IMF restrictions on tax exemptions stand in the way of attracting FDIs

29 July 2025 08:56 am Views - {{hitsCtrl.values.hits}} 21 Bookmark

A A A

Join our WhatsApp Channel

Colombo, July 29 (Daily Mirror) - The International Monetary Fund (IMF) restriction on granting tax exemption has kept key FDI (Foreign Direct Investments) projects on hold.

The government has now sought to evolve a new piece of law envisaging the new tax policy in accordance with the IMF guidelines to broaden the revenue base. The government inked an MoU (Memorandum of Understanding) with China’s Sinopec early this year for US$ 3.7 billion investment in an oil refinery in Hambantota. Also, there are proposed projects in the Colombo Port City.

There is little or no progress in the implementation of major FDI projects such as Sinopec and Port City because of restrictions on granting tax holidays. Some of the projects involving China are stuck because of geopolitical reasons, with the government trying to address them delicately.

In the first quarter of 2025, Sri Lanka witnessed the realised FDI reaching US$ 203 million, a 90% increase compared to the same period in 2024. Overall, Sri Lanka aims to attract US$ 1.8 billion in FDI for the entire year.

IMF Mission Chief for Sri Lanka Evan Papageorgiou, who led a team here recently, said that strengthening the tax exemption frameworks, boosting tax compliance, broadening the tax base, and enhancing public financial management, including to avoid the reemergence of expenditure arrears, are important.

He also stressed that maintaining macroeconomic stability requires sustained efforts to raise fiscal revenues. To continue meeting the medium-term primary balance objective of 2.3 per cent of GDP—a key requirement for restoring Sri Lanka’s debt sustainability—the 2026 budget should be underpinned by strong revenue measures and appropriate spending allocations, consistent with programme parameters. Strengthening the tax exemption frameworks, boosting tax compliance, broadening the tax base, and enhancing public financial management, including to avoid the reemergence of expenditure arrears, are important. Upcoming bills on public-private partnerships, state-owned enterprises, public procurement, and public asset management should be consistent with the Public Financial Management Act and best practices. Cost-recovery energy pricing should be maintained to minimise fiscal risks and support the financial sustainability of the energy utilities. At the same time, protecting the poor and vulnerable through improved targeting, coverage, and adequacy of social support remains critical.