The International Monetary Fund (IMF) pledged to support Sri Lanka’s economic policies with a 48-month arrangement under the Extended Fund Facility (EFF) of around US$ 2.9 billion and they predicted that the economy is expected to contract by 8.7% in 2022.
The IMF team also stressed the need to take measures to curb rising inflation which recently exceeded 60% and pointed out that providing some kind of assistance for the vulnerable and the SME sector would help overcome this to a certain extent. Restoring price stability through data-driven monetary policy action, fiscal consolidation, phasing out monetary financing and stronger central bank autonomy will allow pursuing a flexible inflation targeting regime.
Sri Lankan tax collection is low and tax reforms are an urgent priority among many other reforms they opinioned. The visiting IMF mission led by Peter Breuer and Masahiro Nozaki that visited Colombo from August 24 to September 1, 2022 to continue discussions on IMF support for a comprehensive economic reform program for Sri Lanka said that a ‘wealth tax’ should be introduced and a scheme should also be in place to ‘tax’ high income earners as well.”
Raising fiscal revenue is to support fiscal consolidation and a program will be implemented for major tax reforms. These reforms include making personal income tax more progressive and broadening the tax base for corporate income tax and VAT. The program aims to reach a primary surplus of 2.3 % of GDP by 2024.
“We don’t know the methodology of implementing this but this is a necessity. Sri Lanka has been facing an acute crisis. Vulnerabilities have grown owing to inadequate external buffers and an unsustainable public debt dynamic. The April debt moratorium led to Sri Lanka defaulting on its external obligations, and a critically low level of foreign reserves has hampered the import of essential goods, including fuel, further impeding economic activity. The impact has been disproportionately borne by the poor and vulnerable.”
“Against this backdrop, the authorities’ program, supported by the Fund, would aim to stabilize the economy, protect the livelihoods of the Sri Lankan people and prepare the ground for economic recovery and promote sustainable and inclusive growth.”
They also suggested stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.
Rebuilding foreign reserves through restoring a market-determined and flexible exchange rate, supported by the comprehensive policy package, was another initiative under the program.
Restoring price stability through data-driven monetary policy action, fiscal consolidation, phasing out monetary financing and stronger central bank autonomy that allow pursuing a flexible inflation targeting regime was also highlighted by them.
The IMF team said that the new Central Bank Act would be the cornerstone of this strategy and the recent budget proposal spelt out by President and Finance Minister Ranil Wickremesinghe also highlighted this.