By Uditha Jayasinghe

COLOMBO Sri Lanka President Ranil Wickremesinghe will seek to boost tax revenue and rationalise spending in the government’s second full-year budget on Monday, targeting a return to growth for the crisis-hit economy while keeping an eye on elections.

Sri Lanka tipped into the worst financial crisis in over seven decades last year with the battered economy shrinking 7.8% in 2022, forcing it to default on its foreign debt.

However, this year the island's economy has gradually stabilised, helped by a $2.9 billion bailout from the International Monetary Fund (IMF) in March, prompting the World Bank to raise its growth forecast to 1.7% in 2024 from an earlier projection of 1%.

Sri Lanka's central bank expects growth of 3.3% in 2024 after an economic contraction of 2% this year.

But Wickremesinghe, who is also the country's finance minister, will have to contend with the dual challenges of raising revenue, essential to taking forward the four-year IMF program, while also maintaining public goodwill as he prepares to face presidential elections next year.

The approval rating of the government fell to 9% in October 2023 from 21% in June, according to a poll by Colombo-based think tank Verité Research, partly due to multiple rounds of fuel, water and power tariff hikes needed to put public finances on track under the IMF program.

Wickremesinghe will present the budget on Monday at 12 noon (IST).

"In an ideal world it would be a tighter budget but realistically this budget can go either way since its coming from a political climate," said Raynal Wickremeratne co-head of research at Softlogic Stockbrokers.

"When it comes to more market impact we are unlikely to see income or corporate tax increases. But consumption oriented tax increases that could hit growth is what we would keep an eye on."

Sri Lanka is already grappling with a delay to its second IMF tranche, with the lender calling for a "strong budget" with a projected 2024 deficit of about 12% amidst an estimate for a 15% shortfall for 2023.

For the first time ever Sri Lanka's budget expenditure will exceed 6.5 trillion rupees ($19.8 billion) in 2024, an increase of 12% when compared with the previous year, according to the Appropriation Bill, a precursor for the budget.

Interest payments of 2.6 trillion rupees make up more than a third of total spending, while capital expenditure will stay largely unchanged from 2023 at 1.2 trillion rupees.

Bondholders and bilateral creditors will also be watching the budget for signals on how closely Sri Lanka will adhere to IMF targets, which include reaching a primary surplus of 2.3% by 2025 and reducing debt to GDP to 95% by 2032.

(Reporting by Uditha Jayasinghe; Editing by Sharon Singleton)