Sri Lanka’s president boosted government workers’ pay and increased state pensions, seeking to shore up support before next year’s election as the economy emerges from its worst crisis in seven decades.

Tax revenue is expected to increase more than 47 per cent next year, President Ranil Wickremesinghe outlined in his budget speech in Colombo on Monday (Nov 13), after the government recently hiked the value-added tax rate, and it clamped down on tax evasion. Borrowing will surge in order to recapitalise banks and pay off foreign debt, he said.

Wickremesinghe is facing a tricky balancing act: trying to comply with spending and revenue targets set by the International Monetary Fund under a US$3 billion bailout package, while at the same time keeping voters happy ahead of next year’s presidential election. 

The president announced a 10,000-rupee (S$41.59) increase in the cost of living allowance for public sector employees, and a boost to pensions. At the same time, he’s planning to narrow the budget deficit, largely because of higher tax revenue.

Udeeshan Jonas, chief strategist at Capital Alliance in Colombo, said the government’s revenue goals suggest the economy needs to grow 4 per cent to 5 per cent next year.

“The trillion rupee tax increase target is very ambitious,” Jonas said. “It is an attempt to manage difficult objectives of giving handouts to state workers and the most needy. But revenue targets are ambitious.”

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Sri Lanka’s economic crisis caused it to default on its debt in May 2022 for the first time in its history. The government is currently trying to reach a debt restructuring deal with creditors in order to secure the next US$330 million payout under the IMF programme.

The South Asian nation has struggled to meet its targets on revenue, with the IMF projecting a 15 per cent shortfall this year. Under the IMF programme, Sri Lanka must reach a primary fiscal surplus of 2.3 per cent by 2025 and reduce debt to GDP from 128 per cent last year. 

Wickremesinghe said it was important to continue with reforms to avoid sliding back into “economic hell.” 

“We cannot put ourselves back in the hell that our country was in 2022,” he said. “Some groups are trying day and night to put the country in that place and achieve their political targets. We do not have any political target. The only target we have is uplifting the country.”

The government is targeting a budget deficit, without bank recapitalisation, of 7.6 per cent of gross domestic product in the fiscal year beginning in January, the budget documents show. That’s compared with this year’s 8.5 per cent.

Wickremesinghe came to power last year after a popular uprising ousted his predecessor Gotabaya Rajapaksa.

“By giving a state salary increase, pensions and also subsidies, the budget will try to help some sections of the voters,” said Jonas. “These are direct handouts to lower middle income families.” BLOOMBERG