Sri Lanka devises reform plan ahead of IMF support facility negotiations
Sri Lanka is putting together an economic reforms plan with government spending cuts and tax rises which is close to what was suggested by the International Monetary Fund (IMF) during the end of its country surveillance process.
The government is likely to receive IMF assistance this year to enhance dwindling foreign reserves and tackle the current balance of payment (BOP) and trade deficit problem, official sources disclosed.
A team of IMF economists (Article IV end negotiating team) will visit Sri Lanka next from March 20 -24 for a financial review on 2016 fiscal accounts in determining the status of unpaid claims, contingent liabilities and other information related to appropriation and spending in that year.
They will assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials, sources said. However, according to Prime Minister Ranil Wickremesinghe, instead of taking loans like previous governments and trying to get out of this crisis, his government was looking at increasing income from within the country.
The IMF mission also plans to meet with parliamentarians and representatives of business, labour unions, and civil society before reporting its findings to IMF management and then present them for discussion to the Executive Board.
The Finance Ministry will present the economic reforms plan to the IMF negotiating team for their observations to start the programme of financial or technical assistance following the consent of the IMF Executive Board.
The sources said the IMF Article IV end negotiating team will not be involved in a forensic audit, as earlier thought, on Sri Lanka’s fiscal accounts during their stay in the island. The mission had earlier advised the government to urgently make a stronger effort to narrow the fiscal deficit and put the public finances on a sustainable path.
The bulk of fiscal consolidation would be primarily through (1) raising revenue by broadening the tax base, (2) simplified tax structure, (3) bolster efficiency and fairness of tax administration, increase the VAT rate to 15 per cent including retail and wholesale, keeping NBT rate at 2 per cent, which was exclusively reported by the Business Times on February 21 in an article headlined “IMF urges 15 per cent VAT to retain NBT at 2 per cent, consolidate debt reduction”.
The PM announced proposed tax amendments in Parliament this week, as his government looked at new ways to generate income amidst economic instability. A mini budget presentation is also on the cards. Sri Lanka will hold discussions with the IMF this month on a support facility after the announcement of these policy decisions by the Prime Minister this week.
It will be in the form of Stand-By Arrangements (SBA), Flexible Credit Line (FCL), Precautionary Credit Line (PCL) or technical support facility. Based on the budget framework for 2016, IMF staff estimates suggest the fiscal deficit could widen further. Meanwhile, Sri Lanka’s public debt has risen to over 74 per cent of GDP by end-2015.
Despite the narrowing of the current account, capital outflows have intensified and the overall balance of payments deteriorated, the sources said. These outflows were accompanied by downward pressure on the rupee and a decline in central bank gross foreign exchange reserves.