SRI LANKA STRIKES US $ 1.5 bn DEAL WITH IMF

Another US $ 650 mn budgetary support forthcoming

The International Monetary Fund (IMF) yesterday said they reached a staff level agreement with the Sri Lankan authorities on a 3-year programme for US $ 1.5 billion Extended Fund Facility (EFF) which will see a host of structural reforms, mainly in the fiscal side.

Besides this Balance of Payment (BOP) support moneys which will be directly going to the Central Bank to support the faltering external reserves, another US $ 650 million is forthcoming in the form of budgetary support from other bilateral and multilateral lenders such as World Bank.

The reform-packed agreement has been entered into under the premise that the government is taking all measures to fix its ailing budget by way of collecting more revenues through taxes and closing the administrative loopholes in collecting, reforming the state-owned enterprises (Soes) and targeting subsidies.

Another significant structural reform stipulated by the IMF was trade liberalization and greater flexibility of the exchange management.

“The EFF supports the authorities’ ambitious economic reform agenda for the next three years.

The government’s economic program aims at fundamental changes to tax policy and administration to reverse a two-decade decline in tax revenues and put public finances on a sustainable medium-term footing,” IMF mission chief for Sri Lanka, Todd Schneider said in a statement.

The drawing of the facility in tranches is expected to begin from June once the IMF’S executive board approves the facility.

The IMF’S long list of reforms is similar to a periodic dose of medicine to tame an economy which has been running amok due to bad economic governance. The last time the IMF disciplined the Lankan economy in 2009 when it struck a US $ 2.6 billion Stand-by-arrangement to bail-out the country from a BOP crisis.

The IMF said the government aims to raise its tax-togdp ratio up to 15 percent and reduce the fiscal deficit to 3.5 by 2020. The tax-to-gdp ratio is now at 12 percent significantly lower from the countries at a similar stage of development and the budget deficit for 2015 was 7.4 percent – overshot by a larger margin.

Sri Lanka’s budget has been the main source of instability and the root cause for many economic ills.

With the budget presented in November 2015 is now doomed, the coalition government is now planning a midyear revised budget to be presented.

In boosting the revenue side reforms the government will be eliminating exemptions, holidays, and special rates to broaden the tax base and create a tax system that is simple, efficient, and more equitable while the subsidies will be targeted to protect the poor and vulnerable in the expenditure side.

While the first set of reforms to Value Added Tax (VAT) is due from May 2, implementation of a new Inland Revenue Act, reform of the VAT and the customs code are also in the offing. The government will leverage information technology to bolster tax collection and clamp down on corruption and discretionary tax treatment.

The IMF wants the market forces to prevail in running SOES and to limiting their dependency on public finances.

The first of such reforms began from the announcement of the treasury’s readiness to take over accumulated debt of the national carrier, Sri Lankan Airlines and to run the airline as a public-private partnership.

The pricing of fuel and electricity will be guided by the market but will subsidize for the poor and vulnerable.

In what could be termed as the most detailed statement from the IMF on what the government should and would do as a part of the EFF deal, Schneider said the deal would help the government achieve ‘lift off’ of the economy and fully tap Sri Lanka’s significant economic potential.