Sri Lanka Declared Bankrupt And Cuts Government Spending
After contracting by 8.7 per cent in 2022, a representative for the government of Sri Lanka says the economy is likely to contract even more this year.
On Tuesday, bankrupt Sri Lanka declared significant cuts to government expenditure and cautioned that despite significant tax increases, it would hardly have enough money to cover public pensions and wages.
Following an extraordinary economic crisis that caused widespread suffering last year, the island country has failed on its $46 billion public debt and is currently in talks to receive bailout funds from the International Monetary Fund (IMF).
This week, President Ranil Wickremesinghe ordered a 5% cut in government spending, and on Tuesday, his administration issued a warning that this month’s welfare payments for 1.8 million people living in poverty would be postponed.
According to government spokeswoman Bandula Gunawardana, “the president informed the cabinet yesterday that the economic crisis this year is going to be worse than what we expected.”
Gunawardana stated that the government anticipated that the GDP will continue to drop this year, following an estimated 8.7 per cent decline in 2022.
“We will not get the projected tax revenue because this year too the economy will shrink,” he said.
For Sri Lanka to be eligible for a $2.9 billion IMF loan, it must achieve debt sustainability.
Additionally, the lender has requested that Colombo reduce its 1.5 million-strong public service, drastically increase taxes, and sell off state businesses that are losing money.
Sri Lanka’s attempts to restructure its debt have stagnated because important creditors like China and India have not yet agreed to a “haircut” on their debts to the South Asian country.
On January 1st, personal income and business taxes were doubled in order to boost state revenue.
After a 75 per cent tariff hike in August, electricity costs are also rising by another 65 per cent.
The 22 million people in Sri Lanka faced months of fuel and food shortages, ongoing outages, and uncontrollable inflation last year, inciting widespread resentment.
At the height of the crisis, in July, Wickremesinghe took office, replacing his predecessor who had fled the nation after demonstrators attacked his home.
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