The International Monetary Fund on Thursday backed Sri Lanka’s tax reforms and said they were essential for the cash-strapped country to regain the confidence of creditors, amidst protest by the trade unions against the government’s move.
President Ranil Wickremesinghe, who is also the country’s finance minister, hiked corporate taxes to 30 per cent from 24 per cent in January, after raising VAT (Value Added Tax) to 15 per cent last year. The Sri Lankan government introduced tax hikes with effect from January widely believed to be on demand by the IMF
“Sri Lanka is among the countries to collect the least amount of fiscal revenue in the world, with tax revenue to GDP ratio at only 7.3 percent in 2021. External creditors are not willing to provide financing to fill this gap,” the IMF said in a statement.
The statement came as trade unions are bracing to go for lengthy industrial action to oppose tax reforms.
On Wednesday, the trade unions staged a day-long token strike to protest the government’s massive tax and utility rate hikes that has brought daily life in the crisis-hit island nation to a grinding halt and disrupted services in key sectors like airports, ports and banking.
The trade unions belonging to various sectors called the strike after defying an essential services order issued by President Wickremesinghe and urged his government to withdraw its tax hikes.
The IMF said that they understand the hardship people of Sri Lanka are experiencing at this time.
“Increases in the cost of living, loss of employment and livelihood, and falling real incomes have hit large parts of the population, and particularly the poor and vulnerable who have no buffers to withstand these hardships,” the global lender said.
It added that the current economic crisis has a number of origins, including the government’s inability to meet government spending needs through its revenue collections.
The IMF stressed that tax reforms were needed as only “with appropriate tax receipts will the Government will be able to fund essential expenditures, and avoid further slashing of critically important outlays”.
“These reforms will also help regain the confidence of creditors,” it said in the statement.
State Minister of Finance Ranjith Siyambalapitiya on Thursday said the rupee has gained strength due to measures taken by the government in the ongoing economic crisis.
Meanwhile, the Central Bank said that the rupee was trading at 351.72 to the US dollar on Wednesday – the highest par value since May, last year.
“The amount of foreign reserves, which was USD 1.7 billion in September 2022, had increased to USD 2.1 billion by the first week of February 2023, achieving a growth rate of 23.5%. That’s an increase of USD 400 million. Food inflation affecting all stood at 94.9% as of September 2022,” Siyambalapitiya said.
He added that food inflation had come down to 60 per cent by January 2023.
Sri Lanka was hit by an unprecedented financial crisis in 2022, the worst since its independence from Britain in 1948, due to a severe paucity of foreign exchange reserves, sparking political turmoil in the country which led to the ouster of the all-powerful Rajapaksa family.
The IMF in September last year approved Sri Lanka a USD 2.9 billion bailout package over 4 years pending Sri Lanka’s ability to restructure its debt with creditors — both bilateral and sovereign bond holders.
With assurances from creditors, the USD 2.9 billion facility could get the IMF board approval in March.
The IMF facility would enable the island nation to obtain bridging finance from markets and other lending institutions such as the ADB and the World Bank.
President Wickremesinghe last month emphasised that seeking the IMF bailout package was the only option available to the debt-ridden country to overcome the ongoing economic crisis.
Source: indiatoday
