Hurting Economy, Rising Aspirations, Look for Answers

The people reeling under tremendous economic pressures crave urgent measures to reduce their woes, which may not be possible in the medium term

- DILRUKSHI HANDUNNETTI

Colombo's new administration will soon complete six months in office. Predictably, it has not been a bed of roses. The government has tried to introduce changes, particularly to the entrenched political culture, streamline systems and reduce excessive spending. Nevertheless, the challenges remain daunting.

The left-leaning government presented its first budget on February 17, striking a tricky balance that meets the International Monetary Fund (IMF) requirements while seeking to push a home-spun approach to solving the island's long-standing economic woes. On February 19, Fitch Ratings recognised the island's budget reflected the authorities' commitment to raising fiscal revenues as a share of its GDP—an approach that, if proven successful, may alleviate a long-standing weakness in the credit profile. While acknowledging risks to the fiscal outlook with the slow pace of fiscal consolidation weighing on prospects for debt reduction over the medium term, Fitch also noted the budget offered greater clarity over the administration's medium-term fiscal and economic reform agenda and consistency.

The government aims to increase revenue to 15.1 percent in 2025, from 11.4 percent in 2023, exceeding Fitch's assumption that the 15 percent threshold would be achievable only by 2026. The budget incorporates a 36.5 percent increase in revenue from taxes on external trade and a 13.1 percent from income taxes. While these revenue-based targets demonstrate its commitment to the IMF programme and gradual economic recovery, challenges remain before the fragile economy.