News
Govt. seeks lenient IMF terms but faces challenges
The third review of the Extended Fund Facility (EFF) of the International Monetary Fund (IMF) is expected to be delayed until after the November parliamentary elections as the Anura Kumara Dissanayake administration is working to meet the objectives of the Washington-based lending agency while seeking ways to reduce the burden on its citizens, official sources said.
As part of this effort, President Dissanayake aims to renegotiate the terms of the IMF agreement, particularly around tax reforms, they said. At the conclusion of the IMF staff visit this week,
IMF’s Asia Pacific Director Krishna Srinivasan praised Sri Lanka’s commitment to continuing economic reforms.
He reaffirmed the IMF’s support for Sri Lanka and emphasised the Fund’s readiness to assist the country to achieve its economic goals. The IMF has been closely working with Sri Lanka’s economic team to set a new date for the programme’s third review.
IMF agreements often come with stringent conditions, especially for countries facing significant debt and economic instability, as is the case with Sri Lanka.
These conditions typically focus on fiscal discipline, debt sustainability, and economic reforms, with tax measures playing a central role. Increasing taxes or removing tax cuts helps to boost government revenue and reduce fiscal deficits, which is a key aspect of IMF programmes.
However, President Dissanayake’s administration hopes to push back on some of these conditions, particularly tax hikes, which it believes place undue pressure on citizens already struggling with the economic crisis.
A former Treasury Secretary noted that renegotiating the terms, such as tax cuts, might be possible if the government could propose alternative solutions that meet the same fiscal targets without hindering economic growth.
For instance, the government could argue that tax cuts would stimulate economic activity in the long term, generating more revenue and reducing deficits in the future.
In June 2024, the IMF Executive Board completed its second review of Sri Lanka’s EFF programme, providing the country with immediate access to $336 million.
Following Sri Lanka’s presidential election on September 21 and the appointment of the new government on September 23, the administration has confirmed its endorsement of the IMF programme’s debt targets and restructuring terms.
The bond restructuring process, which Citigroup Global Markets has been appointed to manage, is expected to be completed within 10 weeks, informed sources said.
The new administration is attempting to secure more favourable IMF terms by highlighting the potential for tax cuts to stimulate the economy and drive long-term growth. However, Sri Lanka’s precarious economic position—with high debt levels, inflation, and a weak currency—may make it challenging to convince the IMF to relax its fiscal requirements, several economic experts warned.
External financial support from other countries or institutions could provide the government with additional leverage in its negotiations with the IMF.
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