Editorial

Sri Lanka’s second hurdle to be cleared in the gruelling economic stability steeplechase comes up next month with an IMF team arriving to go through the country’s report card since the first tranche of the USD 2.9 billion bailout package was granted.

In a recent appraisal report on the IMF’s April Extended Fund Facility (EFF), Sri Lanka’s external reserve assets are projected to grow from a meagre USD 1.7 billion in 2022 when the country declared itself bankrupt, to a record USD 14 billion by 2027 despite continuous current account deficits right through the period 2023-2027.

Analysts believe this huge jump in reserve growth is expected from four main sources, viz., outsized increase in project disbursement; large programme disbursement from the World Bank, the ADB and also India, Japan, China and other bilaterals; and substantially greater FDIs (Foreign Direct Investments). This enhanced largesse originated with IMF prodding.

The vastly positive outlook is linked heavily to Sri Lanka’s tenuous foreign policy neutrality. The Western Alliance appears to be wresting back the initiative from China’s once-dominant links to Sri Lanka’s domestic politics and its economy. There’s nothing called a ‘free lunch’ in global affairs and Sri Lanka will be constantly under pressure for pushback from Chinese influence. The ongoing case of a Chinese ‘research vessel’ coming to Colombo port amidst Indian opposition is what President Ranil Wickremesinghe is up against while he seeks IMF assistance, and such undercurrents will be the order of the day as long as geopolitical tension in the Indian Ocean continues.

The projected programme disbursement of around USD 1.6 billion per annum from multilateral lenders during the IMF programme period is reportedly “very unusual and distinctive” given the size of Sri Lanka’s GDP. Large inflows should have a positive outcome also in settling parts of the ISBs (International Sovereign Bonds) after 2027.

Domestically, all the projections for a turnaround in the Sri Lankan economy to grow faster than the forecasted 3.1 percent from 2023-2027 will depend on many factors. These will include the Government’s capacity in pressing forward with its IMF-backed reform programme. Weak Government capacity in executing policy reforms will be a telling factor.

One of the key demands of the IMF is to increase the Government’s revenue collections. The sudden escalations of taxes, from income to electricity to water to alcohol and the Treasury falling short of its targets has been a matter of concern. On the one side, the citizen is up in arms, on the other, the inflows for the state coffers are not as expected. Against this backdrop, President Wickremesinghe recently announced a proposal for the setting up of a single Revenue Authority that brings in the Inland Revenue, Customs and Excise Departments under one roof. There appears to be little, or no traction after this initial Presidential statement, but it is not some idea that suddenly sprang from him either.

In his first avatar as Prime Minister (2001-2004), President Wickremesinghe mooted this idea; something on the lines of Her Majesty’s Revenue and Customs (HMRC), in Britain, which has merged the Tax, Customs and Excise Departments under one umbrella. Its motto is: “We help the honest majority to get their tax right and make it hard for the dishonest minority to cheat the system”. It has extremely wide powers that extend from businesses not complying with money laundering regulations to monitoring tax ‘avoidance’ schemes, promoters, enablers and suppliers etc. Some of these powers are vested in Sri Lanka with the Central Bank where it’s all talk no action on these subjects.

When the proposal was mooted in Sri Lanka 20 years ago, the IMF also came on board as the IMF doesn’t really mind how a country collects its revenue, as long as it does.

Laws were drafted at the time to set up this one single Authority. Officials were sent abroad to study how countries that have such a supra-body works – all with grant money provided by the IMF, but it all came to naught when the unions got wind of the exercise and played up. The then Government was a cohabitation administration and didn’t have the political clout to control the union protests.

There was a little reticence among some behind the proposal as well, as they feared that such an Authority had three different categories of officials. They all needed senior public servants at the helm, but the officials needed speciality in different disciplines; from tax law to levying of duties to strongarm tactics required for the enforcement of Excise laws. Even if they worked under one Authority they needed to function on compartmentalised floors.

The only thing common among them is that they are all reeking with corruption.

The common citizen’s complaint is that the Lankan model’s rationale would be the opposite of the British HMRC legend, namely, “We help the dishonest minority to cheat the system and make it hard for the honest majority to get their tax right”. The ‘big fish’ always get away with acts ranging from dumping containers of toxic medical waste on Lankan soil; to money laundering through the purchase of real estate; to tax avoidance; to adulterating locally manufactured alcohol among a long list of irregularities through the greasing of palms.

The country’s political culture is an accessory to big-time fraud. Many of these fraudsters are funders of political parties and political leaders. The recent case of an MP who got away with merely a trifling fine for smuggling gold and mobile phones and is allowed to continue sitting in Parliament despite no shame, no remorse and no deterrent shows that without the basics of good governance, no Authority will be able to increase revenue collection that the Government not only hopes for, but the country needs so desperately.

As the IMF team prepares to arrive in Sri Lanka, one can only expect, and hope, that the Government has its team of competent officials ready not to merely rubber stamp the IMF’s diktats, and sleepwalk into the negotiations. They have to avoid an “operation successful; patient dead” scenario.

The unbearable living costs, the unfairly and disproportionately high taxes, direct and indirect, together with the proposed taxes in the forthcoming budget must not trigger social unrest that will topple all well-laid plans for economic recovery and send the country reeling back to where it was in 2022.