• SL debt cannot be trimmed without maintaining primary balance

Sri Lanka must continue to raise taxes to achieve a budget surplus excluding interest payments in 2025 and beyond as per the bailout plan by the International Monetary Fund (IMF), Bloomberg Intelligence said.

Accordingly, Sri Lanka’s debt cannot be trimmed without maintaining a primary balance for the foreseeable future while tax hikes and austerity measures are helping to bring the deficit down. 

“We see the budget shortfall narrowing to 3.8% of GDP (Gross Domestic Product) by 2027 from 8.7% in 2023. Excluding interest payments, the Government looks set to achieve an average budget surplus of 2.3% of GDP in the three years through 2027. This compares with a deficit this year that we estimate at 0.6% of GDP,” it said.

Moreover, Bloomberg Intelligence said that the overall deficit will also narrow as the government's cost of borrowing declines.

It is expected that Sri Lanka's debt restructuring will cut its interest payments to 5.7% of GDP in 2032 from about 7.9% in 2023 as the bondholders are expected to take a haircut of 28.8%.

It said that Sri Lanka's fiscal policy has been restrictive since 2022 and that the Government will likely raise tax revenues to 12.1% Of GDP this year 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 keep the budget (excluding interest payments) in deficit this year. Without this, the Government would run a primary surplus of about 0.8% of GDP in the current year. A tight posture in effect.” the report said.

Further, it said that fiscal policy is likely to remain contractionary in 2025. When the Government is expected to ratchet taxes even higher to ensure a primary budget surplus and start paying down debt - and the IMF will not keep lending unless the surpluses continue. “This means Sri Lanka will be unable to use fiscal policy to boost growth for the foreseeable future.” it added.