit economy, but analysts say the 2023 budget failed to address core issues on excess spending and articulate strong policies on restructuring loss0making state owned enterprises (SOEs).

President Ranil Wickremesinghe in his capacity as the finance minister presented the 2023 budget on Monday November 14 which he said will lay the foundation for a strong and modern economy that creates opportunities for the island nation’s youth.

The budget has aimed at increasing tax revenue by 69 percent to 3,130 billion rupees next year from this year’s 1,852 billion rupees while bringing down the budget deficit to 7.9 percent in 2023 from this year’s revised 9.8 percent.

The high tax revenue target comes as millions of Sri Lankans face the impacts of the ongoing economic crisis – 66 percent inflation, job losses, and shrinking disposable income.

Wickremesinghe in his budget speech announced measures to improve tax administration in a move to broaden the tax net and increase the revenue, though most of the tax hikes including personal income tax were proposed last month.

“While the requirement for everyone over 18 to open a tax file is a first step, many of those who open files will be below the tax-free threshold,” Wickremeinghe said.

“Therefore, it is important to introduce measures that identify high income earners specifically and get them into the tax net.”

Analysts said the budget ended some speculations on increasing taxes further.

“Fears of additional taxes such as wealth tax, increase in VAT (value added tax), additional taxes on revenue etc came to rest with the announcement of the 2023 budget proposals,” Danushka Samarasinghe,  Chief Executive Officer/Director at Nation Lanka Equities (Pvt) Ltd told EconomyNext.

“Ending uncertainty and speculation is a positive. But it would have been better if there were time-bounded targets for increasing government revenue from measures such as divesting state owned assets and SOEs,” he said.

“Just a mere mention of the intention of divestiture may not hold water. Also any significant reforms to reduce the public sector headcount was the need of the hour and seems to be omitted.”

Wickremesinghe in his budget named five SOEs that will be considered for restructuring without any time frame and the proceedings from such a process are expected to boost the foreign currency reserves and a faltering rupee currency.

High expectations 

Markets had been expecting a strong reform-oriented budget from Wickremesinghe mainly to reduce government expenditure, strong measures to reduce the state sector and minimise corruption, as well as stringent restructuring of SOEs.

However, many analysts said the anticipated strong policy measures were missing from the budget.

“The president should have explained how he plans to restructure bleeding SOEs like the CPC and CEB,” a senior market analyst told EconomyNext referring to state-run fuel retailer Ceylon Petroleum Corporation (CPC) and state-owned Ceylon Electricity Board (CEB).

“These institutions are run at the cost of all other institutions in the country. The restructuring he has suggested has been discussed for the past seven years. There is no timeline for the restructuring he has announced.”

“There are no bold policies. There is no reduction in government expenditure. There is a looming banking sector crisis, but there is no single word about it. There is no solid plan to slim down the state sector. It is only about taxing the same people who have been paying the tax. This budget is off the mark. It lacks vision, courage, and sense of urgency.”

The CPC and CEB are the top loss-making SOEs in the country. The institutions have been bleeding because successive governments failed to set market-based prices for electricity and fuel fearing electoral defeat.

However, the economic crisis following the foreign exchange shortage forced the government to raise the prices of both electricity and fuel to record highs in the second half of this year.

Wickremsinghe, before the budget, had repeatedly spoken about reforms in these two loss-making government’s institutions. However, analysts say, the budget was not as strong as it was expected to be.

Tight rope

Wickresinghe is also under pressure due to a geopolitical cold war between India and China. International powers want Sri Lanka to move away from China while Beijing has been one of the trusted lenders to the island nation.

He needs the support of all the countries if Sri Lanka wants to successfully receive a 2.9 billion US dollar, four-year International Monetary Fund (IMF) loan to instill investor confidence in Sri Lanka.

But more than international pressure, Wickremesinghe is walking a tight rope locally since his appointment as president as he has to depend on the ruling Sri Lanka Podujana Peremuna (SLPP) lawmakers.

The SLPP had a two-third parliament majority before President Gotabaya Rajapaksa was ousted by protesters who demanded that he resign over his mismanagement of the economy.

Wickremesinghe, who has been in parliament for 45 years, is the leader of center-right United National Party (UNP). The UNP has only one seat in the 225-member parliament.

Political analysts had predicted that Wickremesinghe would be forced to go for only mild changes during the budget because bold measures could be unpopular for the centre-left and nationalist SLPP.

The president needs the support of the SLPP to pass the budget but has to also allow many opposition lawmakers to cross over to the government benches to pass the budget and implement other crucial economic policies.  (Colombo/Nov14/2022)

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Sri Lanka to discuss two contentious points with bondholders: report

ECONOMYNEXT – Sri Lanka and sovereign bondholders are to discuss two matters in the near future which the two sides failed to reach agreement at March talks in London, a media report quoting a top aide to President Wickremesinghe as saying.

Sri Lanka and bondholders had discussed four matters on restructuring international sovereign bonds in late March and agreement had been reached on two, President’s Chief of Staff Sagala Ratnayake was quoted as saying on state-run ITN television.

A restructuring proposal by bondholders was not in line with IMF requirements, and Sri Lanka had sent a counter proposal, he said.

The matters will be discussed at round of talks in the near future.

Sri Lanka was optimistic of reaching an agreement with the bondholders before June, officials have said.

According to matters already in the public domain, sovereign bond holders are keen to get a bond tied to dollar gross domestic product, as they feel IMF growth projections are too low.

In past re-structuring so-called value recovery instruments, a type of warrant, gave their owners extra payments if a country did better than expected and were tied to items like oil prices.

Bondholders had initially proposed bond which would have a lower hair cut initially, and it will have additional hair cuts if growth is low (about 3.1 percent) as projected in an IMF debt sustainability analysis. (Colombo/Apr15/2024)

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BIMSTEC Secretary General visits Sri Lanka, discusses regional cooperation

ECONOMYNEXT – The Secretary General of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), discussed measures to enhance regional cooperation, during his visit to the island last week.

Ambassador Indra Mani Pandey, Secretary General of BIMSTEC visited Sri Lanka from 07 – 12 April 2024, following his assumption of office as Secretary General of BIMSTEC in January this year.

The Secretary General “met with senior officials of relevant Ministries/Agencies to discuss measures to enhance regional cooperation under various BIMSTEC initiatives,” the Foreign Ministry said in a statement.

Several BIMSTEC countries have bilateral trade agreements, such as Sri Lanka and India, Thailand and Myanmar, Sri Lanka and Thailand, but no collective regional agreement to enable intra-regional leverage.

During the visit, Secretary General Pandey held discussions with Ministry of Foreign Affairs officials and paid courtesy calls on the President and the Minister of Foreign Affairs.

Secretary General Pandey participated at an event on “Regional Cooperation through BIMSTEC” organized by the Lakshman Kadirgamar Institute (LKI) on 9 April. (Colombo/April15/2024)

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Sri Lanka rupee closes weaker at 299.00/10 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 299.00/10 to the US dollar in the spot forex market on Monday, from 298.50/55 on Wednesday, dealers said, while bond yields were broadly steady.

A bond maturing on 15.12.2026 closed stable at 11.30/35 percent.

A bond maturing on 15.09.2027 closed stable at 11.90/12.00 percent.

A bond maturing on 15.12.2028 closed at 12.10/20 percent up from 12.10/15 percent.

A bond maturing on 15.09.2029 closed stable at 12.20/40 percent. (Colombo/Apr15/2024)

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