On Tuesday, bankrupt Sri Lanka announced drastic cuts to government spending and warned that, despite significant tax increases, it would struggle to pay public salaries and pensions.
After suffering through an unprecedented economic crisis last year, the island nation has defaulted on its $46 billion public debt and is negotiating an IMF bailout.
This week, President Ranil Wickremesinghe issued an order to cut state spending by 5%, and on Tuesday, his administration issued a warning that welfare payments to 1.8 million families living below the poverty line might be delayed for a month.
Bandula Gunawardana, a government spokesperson, stated to reporters, “The president informed the cabinet yesterday that the economic crisis this year is going to be worse than what we expected.”
After shrinking by an estimated 8.7% in 2022, Gunawardana stated that the government expected the economy to contract further this year.
He stated, “We will not receive the projected tax revenue because the economy will shrink again this year.”
In order for Sri Lanka to be eligible for a $2.9 billion IMF loan, the country must first achieve debt sustainability.
Additionally, the lender has requested that Colombo reduce its 1.5 million-strong public service, significantly increase taxes, and dispose of state enterprises that are operating at a loss.
Sri Lanka’s efforts to restructure its debt have been stalled because key creditors like China and India have yet to agree on a “haircut” for their loans to the South Asian nation.
On New Year’s Day, the state implemented doubled corporate and personal income taxes to boost revenue.
After a 75 percent tariff increase in August, electricity prices are also increasing by 65 percent.
The 22 million people of Sri Lanka endured months of fuel and food shortages, prolonged blackouts, and skyrocketing inflation last year, igniting public outrage.
After his predecessor fled the country when protesters stormed his residence, Wickremesinghe assumed power in July, when the crisis was at its height.
Source: AFP