Sri Lanka's government announced a smaller-than-expected expansion in its budget for 2024 on Monday while projecting a significant jump in revenues crucial to keep its bailout programme from the International Monetary Fund afloat.

The government set a budget deficit target of 2.85 trillion Sri Lankan rupees ($8.73 billion) in 2024, or 9.1% of GDP, higher than the revised 8.5% of GDP in the current year. The original target for this year was 7.9%.

The government also projected total tax revenue at 4.1 trillion rupees for next year, sharply higher than 2.85 trillion rupees in the current year, with the biggest jump coming from the goods and services tax receipts, the budget document showed.

"This is a budget to build the foundation of Sri Lanka's recovery. We cannot continue as a people who depends on others," President Ranil Wickremesinghe, who is also the island nation's finance minister, told the parliament.

"To ensure that Sri Lanka does not collapse again we have to renew and recreate our economic and political systems."

Sri Lanka's economy contracted 7.8% in 2022, forcing it to default on its foreign debt in its worst financial crisis since Independence in 1948.

The island will allocate 3 trillion rupees to repay international sovereign bonds in 2024 after ongoing debt restructuring talks with bondholders are finalised, Wickremesinghe said, proposing to raise Sri Lanka's debt ceiling by 3.45 trillion rupees to 7.35 trillion rupees.

Sri Lanka must meet strict targets set by the IMF under a $2.9 billion bailout, part of which has already been allocated and helped drive a slow recovery in an economy set to contract 2% this year.

The central bank expects growth of 3.3% in 2024, when the country will hold presidential elections.

"While no specific new revenue measures are announced in the budget, the onus is on VAT increase and improvement in tax collection to raise revenues," said Thilina Panduwawala, head of research at Frontier Research.

"This increase remains an ambitious target, with a very likely shortfall. The result as usual is that capital expenditure will be much less than budgeted," he added.

The cabinet had already approved raising Value Added Tax (VAT) by 3% from Jan. 1 and broadening collection.

The IMF had warned of revenue shortfalls and backed a 12% budget deficit for 2024 under its four-year program, in contrast to the government's targets.

The government has projected a primary account deficit of 0.6% of GDP, slightly smaller than 0.7% in 2023, with the IMF requiring the nation to reach a primary surplus of 2.3% by 2025 and reduce its debt to GDP to 95% by 2032.

Budget expenditure has been set at a record 6.98 trillion rupees in 2024, an increase of nearly 33% compared to 2023, with capital expenditure more than doubling and 450 billion rupees reserved for bank recapitalisation.

Hundreds of public sector workers protested outside parliament during Wickremesinghe's speech demanding the salary increase be doubled to 20,000 rupees from the 10,000 outlined in the budget. ($1 = 326.5000 Sri Lankan rupees) (Additional reporting and writing by Swati Bhat; Editing by Shri Navaratnam, Miral Fahmy and Bernadette Baum)