Following the economic crisis 2022, the ongoing adverse conditions in Sri Lanka have left the population living in increasingly painful circumstances. Essential goods remain unregulated and continue to rise in price.
Moreover, businesses exploit the situation, failing to reduce prices for items that could be lowered to maximise profits. There is still no clear plan to tackle the rampant commercial mafia profiting from inflated prices.
Political delays and schemes enacted by businessmen have exacerbated the public’s predicament. A significant issue is the lack of income that matches expenses; many companies have not raised employee salaries despite the increasing profits.
Although there have been some minor increases in government employees’ salaries, they remain inadequate for a decent living. Loan disbursement by banks is also restricted, with many banks requiring a minimum monthly income of 200,000 rupees to qualify for a housing loan. Consequently, many people cannot address issues related to housing, education, and healthcare.
Presidential Assurance by Anura
President Anura Kumara Dissanayake recently participated in an official state visit to India, his first official diplomatic trip since taking office. Upon his return, on the 18th of the month, he addressed Parliament, emphasising that the country would never again face the risk of bankruptcy as experienced during 2022-2023.
He stressed that the devastated economic conditions from that period would not be permitted to recur. In April 2022, Sri Lanka found itself unable to service foreign debt, leading the government to temporarily suspend payments, which was a fundamental reason behind the declaration of bankruptcy.
This situation arose due to a lack of debt sustainability, and while the moratorium was a temporary measure, debt repayments must inevitably resume. Some predict that when repayments start again, Sri Lanka could face another crisis, though the economy has stabilised to an extent since the severe crisis in 2022.
Will Debt Payment Be a Challenge in 2028?
The process of resuming debt repayments, temporarily halted, is set to restart in 2028 according to agreements with creditors, regardless of which government is in power. The current regime is also expected to follow this path.
The current government must address past governmental errors. It must also concentrate on serious issues such as the possibility of declaring bankruptcy and increasing tax limits on incomes.
Additionally, there are discussions around lifting restrictions on vehicle imports. Amid these circumstances, President Anura Kumara Dissanayake highlighted potential economic distress by 2028, emphasising that everyone should be attentive to the existing government by then.
Target for Foreign Reserves
President Dissanayake also stated that foreign reserves are anticipated to increase to $15.1 billion by 2028. There are ongoing speculative discussions regarding the potential for a debt crisis. However, debt restructuring obligations currently amount to about $12.55 billion, with an additional $1.7 billion in outstanding debt to be paid. About $11.5 billion was borrowed from the government from 2015-2019.
Assurance of Achieving Targets
Meanwhile, Central Bank Governor Dr Nandalal Weerasinghe indicated that the government is ensuring that debt restructuring does not lead to crisis conditions. Each year, 4.5% of the Gross Domestic Product (GDP) must be allocated for foreign debt repayments, compared to 9.2%.
He noted that in earlier periods, payments were made solely towards interest. Moreover, lower rates for debt service are expected until 2027, transitioning to structured payments from 2028 according to the debt restructuring framework.
Thus, if effectively managed, this could signify a conducive period. However, Dr. Weerasinghe called out the inaccuracies in claims, suggesting that recommencing debt payments would inevitably lead to another economic crisis. He questioned the perception of what constitutes debt restructuring.
Growth in Foreign Reserves
By 2028, the goal is to increase foreign reserves to $15.1 billion, as stated by the president. This target aligns with objectives the International Monetary Fund (IMF) set. This requires a boost in dollar purchases through the Central Bank.
Dr. Nandalal Weerasinghe noted that the government should surpass the IMF’s goals for increasing foreign reserves. Foreign reserves have reportedly reached $6.5 billion, with the Central Bank purchasing $327 million in dollars from local and foreign exchange markets in November alone, reflecting the highest monthly purchase since April 2024.
Tax Reform to Satisfy Society
Another point of interest for society is the increase in income tax thresholds. At the start of the IMF’s third review, recommendations were made to reduce personal income tax levels imposed on professionals such as university staff, doctors, and bank employees, who were primarily opposed to significant tax increases.
Consequently, the current government has begun discussions regarding necessary adjustments. Recently, President Dissanayake stated that the income tax threshold has been raised from 100,000 to 115,000 rupees. The initial bracket, from 600,000 to 1,000,000 rupees, is subject to a 6% tax. The government has enacted significant tax reliefs for lower-income earners, radically decreasing tax burdens for various income levels.
The objective of providing relief is to ensure that pensioners and individuals earning income by holding assets do not face undue hardship. President Dissanayake emphasised that broadening the tax base and raising tax percentages are part of the government’s goal. This would reduce the burden on individuals and organisations while expanding the size of taxpayers. He promised a detailed report regarding this shortly.
Government’s Position on the ETCA Agreement
Meanwhile, the ETCA (Economic and Technology Cooperation Agreement) has also caught the country’s attention. During his visit to India, President Dissanayake discussed with Indian President Droupadi Murmu, Prime Minister Narendra Modi, and various Indian government ministers and businesses.
Foreign Minister Vijitha Herath, Labour Minister, and Deputy Minister for Economic Development Dr. Anil Jayathilake accompanied him on this trip. A united statement was released regarding the discussions held, which confirmed that the Sri Lankan government had expressed readiness to negotiate the ETCA with India.
Foreign Minister Herath clarified that while there was an agreement to discuss the ETCA, this was not an agreement to implement it. The governments of India and Sri Lanka have resolved to update and move forward with the Indo-Lanka Free Trade Agreement, stating that such discussions are not a matter of concern. The government maintains that bilateral agreements should not be solely beneficial for one party.
However, it’s critically acknowledged that India is currently experiencing notable economic growth. Society persists in the belief that the government must plan future actions without disregarding this context.
