IMF says Sri Lanka’s tax reforms essential to regain the confidence of creditors

The International Monetary Fund (IMF) on Thursday said that Sri Lanka's tax reforms are necessary for the cash-strapped country to regain the confidence of creditors. The Lankan government announced a ban on strikes in several key sectors, just one day before a planned nationwide stoppage called by unions, which was aimed at protesting against hikes in taxes and utility bills. 

However, Sri Lankan workers defied the ban as they went on a strike in order to protest against the government and its proposed rescue plan for the bankrupt nation. Workers forced the closure of some hospitals, banks, etc. 

President Ranil Wickremesinghe has hiked corporate tax to 30 per cent from 24 per cent in January, after raising VAT (Value Added Tax) to 15 per cent last year. Wickremesinghe, who is also the country's finance minister, introduced tax hikes with effect from January widely believed to be on demand by the IMF. 

The IMF said in a statement: "Sri Lanka is among the countries to collect the least amount of fiscal revenue in the world, with tax revenue to GDP ratio at only 7.3 per cent in 2021. External creditors are not willing to provide financing to fill this gap". 

The IMF noted that it is aware of the difficulties faced by the common people in the nation at this crucial juncture. The global lender said: "Increases in the cost of living, loss of employment and livelihood, and falling real incomes have hit large parts of the population, and particularly the poor and vulnerable who have no buffers to withstand these hardships." 

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IMF mentioned that the current economic crisis has a number of origins, including the government's inability to meet government spending needs through its revenue collections. 

The IMF said that tax reforms were needed as only "with appropriate tax receipts will the government will be able to fund essential expenditures, and avoid further slashing of critically important outlays". It said also in the statement: "These reforms will also help regain the confidence of creditors." 

Last year in September, the IMF approved Sri Lanka a $2.9 billion bailout package over four years pending the nation's ability to restructure its debt with creditors - both bilateral and sovereign bondholders. 

(With inputs from agencies)

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