Sri Lanka's new president, Anura Kumara Dissanayake, will present the government's income and political goals in his first annual budget on Monday, aiming to continue the country's recovery from the financial crisis and demonstrate its alignment with the IMF's $2.9 billion assistance program.
The severe depletion of dollar reserves plunged the island nation into chaos three years ago, leading to a sharp rise in inflation, currency devaluation, and a default on external debt of $25 billion.
After receiving emergency funding from the International Monetary Fund (IMF) in the amount of $2.9 billion in March 2023, Sri Lanka has shown a recovery that occurred faster than expected. Inflation has decreased, the central bank lowered interest rates to pre-crisis levels, and debt restructuring was completed in December.
Dissanayake, who is also the finance minister, hopes to accelerate the economic recovery through tax cuts, increasing prosperity, and supporting local industries in line with his election promises.
However, he faces the challenge of not exceeding the parameters set by the IMF, which include an ambitious budget deficit target of 5.2% of GDP and revenue growth to 15.1% of GDP by 2025, to secure the next tranche of around $333 million in financial aid.
Analysts note that he will likely need to introduce new taxes and redistribute spending to boost government revenues.
"From this budget, we will try to assess the reliability of the medium-term fiscal plan and the impact of policies on debt and deficit in the future," said Sagarika Chandra, director of the Asia-Pacific Sovereign Department at Fitch Ratings.
Achieving the IMF's goals is critical for Sri Lanka in its effort to improve its credit rating after emerging from default, allowing the country to return to international financial markets and take on new loans to repay old ones starting in 2028.
Investors are also eagerly awaiting the government's plans to attract more foreign investment as Sri Lanka seeks to rebuild its reserves.
Sri Lanka's current reserves stand at $6 billion, enough to cover four months of imports, according to the latest data from the central bank. At the height of the crisis, reserves fell to $1.9 billion at the end of 2022.
"A positive rating response could be triggered by a sustained decline in debt ratios over time, supported by a credible medium-term fiscal consolidation strategy, particularly through revenue growth," Chandra added.
"Historically, revenue growth has been a weak spot."
Sri Lanka's economy is expected to grow by 5% in 2024, according to the latest central bank data, after contracting by 2.3% in 2023. The World Bank estimates that Sri Lanka's economy will grow by 3.5% this year.