Thu. Jan 27th, 2022

Sri Lanka will increase pay and pensions for civil servants, roll back some taxes on food and medicine and promote income support for the poorest citizens.

By Bloomberg

Sri Lanka will increase salaries and pensions for civil servants, remove some taxes on food and medicine, and provide cash to its poorest citizens as the prices of essential items rise in the country which has little foreign currency to pay for imports.

President Gotabaya Rajapaksa’s government will increase the salaries of public sector staff by 5,000 rupees a month ($ 25) from January, his brother and finance minister Basil Rajapaksa said in a briefing in Colombo on Monday. About 2 million people with income support will each receive 1,000 rupees and the administration will also buy crops at higher-than-market rates from farmers suffering losses due to a government rule to stop fertilizer use.

In total, the package amounts to 229 billion rupees, about 1.2% of gross domestic product, and will be reallocated from the 3.9 trillion rupees budgeted to be spent throughout 2022. No new tax will be announced, Rajapaksa said.

The moves seek to calm public anger over rising prices of wheat, sugar and milk powder, which the island nation is struggling to buy from abroad as the local currency depreciates and inflates its import bill. The coronavirus pandemic has hurt Sri Lanka’s crucial tourism sector, sparking debate among policymakers over whether to seek a lifeline from the International Monetary Fund or rely on bilateral emergency support from countries including China and India.

Chart showing default risk for Sri Lanka's sovereign dollar effects

Sri Lanka’s sovereign dollar effects won earlier Monday ahead of a planned cabinet meeting to consider whether the nation should seek IMF support. The government has not made a decision, Rajapaksa said.

Sri Lanka has $ 500 million worth of dollar bonds maturing on January 18 and another $ 1 billion in July. It has $ 3.1 billion in foreign exchange reserves, roughly enough to pay for two months’ worth of imports, based on extrapolations from previous government calculations. Headline inflation accelerated to 12.1% in December, the second fastest pace in Asia after Pakistan.

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