COLOMBO, (AP/AFP)- Bankrupt Sri Lanka announced on Tuesday sharp government spending cuts and warned it had barely enough revenue to pay public salaries and pensions despite huge tax hikes.
The island nation has defaulted on its $46 billion public debt and is negotiating an International Monetary Fund (IMF) bailout after an unprecedented economic crisis last year brought widespread misery.
Government spokesman and Media Minister Bandula Gunawardena said each ministry’s annual budget will be cut 5%. He said that the government was “trying its best to curtail other expenses too.”
“The president informed the cabinet yesterday that the economic crisis this year is going to be worse than what we expected,” government spokesman Bandula Gunawardana told reporters.
Gunawardana said the government expected the economy to contract further this year after shrinking an estimated 8.7 per cent in 2022.
“We will not get the projected tax revenue because this year too the economy will shrink,” he said.
Sri Lanka’s Parliament last month approved a 5.82 trillion rupee ($15 billion) budget, which provides for the restructuring of state-owned enterprises, reduces subsidies for electricity, and increases taxes to boost revenues based on proposals by the International Monetary Fund under a preliminary $2.9 billion bailout plan.
Unsustainable government debt, a severe balance of payments crisis and the impact of the COVID-19 pandemic led to a shortage of essentials such as fuel, medicine and food. Soaring prices have caused severe hardships for Sri Lankans, leading to a political upheaval that forced the resignation of then-President Gotabaya Rajapaksa.
His successor, Ranil Wickremesinghe, has somewhat reduced the shortages of fuel and cooking gas, but power outages continue, along with shortages of imported medicines.
Gunawardena told reporters on Tuesday the country’s economy suffered a 7% negative growth rate in 2022. “As a result, we expect that the government’s income from the taxes would drastically decline within the first three months of this year. We think this income loss would prevail throughout this year.”
“The treasury is facing its worst economic crisis,“ he said, adding that the government was struggling to raise the money needed to pay salaries of public servants.
The government is under pressure to reduce its massive bureaucracy of 1.6 million civil servants and is facing severe criticism over hiking taxes and the electricity bill.
Last year, Sri Lanka suspended repayment of nearly $7 billion in foreign debt due this year. It has since entered into a preliminary agreement with the IMF, which has agreed to provide $2.9 billion over four years depending on the willingness of Sri Lanka’s creditors to restructure their loans.
Sri Lanka’s total foreign debt exceeds $51 billion, of which $28 billion has to be repaid by 2027.
Sri Lanka needs to achieve debt sustainability as a precondition to secure a $2.9 billion IMF loan.
The lender has also asked Colombo to trim its 1.5 million-strong public service, sharply raise taxes and sell off loss-making state enterprises.
Key creditors such as China and India are yet to agree upon a “haircut” on their loans to the South Asian nation, which has stalled Sri Lanka’s efforts to restructure its debt.
Doubled personal income and corporate taxes kicked in on New Year’s Day to shore up state revenue.