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Sri Lanka’s Fiscal Struggles Persist Despite Optimistic Projections: Verité Research Report

Sri Lanka continues to grapple with fiscal challenges, as evidenced by its persistent failure to meet its revenue to GDP target for the 33rd consecutive year. The recently unveiled “State of the Budget Report 2024” by Verité Research sheds light on this enduring issue, providing an in-depth analysis of Sri Lanka’s fiscal landscape. This annual report serves as a vital resource for informed engagement with the budget, offering objective insights into the country’s fiscal, financial, and economic estimates.

Verité Research’s analysis reveals a concerning reality: Sri Lanka’s tax revenue consistently falls short of expectations. In 2023, the government projected a significant 13% deficit in tax revenue. Despite the government’s optimism, projecting a revenue of LKR 4,164 billion for 2024—a 42% increase from the previous year’s revised projections—Verité Research presents a more cautious outlook. Their projection anticipates a 14% shortfall, estimating revenue at only LKR 3,570 billion.

The report highlights that the overestimation of revenue from Value Added Tax (VAT) contributes to 61% of the projected shortfall, with the remainder attributed to overestimations in corporate income tax, personal income tax, Social Security Contribution Levy (SSCL), and Customs import duty. This persistent overestimation underscores the necessity for more accurate fiscal planning and forecasting methodologies.

In addition to revenue projections, Sri Lanka grapples with another pressing issue: its soaring interest-cost-to-revenue ratio, the highest globally. While the government aims to reduce this ratio to 64% in the 2024 budget, Verité Research’s analysis suggests a bleaker outlook. Projections indicate that this ratio is likely to exceed 70%, posing obstacles to economic recovery and debt sustainability. Such a scenario not only falls short of expectations but also jeopardizes Sri Lanka’s adherence to its economic recovery plan agreed upon with the International Monetary Fund (IMF).

In conclusion, the “State of the Budget Report 2024” serves as a crucial tool for policymakers, economists, and stakeholders, providing a sobering assessment of Sri Lanka’s fiscal challenges. Addressing these issues necessitates concerted efforts to enhance revenue collection mechanisms, accurately forecast fiscal targets, and pursue prudent fiscal policies to ensure sustainable economic growth and stability.

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