The International Monetary Fund (IMF) had asked the government to expedite the legislative process pertaining to Value Added Tax (VAT) amendments, and stressed that any delay in doing so could lead to the postponement of the disbursement of the second tranche of the US $ 1.5 billion three-year Extended Fund Facility (EFF) entered into with the government in June.
Making the parting remarks after concluding the first review of Sri Lankan government’s economic programme that is being supported by the EFF, the Chief of the IMF staff team, Jaewoo Lee however said all quantitative targets through end June had been met by the government.
“We want to see the VAT Amendment Bill to be submitted to Parliament. That will enable us to go to our board with good conscience (and say) that progress is (being) made.
If it does not happen in a timely manner, we might have to postpone the (next) review,” Lee told the reporters on Friday.
The disbursement of the US $ 1.5 billion would occur in 7 tranches of approximately US $ 160 million each, followed by semi-annual reviews. The first such disbursement was made in early June.
The EFF programme entered into saw the IMF prescribing a slew of fiscal reforms, the majority of which relating to enhancing government revenue through taxes.
Sri Lanka has one of the lowest tax revenue-to-GDP ratios in the region.
Meanwhile Eteri Kvintradze, the IMF Resident Representative for Sri Lanka and the Maldives said that the VAT would become one of the main revenue sources for the government in 2017.
“We expect the VAT to take full effect in 2017 and it will be one of the main revenue sources in the 2017 budget. So, we don't see VAT as a temporary measure. We see VAT as something that could support Sri Lanka’s revenue capacity,” Kvintradze said.
The IMF’s remarks on the VAT were contrary to the government’s claims that the increase of the VAT to 15 percent was only a temporary measure.
Commenting on additional tax reforms that are expected from the forthcoming budget, Lee wanted the government to revise income tax structure— perhaps in reference to either a higher income tax rate or an expansion of the tax net or both.
“For the 2017 budget, we want the government to implement income tax reforms, which will rebalance the source of tax revenues, towards a larger share of direct tax revenues compared to indirect taxes. That will be a main component of the budget”, he added.
Sri Lanka collects 80 percent of its tax revenue through indirect taxes and 20 percent through direct taxes. The Prime Minister promised to bring this tax revenue mix to 60:40 in November, last year. But later the government did exactly the opposite by raising indirect taxes.
While welcoming the Central Bank’s move to pre-emptively tighten the monetary policy to maintain inflation within the target stipulated by the IMF, the mission Chief asked the Monetary Board to, “remain vigilant in monitoring inflation pressures and stand ready to tighten further should inflation or credit growth continue to rise”.
“The mission welcomes the effective tightening of fiscal and monetary policies that contributed to improving market confidence and easing pressures on external balances,” Lee said in a statement.
Despite the headwinds and widespread uncertainties, Lee forecasted the Sri Lankan economy to grow at least by 5 percent in both 2016 and 2017, much slower than the 6.5 percent target of the government.
“There have been some ups and downs but we still expect the growth rate to be around 5 percent this year and next year,” he remarked.
The mission stayed in the country from September 13 to 23 holding discussions with various Sri Lankan authorities and these discussions will continue in October in Washington D.C. during the annual meetings of the IMF and World Bank.