Tax hikes come ahead of crucial IMF talks

The Government’s decision yesterday to raise tax revenue and curb imports is aimed at cutting the burgeoning trade deficit ahead of a crucial meeting of the International Monetary Fund (IMF) tomorrow in Washington on the final instalment of US$ 800 million under the fund’s US$ 2.6 billion Standby Arrangement (SBA loan).

Taxes on cigarettes and alcohol were raised while high taxes on motor vehicles were also imposed to curb imports, a step also taken earlier by the Central Bank when it enforced a credit squeeze.
Economists said the move was a two-fold strategy of raising falling revenues (cigarettes and alcohol) and further reducing motor vehicle imports in line with IMF expectations to reduce the yawning trade deficit.

Last year imports cost US$ 20 billion against export earnings which were just half at $10 billion, with the deficit doubling against the 2010 figure. Central Bank officials including Governor Ajit Nivard Cabraal declined to comment on the possible outcome of tomorrow’s IMF board of directors meeting. The Sunday Times reliably learns that the Central Bank and the IMF have mutually agreed, for the first time, to ‘keep mum’ on the possible outcome of the meeting, and other details.

In September last year, the fund expressed concern over foreign exchange reserves being used to defend the rupee. The Central Bank last month withdrew from its regular intervention in the exchange markets. This led to speculative trading, resulting in the US dollar rising sharply to Rs 130 last week and easing this week to Rs 128 from about Rs 110, two months ago.

The trade deficit continues to rise this year. In January, according to latest figures, exports fell 0.6%to US$ 917.7 million while imports rose 20% to US$1.8 billion, with deficit going up sharply by 49.7% to US$ 965.5 million.

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