Sri Lanka raises taxes ahead of foreign debt deal

COLOMBO: Sri Lanka slapped a new 18 percent value added tax (VAT) on fuel, mobile phones and computers from Monday to raise desperately needed revenue ahead of a foreign debt restructuring. An earlier VAT of 15 percent on other consumer goods was also increased to 18 percent as the government sought to shore up its finances while Sri Lanka emerges from its worst economic crisis.

“In order to achieve economic stability, we must continue to forge ahead in this demanding path—one that is not adorned with flowers but presents formidable challenges,” President Ranil Wickremesinghe said in his New Year message.

Months of civil unrest sparked by the economic crisis forced the resignation of then-president Gotabaya Rajapaksa when protesters stormed his residence in July 2022. His successor Wickremesinghe has raised taxes and cut government subsidies to comply with an International Monetary Fund bailout and cracked down on anti-government protests.

The IMF rescue program requires him to finalize by May a restructure of the island country’s $46 billion external debt after a government default in 2022. The higher taxes kicked in as the government negotiated with its bilateral lenders and sovereign bond holders to reschedule repayments, a key condition of the IMF bailout.

The central bank official was reiterating what President Wickremesinghe said earlier in the month. “There was no alternative to the IMF program for the cash-strapped island nation to get out of its economic bankruptcy,” the President said on December 17. Notably, he is also the finance minister for the island nation. The main opposition party Samagi Jana Balawegaya (SJB) has promised to renegotiate the terms of the bailout stating that the conditions attached to the program were given a nod by the President and has created economic hardships for the public.

As part of the program, Wickremesinghe introduced strict economic reforms like increasing personal taxes and high utility tariffs. A higher Value Added Tax will also be implemented from January 2024, covering items like fuel, which were earlier VAT-free.

The President insisted that these methods were the only way to achieve long-term relief, even as they create short-term difficulties. Regarding the renegotiating, Wickremesinghe said, “There was renegotiation after the first review and it will be reviewed at the time of the second review too.” He added that it was crucial to maintain the IMF program to continue receiving support from the global community to help resolve the crisis the country is going through.