VAT, electricity rates need to be upped


Sri Lanka is in for an IMF loan, provided at least two conditions are met, as indicated by an IMF statement released yesterday (30 June) and going by what Premier Ranil Wickremesinghe recently said, that is, tax rates should be on par with what was there when they were in power in 2019.

To qualify for an IMF loan, known technically as an ‘Extended Fund Facility’ (EFF), Sri Lanka will have to ‘further’ raise the present 12 per cent VAT rate to 15 per cent as that which prevailed in 2019, while a new conditionality will be to liberalise electricity rates, similar to the present adoption of a pricing formula to determine the pricing of fuel at the pump, an increase which the local authorities have already committed themselves to.

These hikes may lead to what is known as a staff-level agreement with the IMF, followed by IMF Board approval, where the whole process may take another two months (August). The IMF also indicated that interest rates need to be raised further to counterbalance high inflation. An IMF team co-headed by Senior Mission Chief for Sri Lanka Peter Breuer and Mission Chief for Sri Lanka Masahiro Nozaki, which concluded a 10-day visit to the island yesterday, issuing a statement said, ”The IMF team had constructive and productive discussions with the authorities on economic policies and reforms to be supported by an IMF EFF arrangement.”

Significant progress was made and discussions will continue virtually towards reaching a staff-level agreement on the EFF arrangement in the near term.

The objectives of the new IMF-supported programme would be to restore macroeconomic stability and debt sustainability, while protecting the poor and vulnerable, safeguarding financial stability, and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.

The IMF staff team and the Sri Lankan authorities made significant progress on defining a macroeconomic and structural policy package. The discussions will continue virtually with a view to reaching a staff-level agreement on the EFF arrangement in the near term. In this context, discussions focused on designing a comprehensive economic programme to correct macroeconomic imbalances, restore public debt sustainability, and realise Sri Lanka’s growth potential. Discussions advanced substantially during the mission, including on the need to reduce the elevated fiscal deficit, while ensuring adequate protection for the poor and vulnerable.

Given the low level of revenues, far-reaching tax reforms are urgently needed to achieve these objectives. Other challenges that need addressing include containing rising levels of inflation, addressing severe balance of payments pressures, reducing corruption vulnerabilities, and embarking on growth-enhancing reforms. “Authorities have made considerable progress in formulating their economic reform programme and we are looking forward to continuing the dialogue with them,” the statement also said.

The IMF team held meetings with President Gotabaya Rajapaksa, Prime Minister and Finance Minister Ranil Wickremesinghe, Central Bank Governor Dr. P. Nandalal Weerasinghe, Secretary to the Treasury K.M. Mahinda Siriwardana, and other senior government and CBSL officials. It also met parliamentarians, representatives from the private sector, civil society organisations, and development partners, the statement concluded.

By Paneetha Ameresekere and Sulochana Ramiah Mohan