IMF calls for immediate tax reforms

Sri Lanka will record five percent growth this year and the next amidst ups and downs, the International Monetary Fund (IMF) team reviewing the economic progress of Sri Lanka under its Extended Fund Facility (EFF) program to support the country’s economic reform agenda, said last week.

The team commended the authorities for implementing the IMF program under tough conditions with all quantitative targets through end June being met. It also welcomed the tightening of fiscal and monetary policies which contributed to enhance market confidence and eases pressure on external balances.

“Overall, macroeconomic performance during the first half of this year reflected a mix of improving balance of payments, reduced growth mainly due to adverse weather and slightly higher inflation,” leader of the IMF staff team, Jaewoo Lee said. However, the IMF team said that some forward looking aspects of the program related to the implementation of tax reforms need to be a dressed without further delay.

It is vital that the government expedite the legislative process of implementing Value Added Tax (VAT) amendments which are needed to achieve revenue targets for this year and the next.

“The 2017 Budget should underpinned by a well-crafted and high quality tax policy strategy to raise Sri Lanka’s low tax to GDP ratio. The legislative process for the new Inland Revenue Act will be a vital step in re-balancing the tax system towards a predictable and efficient structure to generate the resources to support development projects,” Lee said.

The mission also welcomed the Central Bank’s move to preemptively raise policy rates to maintain inflation within its target band.

The Central Bank should remain vigilant in monitoring inflationary pressures and be ready to tighten further should inflation continue to rise.

“Greater integration into regional and global supply chains and higher levels of foreign direct investment and more prospects for private sector investment are vital to achieve medium term macroeconomic goals,” Lee said.

The IMF approved a three-year, $1.5 billion loan for Sri Lanka under the Extended Fund Facility (EFF) to support the balance of payments position and the country’s economic reform agenda in June this year.

The first tranche under the EFF, amounting to SDR 119.9 million (approximately USD 168.1 million), was be made available to Sri Lanka immediately.

The remaining amount will be disbursed in six tranches over three years, with the final tranche expected to be disbursed in April 2019.

The mission also encourages the government to make concerted efforts in implementing structural reforms in public financial management and State-owned enterprises, building on the substantial technical assistance received over the years.