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Sri Lanka must continue raising taxes to achieve a budget surplus excluding interest payments by 2025 and beyond, according to Bloomberg Intelligence's analysis of the IMF bailout plan. The country's debt cannot be reduced without maintaining a primary balance, with tax hikes and austerity measures helping to lower the deficit. Bloomberg Intelligence projects the budget shortfall will narrow to 3.8% of GDP by 2027, down from 8.7% in 2023. Excluding interest payments, the government is expected to achieve an average budget surplus of 2.3% of GDP over the next three years, compared to an estimated deficit of 0.6% of GDP in 2023. Moreover, the overall deficit will also shrink as borrowing costs decline, with debt restructuring expected to cut interest payments to 5.7% of GDP in 2032 from 7.9% in 2023, as bondholders take a 28.8% haircut.
Bloomberg Intelligence further noted that Sri Lanka's fiscal policy has been restrictive since 2022, with tax revenues expected to rise to 12.1% of GDP in 2023 from 7.3% in 2022. A one-off expenditure of 450 billion rupees to recapitalize banks hit by bad loans during COVID and the debt crisis will likely result in a budget deficit excluding interest payments this year. Without this expenditure, the government would achieve a primary surplus of about 0.8% of GDP in 2023. The report suggests fiscal policy will remain contractionary in 2025, with further tax increases expected to ensure a primary budget surplus and initiate debt repayment. The IMF will continue lending only if these surpluses are maintained, limiting the government's ability to use fiscal policy to stimulate growth for the foreseeable future.
