Sri Lanka's treasury announced that the government will be reducing it's spending after officially announcing that it was defaulting on it’s external debt of up to $US 51 billion.
“We will be issuing a new circular to all the line ministries to reduce the government spending,” Treasury Secretary K M Siriwardena reportedly said, as the island continues to grapple with it's economic crisis.
Siriwardena told reporters that no specific cuts have been decided but noted that the budget deficit had risen sharply in the last two years due to high government spending and lower revenue.
When announcing Sri Lanka’s 2022 budget, Basil Rajapaksa, who was serving as Finance Minister at the time, guaranteed that the debts due to be settled in July 2022 would be repaid, and that plans to manage the economy included a reduction on borrowing. However, yesterday Sri Lanka announced that it was defaulting on it's debt as it has become "challenging and impossible" to pay its creditors.
"The best action that can be taken is to restructure debt and avoid a hard default," the newly appointed Central Bank Governor P. Nandalal Weerasinghe told reporters yesterday.
Last month, the |nternational Monetary Fund (IMF) highlighted that the administrations's pre-pandemic tax cuts coupled with the the impact of COVID-19, "led to fiscal deficits larger than 10 percent of GDP in 2020 and 2021 and a rapid increase in public debt to 119 percent of GDP in 2021."
Sri Lanka is set to commence talks with the IMF later this month to discuss a bailout. The economic crisis has caused prices to soar, leaving many without food, fuel and medicines. Outraged by the mismanagement of the economy, protests have been taking place predominantly in Colombo, calling for the Rajapaksa regime to step down.
