ECONOMYNEXT – Sri Lanka has begun talks with the International Monetary Fund to craft a new staff level agreement to pass the next review of its program and maintain it through 2025.
A staff level agreement with a budget according to its parameters is required to pass the next review.
The government of President Anura Dissanayake had expressed the readiness to work with the IMF “to advance Sri Lanka’s economic recovery within the context of the mandate,” saying that the success of the IMF program hinges on rebuilding public trust in governance”.
The NPP has said that it wants to increase the threshold of income tax to 200,000 rupees from the current 100,000 rupees a month and also bring down VAT on some medical implements.
The IMF program generally requires Sri Lanka’s government revenues to be raised to 15 percent of gross domestic product.
Increase revenues by 1.2-pct of GDP in 2025
Key legislative reforms of the IMF program have already been passed.
Sri Lanka has to meet a primary balance target of around 2.3 percent of GDP and revenue target of around 15 percent of GDP under the IMF deal.
In the existing program, a 300 billion rupee primary surplus has been set by December 2024, and 130 billion rupees has been proposed for March, which can be revised or hardened in to performance criteria in the new staff level agreement.
In 2024, Sri Lanka is likely to end up with revenues of about 13.8 percent of GDP, Udeeshan Jonas, Chief Strategist at CAL, a Colombo-based investment banking group said.
The challenge is to boost revenues by 1.2 percent of GDP, but with vehicle imports being relaxed next year it is not an impossible task, he said.
Expenditure Items
Top expenditure items include a public sector salary increase. A 7,500 rupee a month increase will cost around 100 billion rupees.
The already announced fertilizer subsidy to farmers and diesel for fisheries is likely to cost around 30 billion rupees.
The NPP manifesto had proposed subsidies under the income transfer program ‘Aswesuma’ to 170 billion rupees.
If it is an increase on existing volumes, that would add another 50 billion rupees to the expenditure bill.
President Dissanayake has mentioned that the government wants to support child malnutrition and the disabled.
A reduction in the PAYE tax could cost around 50 billion rupees, Jonas said.
Monetary Policy
Sri Lanka’s central bank has kept exceptional monetary policy so far, allowing the exchange rate to appreciate, and allowing food prices in particular to fall absolutely.
Under IMF programs, currencies that collapse from the inflationary rate cuts and outflow sterilization is usually not allowed to appreciate for ‘competitive exchange rates’ or to target the real effective exchange rate.
As the economy recovers, currencies depreciate more under high inflation targets and anchor conflicts, triggering fresh social unrest and new IMF deals in many cases, critics say.
In 2018, in particular, Sri Lanka missed foreign reserve targets as money was printed to boost inflation or cut rates.
The new administration’s stance on privatization is also not clear. If there is no privatization ahead, Sri Lanka would also have to depend more on taxes in the long term, unless steady expenditure rationalization is done.
SriLankan Airlines has debt including bonds and borrowings from state banks. Some of the debt of energy utilities, which came from borrowing made during forex shortages, has been taken over by the government.
Sri Lanka is expected to present and pass a budget in line with the IMF program parameters in February.
The completion of sovereign debt exchange is expected earlier. (Colombo/Nov19/2025)