The president of Sri Lanka is likely to reduce spending when he proposes an interim budget on Tuesday to get the country through the rest of the year, amid talks with the International Monetary Fund on a rescue package.
The tourism-dependent nation of 22 million people is experiencing its greatest economic crisis since its independence in 1948, with foreign exchange reserves collapsing, governmental finances in disarray, and basic goods prices skyrocketing.
Having become president after his predecessor was ousted in a popular uprising in July, Ranil Wickremesinghe told Reuters earlier this month that the interim budget would focus on fiscal consolidation measures agreed with the IMF.
He said that expenditure would be slashed by a “few hundred billion” rupees, including on defence, to channel funds for welfare and to repay interest on loans. Sri Lanka aimed for 3.9 trillion rupees ($10.99 billion) expenditure in its last budget, presented in November.
Wickremesinghe, who is also the finance minister, is expected to outline measures to support low income communities worst hit by the financial crisis and announce fresh taxes to shrink a double digit deficit.
A full-year budget for 2023 is likely to be presented in November, where a broader recovery plan will be outlined.
“The interim budget will likely aim for a 9.9% deficit for 2022, which is lower than the earlier 12%,” said Lakshini Fernando, macroeconomist at investment firm Asia Securities.
“But expenditure and revenue targets will be difficult to achieve given the cooling economy and welfare demands.”
The island nation missed interest payments due on June 3, June 28, and July 18, and a principal payment due on July 25, according to rating agency S&P Global.
An IMF team that arrived in the country last week concludes its visit on Wednesday, with Sri Lankan officials saying they expect to have a staff-level agreement in place to advance talks for an emergency loan of around $3 billion.
The IMF team has also discussed restructuring Sri Lanka’s debt of about $29 billion.