Economic Transformation Act (ETA) sets a primary balance target of 2.3% of GDP: Sri Lanka has achieved this target only once in last 74 years

Abstract

The Economic Transformation Act (ETA), enacted recently, sets out five targets related to the fiscal management of the government to be achieved in the coming years. , These targets, mentioned below, are aimed at ensuring fiscal discipline and preventing the recurrence of an economic crisis.

A Primary Balance Target: Section 4(g) of the ETA mentions the Primary Balance is to be maintained at 2.3% of GDP until 2032 and 2% of GDP after 2032. (The primary balance is the difference between a government's revenues and its non-interest expenditures).

Government Revenue Target: Section 4(h) states that Government revenue should reach at least 15% of GDP beyond the year 2027.

Government Debt Restructuring Targets: Section 3(1)(a)(i), (ii), and (iii) specify that the Public Debt to GDP ratio should be below 95% by the year 2032 and thereafter. The Central Government Annual Gross Financing Needs to GDP ratio shall be below 13% by 2032. The Central Government Annual Debt Service in Foreign Currency to GDP ratio shall be below 4.5% by 2027 and thereafter.

Starting from 2025, the Minister assigned the subject of Economic Policy shall present a policy framework and strategies to implement these targets. Additionally, an annual report must be presented to Parliament by 31 March each year detailing the measures being taken towards achieving the targets. If targets are not met, the report must include remedial measures and a timeline for achieving the targets.

However, the Primary Balance target of 2-2.3% is set at a higher level that is unprecedented in Sri Lanka’s actual record. In the past 74 years, this target was met only once, in 1955, when the primary balance reached 2.8% of the GDP. The government achieved a positive balance only six times in the past: in 1954, 1955, 1992, 2017, 2018, and most recently in 2023.

In the past, there was a similar limit in the Fiscal Management (Responsibility) Act (FMRA), No. 3 of 2003 that prohibited the budget deficit from exceeding 5% of GDP from 2006 onward. Yet, the government failed to achieve this limit in all the years. See our blog about Non-Compliance with the FMRA Has Been a Demonstration of Irresponsibility.

Therefore, an introduction of such a target, which was rarely achieved in the past raises the question of whether the government can achieve this target to restore fiscal discipline, or would it be another limit that is breached similar to the FMRA limit.