Sri Lanka is in a Catch-22 position as it prepares the budget for 2025, regardless of which government is in power, due to the need to comply with the $ 2.9 billion Extended Fund Facility (EFF) agreement made with the International Monetary Fund (IMF), which remains in effect until 2028, according to Minister of Transport, Highways, and Mass Media Dr. Bandula Gunawardana.
The following article is based on a discussion with Dr. Gunawardana.
By 2025, the country’s external foreign resource gap is expected to be insufficient to cover international transactions.
Official data suggests a need for $ 5.018 billion to bridge this gap. Any administration drafting the upcoming budget must secure this funding.
To support this, the IMF has agreed to provide $ 663 million through its extended credit facility and an additional $ 700 million to address the budget deficit.
Furthermore, the World Bank (WB) and the Asian Development Bank (ADB) have pledged $ 400 million and $ 300 million, respectively. There is also an anticipated debt relief of $ 3.655 billion through the restructuring of foreign debt.
Political parties aspiring to govern must clarify whether they will adhere to the agreements reached by President Ranil Wickremesinghe, who also serves as Finance Minister. Dr. Gunawardana emphasised that even if international cooperation was not expected, there was no alternative for the country’s future budget.
Deviation could destabilise the country
Sri Lanka anticipates receiving $ 1.363 billion under an IMF programme, also supported by the WB and ADB in 2025, Dr. Gunawardana noted.
The IMF Board-approved economic reform programme, which extends until March 2025, requires the accumulation of $ 250 million in foreign reserves under a net international reserve target for the first quarter. By the end of the year, gross international reserves are projected to increase by $ 1.569 billion.
Dr. Gunawardana, who has previously served as Rural Economy Minister and Deputy Finance Minister in 2004, warned that any deviation from the current Government programme led by President Wickremesinghe could destabilise the country again.
He highlighted that renegotiations with the IMF could jeopardise the disbursement of the next tranche due in December, along with subsequent disbursements from the WB and ADB. Between December 2024 and January 2025, the country could lose between $ 1.2 billion and $ 1.3 billion, potentially leading to further instability.
The successful negotiation of debt restructuring agreements with 17 countries has been a significant achievement for Sri Lanka. The Government has completed the debt restructuring process while maintaining foreign policy, national identity, and sovereignty. The country’s swift recovery from the economic crisis has been globally recognised.
However, some Opposition politicians are misleading the public by advocating for renegotiations with the IMF for narrow political gains.
Dr. Gunawardana explained that the decision to apply for the EFF had been officially communicated in March 2022, and that it had taken until March 2023 to receive the first tranche, following a year of negotiations on the Debt Sustainability Analysis (DSA).
The DSA is based on several key parameters: reducing the national debt, currently at 133% of Gross Domestic Product (GDP), to 95%; lowering the current payment of 9.3% of GDP for foreign loan settlements to 4.5%; achieving a primary budget surplus of 2.1%; and increasing tax revenue to 15% of GDP.
These goals are now legally binding and any attempts to alter them would require renegotiation, which could take another year or slightly more than a year.
Dr. Gunawardana warned that such a scenario would likely lead to another man-made economic crisis, with the IMF withholding the next $ 400 million tranche due in December.
If the IMF delays its payment, the WB and ADB would likely withhold their respective tranches, resulting in a potential loss of $ 1.2 billion to $ 1.3 billion between December and January.
This would destabilise the country again, potentially devaluing the rupee and causing inflation to rise.
Future budgets
For the 2025 Budget, Sri Lanka expects to receive $ 3.655 billion in debt relief. This funding structure is crucial for meeting obligations such as salaries, pensions, and subsidies for public servants, irrespective of the ruling administration.
However, these debt relief projections are speculative and extend into 2027. By that year, despite efforts to reduce budget gaps, a deficit of $ 3.911 billion is anticipated.
To prepare the 2027 Budget, Sri Lanka plans to rely on a comprehensive credit facility of $ 629 million, along with $ 600 million from the IMF, $ 300 million from the WB, and $ 300 million from the ADB.
Despite these allocations, there remains a shortfall of $ 1.5 billion. To address this deficit, the country will need to access international markets, although current global conditions limit the issuance of Sri Lankan sovereign bonds until 2027.
To issue these bonds successfully, foreign reserves need to reach $ 14 billion, up from the current $ 5.5 billion. Despite these challenges, a structured annual programme had been developed to address these financial needs, Dr. Gunawardana clarified.
In this context, no government can operate outside of the prepared economic programme. Dr. Gunawardana asserted that any attempt to govern without adhering to this economic strategy could lead to another collapse of the country.
Looking forward, the 2025 Budget must be drafted in the coming months. Approval of this budget is essential for disbursing salaries to public servants, pensions for senior citizens, and social welfare benefits such as ‘Samurdhi’ and ‘Aswesuma’.
Record number of new legislation
The Government has also enacted a record number of new laws over the past two years, establishing the most up-to-date legal framework in South Asia. These include the Central Bank Act, the Economic Transformation Act, the Public Debt Management Act, the Fiscal Management Act, and the Anti-Corruption Act.
The Central Bank Act is expected to enhance the independence of the bank. By focusing on price stability and depoliticising monetary policy decisions, the act aims to stabilise the currency, prevent money printing, lower interest rates, reform taxes, incentivise Foreign Direct Investment (FDI), and promote long-term economic growth.
The Economic Transformation Act aims to establish the National Policy on Economic Transformation and create entities such as the Economic Commission of Sri Lanka, Investment Zones, the Office for International Trade, the National Productivity Commission, and the Sri Lanka Institute of Economics and International Trade.
Sri Lanka has also implemented a comprehensive Anti-Corruption Act designed to combat bribery and corruption, introducing several key provisions and strengthening investigative and punitive mechanisms.
Dr. Gunawardana stressed that any political party hoping to assume power should publicly disclose whether they intended to adhere to, amend, or abolish these legislations.