• To get out of economic crisis, be serious about addressing fiscal sector issues
• SL has only recorded a primary surplus five times in post-independence history
• Increasing revenue collection as a percentage of GDP to 13% seems very ambitious
• A bulk of the additional revenue will have to come from new tax measures
• In 2024, interest payments will still absorb 64% of Government revenue

Sri Lanka’s total public debt translates to around Rs. 1.6 million for every man, woman, and child in the country and if we are to get out of this economic crisis once and for all, we have to be serious about addressing the issues in the fiscal sector, asserted public policy specialist and Advocata Institute Senior Research Fellow Dr. Roshan Perera, in an interview with The Sunday Morning.

Commenting on the recently-unveiled Budget 2024, she said its fiscal targets were in line with the goal of macroeconomic stabilisation, noting however that achieving a primary surplus in 2024 would be contingent on the Government raising the required revenue, while maintaining non-interest expenditure within the Budget allocations.

She also pointed out that the Budget 2024 expectation of increasing total revenue collection as a percentage of GDP to 13% from the revised estimate for 2023 of 10.2% of GDP seemed a very ambitious target, given that revenue collection in 2023 fell short of the target set in Budget 2023 of 11% of GDP despite several new tax policy measures being introduced in 2023.

Meanwhile, the large amount of resources absorbed by the public sector underscored the need for a serious restructuring of the entire sector, she noted, adding that if the private sector was to be the engine of growth, more resources needed to be made available to that sector. 

Following are excerpts of the interview:

What is your view of Budget 2024 in general?

Before answering your question, I would like to quote from two statements: The first is from the Budget speech 2024: 

“…for the majority of the 75 years following independence, our spending has often diverged from our generated revenue. When I say this, one might think that the governments of this country spent lavishly and wasted money. Not just governments. The country as a whole has lived beyond its means. …After 75 years of independence, we now find ourselves in a dire situation… Our economy collapsed completely, leading us to a status of bankruptcy. …what will happen if this practice (undertaking necessary reforms) is interrupted and disrupted? The series of reforms carried out with the support of the International Monetary Fund will stop. If that happens, the debt restructuring operation will come to a standstill. Confidence is broken and foreign exchange flow into the local banking system will stop… the foreign income we started receiving again will halt. The Government will have to borrow more from the domestic market by raising interest rates again… If that happens, we will slide back into economic hell. Our economy is derailed beyond repair… If that happens again, no one in the world will come forward to save Sri Lanka. The trust placed in us by all parties, including our external creditors, the International Monetary Fund, is broken.”

The second is a quotation from a document penned a couple of decades before: 

“…the truth is that Sri Lanka is in the thick of an economic crisis born of deep indebtedness. If not arrested soon, it will keep employment and incomes at the worst nadir for generations to come. Therefore we need to act prudently and with a renewed vision to stop the country from going down the slow path of ruin. The need for reforming the country is compelling as there is no way we can carry on in the current way … if the country cannot control its finances, it cannot control its economic future… government debt has expanded dramatically in recent years, to the point where today the size of the public debt is larger than the country’s GDP… as a result the revenue required to service this debt each year now exceeds the total revenues of the Government… To put this in perspective, the total public debt translates to Rs. 77,500 for every man, woman, and child in the country… Eventually we or our children will have to face the prospect of being unable to repay these debts. However, long before that our reputation as a country that can manage its resources and maintain its creditworthiness will be damaged to the point where we will be unable to recover. Therefore, we have a single-minded priority to overcome the debt crisis.” (Source: ‘Regaining Sri Lanka: Vision and Strategy for Accelerated Development,’ Government of Sri Lanka, December, 2002)

Twenty years on, total public debt translates to around Rs. 1.6 million for every man, woman, and child in the country. If we are to get out of this economic crisis once and for all, we have to be serious about addressing the issues in the fiscal sector.

The fiscal targets in Budget 2024 are in line with the goal of macroeconomic stabilisation. Under the Extended Fund Facility (EFF) programme with the International Monetary Fund (IMF), the primary balance (which is total revenue of the Government minus all non-interest expenditure) is expected to reach a surplus of 0.8% of GDP in 2024. The country has only recorded a primary surplus five times in its post-independence history. Hence, achieving a primary surplus in 2024 will be contingent on the Government raising the required revenue while maintaining non-interest expenditure within the Budget allocations. 

How realistic are the revenue targets in Budget 2024 and what will the impact be if these targets are not realised? 

Budget 2024 expects to increase total revenue collection as a percentage of GDP to 13% from the revised estimate for 2023 of 10.2% of GDP. This seems a very ambitious target given that revenue collection in 2023 fell short of the target set in Budget 2023 of 11% of GDP, despite several new tax policy measures being introduced in 2023.

In nominal terms, it is an increase of 45% to Rs. 4,127 billion. This is on the back of an increase in tax revenue of 42% to Rs. 2,851 billion in 2023. While a pickup is expected in economic activity in 2024, the projection for growth is under 2%, with inflation being kept at single-digit levels. While some of the increase in tax revenue collection is expected from increased economic activity, a bulk of the additional revenue will have to come from new tax measures. 

Around three-quarters of the increase in tax revenue is expected from taxes on domestic goods and services, with the balance from income taxes (28%) and taxes on external trade (13%). Changes to the VAT rate (from 15% to 18%), removal of VAT exemptions (except medicine, education, and some agriculture goods), and a reduction in the VAT threshold as well as the removal of the restrictions on imports are expected to generate a bulk of the revenue. However, this depends significantly on the sensitivity of domestic consumption to the price impact arising from the increase in the VAT rate and the imposition of VAT on hitherto exempted goods. 

Achieving these revenue targets will also depend on how quickly the economy picks up and, correspondingly, consumer demand. Close monitoring of revenue collection is vital. Any sign of a revenue shortfall requires immediate corrective action either by introducing new revenue measures or adjusting expenditure. As any fiscal slippage would require additional financing either from domestic or foreign sources, it would result in adverse impacts on interest rates and the exchange rate.

Can Sri Lanka afford this Budget? Are the goals realistic and is implementation feasible?

On the expenditure front, interest payments account for over 50% recurrent expenditure in 2024 with salaries and wages and transfer to households (pensions, social safety net, etc.), accounting for around 21% each. The Domestic Debt Optimisation (DDO) exercise is expected to reduce these costs, but it would materialise only over the medium term. Hence, in 2024, interest payments will still absorb 64% of Government revenue. 

The next big expenditure is salaries and wages, which is projected to increase substantially due to the cost-of-living adjustment proposed in Budget 2024. This will be given to 1.5 million employees in the public sector. While additional revenue is required to finance this increase, the implications it could have for wage pressures in the rest of the economy is a concern. A breakdown of the number of public servants in the document ‘National Budget 2024: For what? For whom?’ shows the dire need for rationalisation of the public service. 

The large amount of resources absorbed by the public sector, both from taxes as well as from borrowing from bank and non-bank sources, underscores the need for a serious restructuring of the entire public sector. 

While 80% of credit from the banking sector went to the private sector and 20% to the public sector in the 1990s, this proportion has steadily declined. By the 2020s, more than half the lending from the banking sector was absorbed by the public sector. This is a typical crowding out of resources. If the private sector is to be the engine of growth, more resources need to be made available to that sector.