IMF releases US$ 163mn following VAT and other new taxes in budget

Completing the first programme review, the International Monetary Fund’s (IMF) Executive Board last week released the second US $ 162.6 million tranche under the 3-year Extended Fund Facility (EFF) entered into with the Sri Lankan government in early June to fend off a Balance of Payment (BoP) crisis.      

The approval from Washington, D.C. came just three weeks after the parliament passed the Value Added Tax (VAT) Amendment Bill and budget for 2017, which proposed a slew of new taxes, fees and levies to bolster the government revenue. 

The IMF programme was in a state of abeyance for sometimes since the first US $ 168.1 million tranche was disbursed as the VAT increase got delayed twice due to government failing to follow the stipulated legal process in presenting the VAT Amendment Bill to the parliament. The disbursement of the full EFF facility amounting to US $ 1.5 billion would occur in 7 disbursements of approximately US $ 160 million each followed by semi-annual reviews. 
Increase of VAT as a temporary measure to boost government revenue was a main promise given in securing the loan agreement on June 3. This is apart from the capital gains tax and several other taxes to increase proportion of direct taxes as the tax revenue is largely tilted towards regressive indirect taxes which impoverish the poor the most.  

While calling for income tax reforms, the IMF Staff Mission in September cautioned any further delays in presenting the VAT Amendment Bill in parliament could lead to a delay in the disbursement of the second tranche of the loan. 

“We want to see the VAT amendment bill to be submitted to the Parliament. That will enable us to go to our board with good conscience that progress is (being) made,” the chief of the IMF staff team, Jaewoo Lee told the media in Colombo two month ago. 
Now that the VAT Amendment Bill has been passed the IMF has begun to sound a bit conciliatory in their remarks when they completed the review of the EFF last week.  
“Fiscal performance has been encouraging. The reinstatement of the amendments to the Value Added Tax will help boost revenues. The 2017 budget proposal aims to strengthen government finances through revenue mobilization, while guarding against revenue shortfalls by aligning spending with revenue on a quarterly basis,” said Tao Zhang, the Acting Chair and the Deputy Managing Director at the IMF in a statement.
Zhang further said the progress made by the country under the fund’s programme had been, “broadly satisfactory”, with macro-economic and financial conditions begining to stabilize, inflation trending down and BoP improving. 
But he noted that the country’s international reserves remain below comfortable levels. 
According to Central Bank data, the gross official reserves stood at US $ 6.5 billion by the end of September but the recent foreign sell offs in government securities with the absence of strong inflows, either from exports or otherwise, could have depleted the buffer.  
Further pressure could mount on Sri Lanka if emerging market sell offs accelerate in expectation of a rate hike in the US treasuries in December in expectation of higher inflation, stronger dollar and higher economic growth under a Donald Trump presidency.  
Meanwhile, the IMF also said the credit growth in Sri Lanka still remains strong but said the Central Bank had indicated their readiness to tighten the monetary policy further if inflationary pressures resurge or credit growth persists. 
“The authorities intend to continue building up reserves through outright purchases while allowing for greater exchange rate flexibility,” Zhang added. 

Meanwhile, he emphasized the need to strengthen the supervisory and regulatory framework, and identify and mitigate vulnerabilities in the financial sector, particularly with regard to non-banks and state-owned banks. 
However, he said banking sector is currently well capitalised and steps were being taken to find a resolution mechanism for the distressed financial institutions.