Deutsche Bank-Asia Economic Notes Sri Lanka 2025 budget strikes a positi...-113575153

17 February 2025Deutsche BankResearch Asia Sri Lanka Economics Asia Economic Notes Date Sri Lanka: 2025 budget strikes a positive noteThe new Sri Lanka government under the leadership of President Anura Dissanayake presented its first full-year budget for 2025 on 17th Feb, targeting a fiscal deficit of 6.7% of GDP, exactly in line with our forecasts. The budget factors in 5% real GDP growth for 2025; our forecasts are more conservative at 3.5%; consequently, we think tax collections could turn out to be lower than the budgeted 13.9% of GDP. However, overall fiscal deficit target of 6.7% of GDP is likely to be met, as capital expenditure may not increase as much as the budgeted 4% of GDP. Having delivered substantial rate cuts in 2024, we expect the CBSL to remain on the sidelines for now, while LKR will likely end 2025 around 305 levels.Figure 1: Sri Lanka economic forecasts2023202420252026Nominal GDPUSD bn85100109113Real GDP%-2.35.03.53.0Private cons. -2.53.03.03.2Govn't cons. -2.0-3.01.01.0Investment-3.020.57.45.5Exports-5.012.05.04.0Imports-8.022.07.06.7Unemployment%4.74.64.54.4CPI inflation %20.51.32.75.0FXLC/USD324293305315Trade balance% of GDP-5.8-6.1-7.6-7.9CA balance% of GDP1.80.5-1.1-1.4Fiscal balance% of GDP-8.3-6.8-6.7-6.0Government debt% of GDP109.4107.2103.4102.0Source : CEIC, Deutsche Bank researchKaushik DasChief Economist+91-22-7180 4909Deutsche Bank AG/Hong KongIMPORTANT RESEARCH DISCLOSURES AND ANALYST CERTIFICATIONS LOCATED IN APPENDIX 1. UNTIL 19th MARCH 2021 INCOMPLETE DISCLOSURE INFORMATION MAY HAVE BEEN DISPLAYED, PLEASE SEE APPENDIX 1 FOR FURTHER DETAILS.Distributed on: 17/02/2025 15:46:05 GMT7T2se3r0Ot6kwoPa17 February 2025Asia Economic NotesPage 2Deutsche Bank AG/Hong KongSri Lanka 2025 budget strikes a positive noteThe new Sri Lanka government under the leadership of President Anura Dissanayake presented its first full-year budget for 2025 on 17th Feb, targeting a fiscal deficit of 6.7% of GDP, exactly in line with our forecasts. The fiscal calculations are made on the basis of 5%yoy real GDP growth assumption for 2025 (5.0%yoy growth likely in 2024 as well) vs. our more conservative estimates of 3.5%yoy growth. The 2024 revised estimates show fiscal deficit at 6.8% of GDP. Tax revenues are estimated to rise to 13.9% of GDP in 2025 vs. 12.3% of GDP in 2024 and 9.8% of GDP in 2023. If nominal growth turns out to be lower than expected in 2025, then there could be downside risks to the tax revenue collection targets. Total revenue (including grants) is expected to rise to 15.1% of GDP vs. 13.6% of GDP and 11.1% of GDP in 2024 and 2023 respectively. We see some downside risks to these revenue targets.On the expenditure side, Sri Lanka aims to raise total expenditure to 21.8% of GDP in 2025 (vs. 20.4% and 19.4% in 2024 and 2023 respectively), by raising public investments (to 4.0% of GDP in 2024 vs. 2.7% of GDP in 2023), while holding recurrent expenditure steady at 17.8% of GDP in 2025. We expect public investm