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IMF releases US$334m but insists on tax revenue targets
View(s):By Damith Wickremasekara and Bandula Sirimanna
Hours after the second reading of the budget was passed, the International Monetary Fund’s (IMF) executive board released US$334 million under the four-year bailout package, calling on Sri Lanka to ensure it meets the tax collection targets.
A senior Treasury official said that the IMF had pointed out that Sri Lanka could raise a tax revenue target of more than Rs 900 billion if the revenue collection measures were enforced properly.
He said no new taxes would be imposed, and the existing taxes would not be revised.
“We have been advised to increase foreign direct investments as well,” he said.
He said the revenue measures were being enforced properly, and the country was confident of getting two more bailout packages within the year.
On Friday, the IMF board approved the third review of the Extended Fund Facility (EFF) arrangement, allowing the government to draw around US$334 million.
The Central Bank’s former governor, Dr. Indrajit Coomaraswamy, told The Sunday Times the government had taken laudable steps in the budget 2025 towards meeting ambitious fiscal targets agreed with the IMF, in particular in achieving the primary surplus target of 2.3 percent of GDP set for 2025 from 0.6 percent.
He noted that the latest IMF executive board decision was the result of significant progress made in maintaining price stability, supported by sustained commitment to prohibit monetary financing, exchange rate flexibility, and the balance of payments measures.
However, a former Treasury secretary who has in-depth knowledge of IMF procedures said concerns did persist regarding the feasibility of achieving these IMF targets. The 2025 budget projects total government spending at 21.8 percent of the Gross Domestic Product (GDP), with a focus on social welfare programmes and infrastructure development.
He said the government faced a challenge to achieve these targets as its fiscal and monetary policies were still not clear, although it was required to maintain policy consistency.
In a statement, IMF Deputy Managing Director Kenji Okamura highlighted the economy’s vulnerability, emphasising that reform is essential to ensure macroeconomic stability, debt sustainability, and long-term inclusive growth, and warned against policy reversals.
Dr. Coomaraswamy said enhancing tax compliance and curbing exemptions were essential to ensure that economic reforms remained on track.
Prof. Priyanga Dunusinghe from Colombo University said that the IMF focused on the government’s familiar pattern of combining liberal macroeconomic policies with welfare’s micro-level interventions.
However, inconsistencies may have been pointed out by the IMF, particularly in taxation policies, where the removal of property taxes appears contradictory given that 47 percent of the national budget is controlled by the wealthiest 20 percent of the population.
He noted that concerns remained over whether revenue targets would be met, especially given the high reliance on tariffs, particularly on vehicle imports.
Sri Lanka has fulfilled the conditions and structural benchmarks required for the IMF executive board to pass the third review, Deputy Minister of Economic Development Anil Jayantha said.
Sri Lanka had also met and outperformed most quantitative targets, he said, adding that Sri Lanka had achieved all quantifiable targets and most of the structural benchmarks due by January 2025 had been completed.
In its statement, the IMF referred to Sri Lanka’s excellent debt restructuring progress, hailing the achievement of the successful bond exchange in recent times as a milestone for returning debt to sustainability. The IMF called for expeditious agreement with the bilateral creditors, including those comprising the Official Creditor Committee, as its number one priority.
Monetary policy must be geared towards attaining price stability and the autonomy of the Central Bank; without monetary financing, it said.
Long-term exchange rate flexibility and gradation of balance of payments controls have to be there to accumulate foreign reserves and attain balance.
Non-performing loans resolution, governance improvement in state banks, and insolvency and resolution framework strengthening are crucial in reviving the credit growth and aiding economic recovery.
The IMF also called for the additional imposition of governance reforms to facilitate the opening up of Sri Lanka’s long-term economic potential.
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