Sri Lanka sees budget deficit falling, but strain on economy remains

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COLOMBO — The Sri Lankan government will reduce the budget deficit to around 8.8% of gross domestic product in 2022, finance minister Basil Rajapaksa said in his budget speech on Friday, though it missed its deficit target for 2021.

The government will also roll out a goods and services tax announced in the 2021 budget from January 2022, the minister said.

“We are living through history’s most challenging period in terms of people’s lives, livelihoods, sources of income, and job security,” said Rajapaksa, whose brother, Gotabaya Rajapaksa, is the island nation’s president.

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“I strongly believe that, even amidst these challenges, we are equipped with all the necessary strengths to manage the economy and to overcome such challenges.”

The new projected 11.1% budget deficit for 2021 is higher than the 9.5% target set by the government in June which itself was revised up from 8.9%.

“This budget is a credit positive,” Dimantha Mathew, Head of Research for First Capital told Reuters.

“There is a significant amount of taxes coming in and the government is looking to increase revenue by 46% next year while expenditure is expected to rise only by 16%. So the fiscal concerns are being addressed.”

However, he warned that there could be some tightening of the economy due to public and capital expenditure cuts that could see consumer spending being hit. Sri Lanka has a large public sector that makes up about 2 million of the 21 million population.

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Sri Lanka’s central bank announced in October that it would keep its 2021 target of 5% growth unchanged. Growth numbers for next year are yet to be announced by the government and no projections were included in the budget speech.

The budget also included support because of the COVID-19 pandemic for specific sectors such as tourism, apparel, plantations, and agriculture as the government looks to boost growth.

In late October, Moody’s downgraded Sri Lanka to Caa1 from Caa2 on debt sustainability concerns and a challenging external environment. Moody’s estimates that revenue will remain around 10% of GDP over the next few years while interest payments will continue to absorb around 60-70% of revenue.

Sri Lanka has to repay $4.3 billion in debt in 2022 and reserves dipped to $2.27 billion at the end of October. ($1 = 201.0000 Sri Lankan rupees) (Reporting by Uditha Jayasinghe, Writing by Alasdair Pal, Editing by Timothy Heritage)