The International Monetary Fund (IMF) says it is important the government expedites the legislative process of implementing the value added tax (VAT) amendments that are needed to support revenue targets for 2016 and 2017. In an End-of-Mission press release issued following a recent visit by an IMF staff team led by Jaewoo Lee to Colombo, to hold discussions on the first review of the Sri Lankan authorities’ economic program that is being supported by a three-year Extended Fund Facility (EFF), Lee states that the 2017 budget, expected should also be underpinned by a well-crafted and high-quality tax policy strategy to raise Sri Lanka’s low tax revenue-to-GDP ratio.
“The mission commends the authorities for implementing their IMF-supported economic programme under difficult circumstances, with all quantitative targets through end-June being met. However, some forward looking aspects of the programme review, mainly related to the implementation of the tax reform package, need to be addressed without further delay,” the statement noted.
It pointed out that commencing the legislative process for the new Inland Revenue Act would be an important step in rebalancing the tax system toward a more predictable, efficient and equitable structure and in generating the needed resources in support of the country’s ambitious social and development objectives.
“The mission made significant progress toward reaching a staff level agreement with the government on completion of the first review. Discussions will continue in October in Washington D.C. during the Annual Meetings of the IMF and World Bank.
“Overall, macroeconomic performance in first half of 2016 reflected a mix of improving balance of payments, reduced growth mainly related to recent floods, and slightly higher inflation. The mission welcomes the effective tightening of fiscal and monetary policies that contributed to improving market confidence and easing pressures on external balances.
Meanwhile, the mission also encouraged the government to make concerted efforts in implementing structural reforms in public financial management and state owned enterprises, building on the substantial technical assistance received over the years.
“Renewed effort toward greater integration into regional and global supply chains, higher levels of foreign direct investment (FDI), and enhancing prospects for private sector investment are important for achieving medium-term macroeconomic objectives. Bolstering competitiveness to boost trade and private sector development will also support growth potential,” the IMF statement said.
Commenting on the recent decision by Central Bank to hike policy interest rates, the IMF mission said they welcomed the Central Bank of Sri Lanka’s (CBSL) move to preemptively raise policy rates to maintain inflation within its target band.
“In light of easing external pressures, the mission encourages the CBSL to continue its effort to rebuild international reserves and maintain exchange rate flexibility to further develop the foreign exchange market. In this regard, the mission and the authorities discussed plans for a transition to flexible inflation targeting as the monetary policy framework, possibly supported by IMF technical assistance,” the statement added.
During the visit, the mission met with President Sirisena, Prime Minister Wickremesinghe, Finance Minister Karunanayake, Governor of the Central Bank of Sri Lanka Coomaraswamy, parliamentarians, other public officials, and representatives of the business community, civil society and international partners.