Crisis recovery and continuity
View(s):Surprising the IMF
The point that I want to get across is that from a policy point of view, the government has little to do in getting the economy to grow at that rate! In other words, the government must do something only when we aspire to accelerate economic growth to higher numbers such as 7 – 8 per cent a year and to sustain it over a longer period of 20 – 25 years.
President Anura Kumara Dissanayake presenting the Budget 2025.
This is something that Sri Lanka never achieved in the past. Only on a few occasions was Sri Lanka able to reach a 7 – 8 per cent rate of growth randomly and unexpectedly, but such achievements were never sustained for a longer period.
The IMF too, for whichever the reason agrees to the fact that the Sri Lankan economy will continue to grow around 3 per cent per annum for the next six years until 2030. IMF growth numbers and other macroeconomic projections were released in its Third Review of the EFF programme last week.
Post-crisis growth numbers can be slower for a few years, but it does not limit the ability of the country to turn it around quickly and achieve a higher growth momentum. In spite of slower growth projections by the IMF, the Sri Lankan expectation for growth is quite optimistic. Of course, the country has the ability to surprise the IMF, as it did by turning the high inflation to deflationary numbers and reaping the fruits of recovery within a short period of time.
Two policy documents
I am referring to two important policy documents which give a sense of medium-term policy directions of the country – the Government Budget 2025 and the IMF Country Report (March 2025), issued a few days ago. Some of the vital information from the two documents provides an insight into policy directions and challenges ahead for the coming years.
An objective analysis of the budgetary numbers show that the current year Budget 2025 is based comfortably on what the previous Budget 2024 has achieved. From a bird’s eye view, the last year budget, that is Budget 2024, shows better achievements in terms of “fiscal consolidation” than what is estimated in the current Budget 2025.
Let me explain: While the government revenue has been rising every year approximately by about Rs.1,000 billion, the budgetary operations depict gradual improvements in budget deficit and primary surplus – the difference between revenue and non-interest expenditure. A gradual improvement in primary surplus shows that the country is on a path to reducing its debt-to-GDP ratio. And Sri Lanka improved it from 0.6 per cent in 2023 to 2.2 per cent in 2024.
Budget 2025 does not distort previous achievements and neither does it improve the fiscal consolidation effort. The estimated revenue increase for 2025 is also closer to Rs.1,000 billion. However, there is not much improvement in both the budget deficit and primary surplus.
Budget 2025 is impressive on the expenditure side – thanks to the improvements reported in the previous year. The question is then what does all this mean for the coming years. This is where the IMF Review provides some valuable information.
Debt sustainability
Apart from achieving “fiscal consolidation”, Sri Lanka’s recovery path includes improving its “debt sustainability”. This needs to be achieved by reducing the country’s debt-to-GDP ratio to below 100 per cent within the next six years and improving external finance position to meet foreign debt obligations.
The country is on the path to debt sustainability for the coming years too at least until 2032 while neither have we stopped adding new debt. As for 2025, the budget deficit of Rs.2,200 billion must be financed with new debt; the Budget Speech reveals the total gross borrowing requirement of the government as Rs. 4,000 billion.
Debt service payment (interest plus amortisation) for the current year is estimated to be Rs.4,550 billion, compared with the government’s total revenue of Rs.4,990 billion. This means that Sri Lanka cannot meet its annual debt repayment obligations without further borrowings.
We have concluded the debt-restructuring process and committed to begin the stalled foreign debt payments in 2028. All these numbers tell us one thing: The country is far from reaching debt sustainability, although we are on that path while keeping further borrowings.
Recovery is not over yet
As far as the road ahead for Sri Lanka is considered, we may understand that we are not yet in a comfortable position of the recovery path in maintaining fiscal consolidation and debt sustainability. This is where we can refer to the latest economic review of the IMF.
The IMF commends what we have achieved so far under its EFF programme citing the performance as strong despite some delays in social spending. Although the reform efforts are bearing fruit with the recovery gaining momentum, the IMF confirms that the economy is still vulnerable. This indicates there are possibilities for the economy to fall back unless and until we deliberately sustain the reform agenda. The reform agenda refers to the policies and actions that are critical to keep the economy on the path towards fiscal consolidation and debt sustainability. “There is no room for policy errors.”
The IMF anticipates further improvements in fiscal consolidation within the next couple of years. While the government revenue must increase to over 15 per cent of GDP from 13.7 per cent in 2024, expenditure must decline to below 20 per cent of GDP from 20.4 per cent in 2024.
The Budget 2025 is, however, within the IMF’s programme parameters, as acknowledged by the IMF. But it warns about the need for improvements in tax compliance gains and the introduction of property tax with digitalisation of property value assessment. The fiscal operations should be in line with the Public Fiscal Management law, while the government should return to cost-recovery electricity pricing as well.
The policy discussion of the IMF revenue implies that although the current budget is within the IMF programme there are further improvements needed while avoiding the risk factors for fiscal consolidation.
Recovery is not enough
Recovery is necessary but not sufficient because at the end of the day sustaining the recovery depends on economic progress. The long-term sustainability depends on unlocking the country’s growth potential through reforms. In this respect, the IMF points out to key structural reforms targeting trade liberalisation, the labour market, public enterprise governance and productivity, and climate resilience.
With respect to trade liberalisation, the government should aim at resolving the para-tariff issue, adopt a export development strategy and push for Free Trade Agreements. Labour laws must be reformed to be in line with international standards. The government should press forward with structural reforms to improve the financial viability of public enterprises. These reforms include both the Ceylon Electricity Board and SriLankan Airlines among other public enterprises.
We are still scratching the surface with respect to reforms in these areas, while in certain respects there have been reforms’ delays and reversals too. It is evident that unlocking the growth potential requires accelerating export growth without depending too much and too long on tourism income and remittance flows.
The year 2025 and beyond is crucial. The country needs not only an economic recovery with fiscal consolidation and debt sustainability, but also a bold reform programme to go beyond and above 3 – 4 per cent rate of growth.
(The writer is Emeritus Professor at the University of Colombo and Executive Director of the Centre for Poverty Analysis (CEPA) and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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