The economic downturn in Sri Lanka has resulted in a chaotic financial crisis among the country’s citizens. The country’s Budget proposal for 2024 seeks to change this by raising the cost of living allowance of public sector employees by Rs. 10,000 effective from April 2024. There are 1,600,000 public sector employees in the country, which includes more than 5,000,000 family members.
“Expenses for the proposed salary increase will be paid through tax revenue,” Treasury Deputy Secretary R.M.P. Ratnayake told The Sunday Morning, adding that the rise was long overdue and had to be done due to inflation and economic changes.
Employees have not received a salary increase in a long time due to the country’s economic situation. The cost of living allowance for Government employees has remained at Rs. 7,800, and the demand for an increase has been discussed for quite some time among stakeholders.
President Ranil Wickremesinghe addressed Parliament last week, outlining Budget 2024, themed ‘A Prelude to a Bright Future’ and announced that public sector employees would receive a salary increase of Rs. 10,000 through their cost of living allowance.
“Even though the timing may not be ideal, it had to be done considering the cost of living because public sector salaries are very low,” the Treasury Deputy Secretary noted.
State salary bill
According to the Central Bank of Sri Lanka (CBSL), the State’s salary bill decreased to 49% of taxes during the nine months leading to September 2023, marking a return to levels observed before the implementation of revenue-based fiscal consolidation that escalated spending and led to growth shocks.
In 2014, Sri Lanka’s salary bill stood at 47% of taxes, marking the onset of increased spending under the ‘revenue-based fiscal consolidation’ strategy. This decline occurred amidst a shift in fiscal consolidation approaches, encompassing both revenue and spending-based strategies.
The International Monetary Fund (IMF) advocated revenue-based fiscal consolidation, a departure from the traditional spending-based approach, causing spending to escalate from approximately 17% of GDP in 2014 to 20% in subsequent years.
Needed sooner or later
University of Peradeniya Department of Economics and Statistics Professor Ananda Jayawickreme, commenting on the situation, said: “It is true that the public sector deserves a salary increase because their salaries are low, unlike the private sector, but the concern is the timing and the country’s poor revenue collection. It has to be done sooner or later; that is true. However, the Government will face funding issues.”
The Sunday Morning also learned that Sri Lanka is falling short of IMF tax revenue targets. According to Professor Jayawickreme, we must raise at least 95% more taxes by next year, which is simply not possible. In this backdrop, funding for the salary increase will be difficult.
There is also the perception that no one likes to see the public sector get a pay rise because it has always been viewed negatively. However, with the ongoing living situation and economic constraints, a pay rise is essential as relief, according to Professor Jayawickreme.
Meanwhile, State Minister of Finance Shehan Semasinghe defended the substantial salary increase for State sector workers, asserting that the Government deliberately avoided the ‘populist’ route of initiating salary raises from January.
Semasinghe stated: “Despite the possibility of resorting to populist measures like increasing Government employee salaries from January, the Government chose a prudent path forward.”
He elaborated: “The choice was made with careful foresight and responsibility to avert undue economic strain on the nation. These measures were implemented under the direct leadership of the President, showcasing a dedication to wise economic governance and lasting policies.”
A strategic move
According to the Ministry of Finance, Sri Lanka requires between Rs. 90-95 billion monthly to fund State salary expenditure, along with an additional Rs. 15 billion for pension coverage. The proposed increase in salaries for 1.6 million Government employees aligns with a similar adjustment plan for the private sector.
The 2024 Budget outlines a goal to elevate tax revenue by 47.1%, targeting Rs. 3,820 billion, a significant increase from this year’s estimated Rs. 2,596 billion. The primary source of this anticipated revenue surge lies in taxes on goods and services.
This rise in tax revenue is a strategic move, signalling Sri Lanka’s commitment to the IMF. Notably, the IMF is yet to release the second tranche of a $ 3 billion loan, pending the achievement of its tax revenue targets.
Specifically, projections indicate a 25% increase in income tax, reaching Rs. 1,080 billion compared to this year’s estimated Rs. 864 billion. Moreover, levies on external trade are anticipated to rise by 41.5% to Rs. 505 billion from the current Rs. 854 billion.