Amidst the announcement of the upcoming Presidential Election and a push from the International Monetary Fund (IMF) to curb expenditure, the Government last week announced an additional interim allowance of Rs. 3,000 for State pensioners, to be distributed effective from September. 

This announcement was made despite the instructions of the Election Commission (EC) to suspend allowances until the conclusion of the upcoming poll. Despite challenges in managing the State budget, this measure is supposed to be a short-term relief measure for retired public officers, according to the Ministry of Finance, until the revised salary structure is implemented from 2025 onwards.

In a special Cabinet meeting held on 24 July, the Government approved an increment in the current allowance for Government pensioners from Rs. 2,500 to a total interim allowance of Rs. 5,500 per month, following recommendations from a special committee assessing disparities in public sector salaries. This adjustment will cost Rs. 8.4 billion for the remainder of 2024. A discussion has also taken place concerning the elimination of pension disparities and increasing interest rates for senior citizens.

Sri Lanka is currently experiencing a primary surplus and has shown signs of improved economic performance with macroeconomic developments, in comparison to the last couple of years of economic crisis. 

In 2024, the country increased its tax revenue, driven by several key factors such as an increase in Value-Added Tax (VAT) rates and Pay-As-You-Earn (PAYE) taxes primarily from private sector workers, which played a role in expanding the tax base and an economy on the path to recovery. However, a question arises as to whether this will put an additional strain on the already massive Government expenditure.

‘Within budget’

Speaking to The Sunday Morning, State Minister of Finance Shehan Semasinghe stated that the additional interim allowance for State pensioners would be managed within the existing budget framework without increasing the budget deficit or affecting the primary surplus.

“The Rs. 3,000 increment will be distributed to pensioners across the board, effective from September. First, we will provide the allocation for the next year. We are managing it within the budget. This will not cause a strain on the economy as we are able to manage it that way and it will not have an impact on the budget deficit or the primary balance.”

Treasury Deputy Secretary R.M.P. Rathnayake also emphasised that there would be no need for borrowings as the increments would be maintained within the budget. He stressed that this minor increment for pensioners would not cause any strain on the economy as it required minimal resources.

EC opposed

According to Election Commission Chairman R.M.A.L. Rathnayake, the commission has instructed that this measure be implemented from October instead of September. 

“We have instructed that the increment should come into effect from October without commencing in September as the elections are approaching. We have informed the Secretary to the Ministry of Public Administration regarding this. Yet, despite our instructions, circulars have been issued. 

“We have formally requested a report regarding this matter through a letter on 8 August as he has not complied with the given instructions. It’s important to note that our instructions were not to withhold the increment but to postpone its disbursement until after the election period.”

Dependent on fiscal performance

Speaking to The Sunday Morning, Frontier Research Senior Research Lead Anjali Hewapathage explained that this increment had been made possible by the Government’s fiscal performance so far. 

“So far the Government has been performing strongly on the fiscal side and this is essentially a result of revenue doing really well on the tax side and expenditure being contained, in comparison to the high expenditure levels that we witnessed in Sri Lanka’s economic past. 

“This particular measure in itself, because of the strong performance that the country has registered and because of revenues continuing to do well, might not have much of an impact on the bottom line primary surplus number, if it is to be assumed that revenue will continue to grow well. The balance between revenue and expenditure and how that changes across time is what we are looking at. In these circumstances and at a time when the country is going into an election period, these measures can be highly uncertain.”

First Capital Chief Research and Strategy Officer Dimantha Mathew noted that if the country maintained the tax revenue above the target rate, this concession would not lead to a significant impact on the economy.

“If this increase is funded through existing resources, given the current primary surplus, there will certainly be room for it as long as the country continues to exceed its revenue targets. However, Rs. 8.4 billion for the remainder of the year may not have a significant material impact in terms of the budget either. It won’t necessarily strain the budget or burden the public if tax revenue slightly exceeds the target. However, if it simply stays on track or falls below it, then this increased expenditure will have an impact in terms of a higher budget deficit, leading to higher borrowing and possibly exert a certain pressure on interest rates.”

He said that it may also positively impact the Gross Domestic Product (GDP), with disposable income moving up. However, he added that there would be no significant change as Rs. 3,000 per person may not have a substantial effect, despite contributing to improved money circulation. 

“When the budget deficit increases, the borrowing requirement of the Government increases. When there is no foreign borrowing, the local borrowing requirement will increase. Currently, local borrowing functions through Treasury bills and bonds or raising more money, which would put a bit of pressure on the interest rates.”

Social protection

Frontier Research Senior Research Analyst Arshad Ismail stated that this increase could help with social protection, especially with so many people falling into poverty.

“Prices of goods and services have almost doubled in the last couple of years, but fixed income earners like pensioners have not really seen a rise, which has significantly reduced their real income. As a result, demand from them has been less and some have even been pushed into poverty. 

“It’s worth noting that Government revenue has been clearly overperforming currently. Monthly revenue collection on average has been close to the Rs. 400 billion mark, whereas pre-crisis this was at Rs. 150 billion on average. The primary surplus is doing great and this financial improvement has likely prompted the Government to make such a promise.

“Regarding the economic impact, there’s likely to be a mix of outcomes. On one hand, the extra cash for pensioners might boost consumer spending, potentially stimulating some sectors of the economy. However, with the number of pensioners reaching 700,000, the Government has to bear an additional expense of Rs. 8.4 billion for this interim allowance this year. If Government revenue continues at this level, then this can be sustainable.”