Fiscal Situation at the End of the Third Quarter

Overview

Following the announcement of the most recent general election, the Secretary to the Treasury issued the Pre-Election Budgetary Position Report, as mandated by the recently enacted Public Financial Management Act. This report provided a comprehensive overview of the fiscal situation as of the end of August.

Subsequently, fiscal data for the end of September was released, indicating further improvements in Sri Lanka’s fiscal position during that month. Under its agreement with the Sri Lankan government, the International Monetary Fund (IMF) has set operational targets for each quarter as part of the ongoing economic stabilization program. The end-September fiscal data enables direct comparison with these targets.

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Tax Revenue

The government’s tax revenue target for the third quarter of 2024, as determined during the IMF’s second review, was LKR 2,400 billion. Actual collections exceeded this target, reaching LKR 2,688.57 billion—an increase of LKR 288.57 billion (12.0%). This performance underscores enhanced tax collection efficiency. Compared to the same period in the previous year, tax revenue rose by an impressive 39.0%.

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Total Revenue

During the first three quarters of 2024, non-tax revenue amounted to LKR 229.73 billion, reflecting a 30.2% year-over-year increase. Additionally, grants received by the government grew by 14.6%. Consequently, total government revenue for the period reached LKR 2,918.31 billion, marking a 38.3% increase. Including grants, total receipts amounted to LKR 2,927.79 billion, up 38.2%.

The prior administration had planned to revise personal income tax brackets to capitalize on this over-performance, with the IMF expressing agreement. The interim budget to be proposed by the new government will clarify how they will take advantage of this situation.

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Expenditure

Total government expenditure for the first three quarters was LKR 3,897.77 billion, reflecting a 4.4% year-over-year increase. Capital expenditure totaled LKR 463.19 billion (up 14.5%), while recurrent expenditure grew by 3.2%.

Recurrent expenditure of LKR 3,434.58 billion included LKR 1,754.88 billion in interest payments, which rose by 1.0%. Excluding interest payments, total expenditure increased to LKR 2,142.89 billion, reflecting a 7.4% rise. This is noteworthy when compared to the 38.3% growth in state revenue, signifying considerable progress in fiscal management.

The IMF sets expenditure limits relative to state revenue. Based on actual revenue collections, the government could have spent up to LKR 2,488.57 billion (excluding interest payments). However, actual expenditure was 13.9% below this ceiling.

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Primary Budget Surplus

Stronger-than-expected tax revenues (12.0% above the target) and lower-than-expected expenditures (13.9% below the target) yielded a primary budget surplus of LKR 784.89 billion for the first nine months—significantly surpassing the target of LKR 220 billion. The previous administration intended to allocate part of this surplus to public sector salary increases.

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Future Outlook and Policy Options

The IMF requires Sri Lanka to achieve a primary surplus of LKR 300 billion by year-end. If the current trend persists, the surplus could exceed LKR 1 trillion. The new government has several options for utilizing this surplus:

1. Introduce Tax Concessions:
   Reducing tax rates would lower the primary surplus. However, this politically appealing option which provides immediate relief to taxpayers could jeopardize revenue targets in future years.
2. Increase Expenditure:
   Enhancing public expenditure, such as raising public sector salaries as planned by the previous government or investing in education and healthcare as promised in the election manifesto of this government, would reduce the surplus while maintaining revenue levels. As most health and education expenses pertain to salaries, raising public sector salaries would also allow the government to claim increased allocations for health and education.
3. Maintain Current Surplus Levels:
   Preserving a substantial primary surplus would help reduce public debt and interest burdens faster, fostering long-term economic stability and growth. Despite a substantial primary surplus, the total budget balance remains a high deficit due to interest payments. Maintaining fiscal discipline would gradually lower borrowing needs, reduce interest rates, and stimulate private sector investment—ultimately driving economic growth. This will also induce a favorable spiral effect on government’s budget.

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Conclusion

Fiscal management decisions, however, will ultimately align with the political priorities of the new administration. These strategies will become evident with the presentation of the interim budget proposals.

#Economatta