IMF calls upon Lanka to reduce fiscal deficit

by Rukshana Rizwie

The International Monetary Fund (IMF)has urged Sri Lanka to take immediate steps to reduce its fiscal deficit and raise tax revenue in the backdrop of a request by the government for a fresh bailout package from the global lender in an attempt to leverage the balance of payments.

Representatives of the IMF who were in Colombo to assess the economic performance had underscored the need to reduce the deficit and put public finances on a sustainable path, highlighting the risks of a large deficit and the need to borrow from domestic and international markets.

The IMF mission in a statement noted that despite a narrowing of the current account deficit, capital outflows have intensified and the island's overall balance of payments has deteriorated.

"These imbalances are also set against an increasingly less benign external environment.Set against such risks, the mission emphasized the urgent need for Sri Lanka to bolster its economic defences."

The IMF has also advised the government to make a stronger effort to narrow the fiscal deficit and put the public finances on a sustainable path. "While several measures in the budget (such as elimination of several special purpose levies, and the commitment to eliminate tax exemptions and bolster the efficiency of tax administration) are welcome, the mission highlighted the macroeconomic and financial risks of a large deficit and the associated need to borrow from domestic and international markets..."

The mission urged the authorities to take a growth and investment-friendly approach to lowering the size of the 2016 budget deficit-focusing mainly on measures to raise revenue by broadening the tax base, simplifying and making an equitable tax system and improving tax administration, to lay the groundwork for further consolidation and debt reduction while also allowing for higher public investment. Sri Lanka is seeking an IMF standby arrangement to avert a possible balance of payments problem.