“Sri Lanka’s Welfare Reforms and Tax Changes: Balancing Relief and Revenue”

Weekly Economic Review

By Rohana Jith

Sri Lanka’s new government, 100 days into office in 2025, has launched critical reforms to address the nation’s economic crisis and uplift its citizens.

A $12.5 billion debt restructuring plan, projected to save $9.5 billion in debt servicing over four years, marks a significant step toward recovery. Inflation dropped to -1.7% in November 2024 due to reduced power tariffs, fuel prices, and a stronger rupee, easing living costs for many.

Deputy Minister of Finance, Dr. Harshana Suriyapperuma, highlighted measures to support struggling families and businesses.

Loan restructuring provides a 12-month grace period for borrowers with loans under Rs. 25 million, nine months for loans between Rs. 25 million and Rs. 50 million, and six months for larger loans, coupled with reduced interest rates and extended repayment periods.

Welfare reforms under the Aswesuma scheme have increased allowances for poor families to Rs. 10,000 and extremely poor families to Rs. 17,500. From January 2025 to June 2026, over 1.4 million families will benefit, alongside assistance for differently-abled individuals and CKDU patients.

The government also allocated Rs. 6,000 per child for school supplies, emphasizing education as a national priority.With bold reforms, Sri Lanka aims to rebuild economic stability and foster a more equitable future.

A new Gazette Extraordinary issued on December 21, 2024, has established revised procedures for disbursing monthly allowances under the Aswesuma Welfare Benefit Payment Scheme, effective January 2025. This supersedes the previous Gazette notification from May 17, 2024, issued under the leadership of former President Ranil Wickremesinghe.

Welfare Benefits: Enhanced Support for Vulnerable Groups

Under the updated scheme, monthly allowances for poor families will increase from Rs. 8,500 to Rs. 10,000, while extremely poor families will see their allowance rise from Rs. 15,000 to Rs. 17,500. Allowances for other categories remain unchanged.

Key allocations under the scheme include:

Transitional and Vulnerable Families: Rs. 5,000 per month will be provided to 480,000 transitional families from January to March 2025, and the same amount will be allocated to 480,000 vulnerable families from January to December 2025.

Poor and Extremely Poor Families: Rs. 10,000 will be given to 960,000 poor families, and Rs. 17,500 to 480,000 extremely poor families from January 2025 to June 2026. For families with two or fewer members, only half of the stated benefits will be provided.

Differently-Abled Individuals: Rs. 7,500 will be allocated monthly to 410,000 individuals from January to June 2025.

CKDU Patients: Rs. 7,500 will be provided monthly to 50,000 patients suffering from chronic kidney disease of unknown etiology during the same period.

Elderly Citizens: Rs. 3,000 will be disbursed monthly to 3,000 elderly individuals from January to June 2025.

The program also introduces a dedicated allocation for children from welfare-assisted families, with Rs. 6,000 earmarked per child to purchase school books and stationery for the upcoming academic year. Children from non-welfare families facing financial hardship will also receive this benefit upon recommendation by the Ministry of Education, ensuring equitable support across all eligible households.

Tax Reforms: Aiming for Relief amidst IMF Scrutiny

The government has announced tax reforms designed to provide immediate relief to individuals and small businesses impacted by inflation and the cost of living under the previous regime. However, these measures have drawn the attention of the International Monetary Fund (IMF), which is monitoring their alignment with the country’s economic reform commitments.

Key tax adjustments include:

Income Tax-Free Threshold: Increased from Rs. 100,000 to Rs. 150,000. While this offers relief to lower-income groups, it may lead to revenue shortfalls if a significant portion of taxpayers falls below the exemption threshold.

Withholding Tax (WHT): The WHT rate is proposed to increase from 5% to 10%, potentially offsetting revenue losses from the higher income tax-free threshold.

VAT Exemptions: The government has removed VAT on locally produced fresh milk and yogurt to promote child nutrition. While this exemption benefits consumers, it may reduce government revenue.

Export Services Tax: Tax exemptions on the export of services will be replaced with a 15% concessionary tax rate. While this aligns with efforts to increase revenue, it may render Sri Lanka less competitive compared to countries offering lower tax rates for export-oriented industries.

IMF Concerns and Economic Implications

The IMF, which granted Sri Lanka a bailout package to stabilize its economy, has emphasized the importance of fiscal reforms, including tax hikes and restructuring.

Julie Kozack, IMF Communications Director, stated during a media briefing on December 18, 2024, that the government’s recent measures would undergo a detailed assessment.

The findings will be included in a staff report to be reviewed by the IMF Executive Board, which is expected to decide on the release of the next $333 million tranche under the Extended Fund Facility program.

Deviating from IMF-recommended policies could strain Sri Lanka’s relationship with the institution and jeopardize future financial assistance. A former treasury secretary warned that such deviations might create challenges in securing funding from international lenders, potentially hampering the country’s economic recovery.

Balancing Equity and Revenue

President Anura Kumara Dissanayake defended the reforms, highlighting their focus on alleviating economic burdens for lower- and middle-income groups. However, experts have raised concerns about the potential trade-offs between equitable relief and fiscal stability:

Revenue Shortfalls: While measures like the increased WHT and export services tax could enhance revenue, exemptions and adjustments to Personal Income Tax (PIT) and VAT may lead to revenue losses.

Public Expenditure Constraints: Reduced fiscal space could limit the government’s ability to fund essential public services or manage debt repayments.

Recommendations for Fiscal Sustainability

To mitigate potential risks, the government should consider:

Conducting a revenue impact study to assess the net effect of the proposed measures and identify areas for improvement.

Calibrating tax adjustments to strike a balance between progressivity and revenue generation.

Maintaining open dialogue with the IMF to ensure compliance with its conditions while demonstrating alternative strategies to offset revenue shortfalls, such as improved tax compliance.

By addressing these challenges, Sri Lanka can work toward sustainable economic recovery while safeguarding the well-being of its most vulnerable citizens.

 

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