Sri Lanka’s president is set to cut spending when he presents an interim budget on Tuesday to see the country in crisis for the rest of the year, amid discussions with the International Monetary Fund over a bailout package.
The tourism-dependent nation of 22 million is facing its worst economic crisis since independence in 1948, with foreign reserves plunging, public finances in disarray and the cost of basic goods rising.
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 spending would be cut by a “few hundred billion” of rupees, including on defence, to channelize funds for welfare and to pay interest on loans. Sri Lanka had targeted spending of 3.9 trillion rupees ($10.99 million) in its latest budget, presented in November.
Wickremesinghe, who is also the finance minister, is expected to outline measures to support low-income communities hardest hit by the financial crisis and announce new taxes to reduce a double-digit deficit.
A full-year budget for 2023 is likely to be presented in November, outlining a wider recovery plan.
“The interim budget is likely to target a deficit of 9.9 percent by 2022, which is down from 12 percent previously,” said Lakshini Fernando, macroeconomist at investment firm Asia Securities.
“But spending 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 on July 25, according to ratings agency S&P Global.
An IMF team that arrived in the country last week concludes its visit on Wednesday, and Sri Lankan officials say they hope to have a staff-level agreement to advance talks for an emergency loan of some 3 billion dollars.
The IMF team has also discussed Sri Lanka’s debt restructuring of around $29 billion.