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Sri Lanka on track for tax reform based EFF deal: IMF mission

Apr 11, 2016 16:43 PM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - The International Monetary Fund is expecting to reach staff-level agreement on a reform heavy three year Extended Fund Facility (EFF) with Sri Lanka over the next two week with wrap talks concluded in Washington.

The three year program will focus on getting more taxes by reforming tax laws, improving tax collections by using computerized systems at Inland Revenue which will help the economy to be stable and fix state enterprises which are burdening the people.

“A durable reduction of the fiscal deficit and public debt through a growth-friendly emphasis on revenue generation is the main priority for fiscal policy," Mission Chief Todd Schneider said in a statement at the end of discussions in Colombo.

"In this context, the mission welcomed the cabinet’s decision to reduce the 2016 fiscal deficit to 5.4 percent of GDP, and advised to move quickly on tax and expenditure policy decisions endorsed by the Cabinet.

"Other near-term steps include a clear strategy to define and address outstanding obligations of state enterprises, start broadening the tax base by reducing tax exemptions, and introduction of a new Inland Revenue Act."

A preliminary deal of staff-level agreement has not yet been reached, but the mission expects to wrap up a deal in Washington over the next two weeks. Sri Lanka is hoping to get a little over a billion US dollars under the agreement, but the money will go into the central bank's balance sheet and would end up bridgng the US budget deficit if the proceeds are invested in US government bonds.

The deal then has to be approved by the IMF's management and its board which may take several weeks.

The program will be based on a revised budget deficit or 5.4 percent of gross domestic product targeting economic growth of 5.0 percnet of GDP. (More details of how the final budget may look like is found here). EN policy columnist Bellwether warned earlier that a EFF with fiscal reforms was on the cards but there would be no monetary reforms, which is needed to finally address balance of payments trouble.

The program envisages reducing protection and opening the country to trade and investment.

The full IMF statement is given below:

A staff team from the International Monetary Fund (IMF) led by Todd Schneider visited Colombo during March 31- April 11 to hold the 2016 Article IV consultation discussions and to discuss the authorities’ request for a Fund supported arrangement. The mission made significant progress toward a staff level agreement with the government on an economic program that could be supported by a 36-month Extended Fund Facility (EFF). Program discussions will continue in Washington D.C. on the margins of the Spring Meetings of the IMF and World Bank, with the objective of concluding a staff-level agreement with the authorities, subject to approval by IMF Management and the Executive Board, in the next two weeks.

At the end of the visit Mr. Schneider made the following statement:

“Macroeconomic performance in 2015 reflected a mix of positive underlying growth momentum, the impact of domestic policies, and an increasingly difficult external environment. The fiscal deficit expanded, public debt increased, and the balance of payments position deteriorated despite an improvement in the terms of trade. Real GDP growth in 2016 is expected to remain around 5 percent and inflation in the low single digits. Over the medium term, there is potential for growth to rise closer to Sri Lanka’s estimated potential output level, but prospects will hinge on a policy upgrade in the near term and removing bottlenecks to trade and investment.

“The authorities’ proposed economic program aims to achieve high and sustained levels of inclusive economic growth, restore discipline to macroeconomic and financial policies, and rebuild fiscal and reserve buffers. Key objectives underlying the reform agenda include: (i) improving revenue administration and tax policy; (ii) strengthening public financial management; (iii) state enterprise reforms; and, iv) structural reforms to enable a more outward-looking economy, deepen foreign exchange markets, and strengthen financial sector supervision.

“A durable reduction of the fiscal deficit and public debt through a growth-friendly emphasis on revenue generation is the main priority for fiscal policy. In this context, the mission welcomed the cabinet’s decision to reduce the 2016 fiscal deficit to 5.4 percent of GDP, and advised to move quickly on tax and expenditure policy decisions endorsed by the Cabinet. Other near-term steps include a clear strategy to define and address outstanding obligations of state enterprises, start broadening the tax base by reducing tax exemptions, and introduction of a new Inland Revenue Act. The medium-term revenue effort will be based on further reform of tax and expenditure policies, supported by modernizing revenue administration and public financial management (including implementation of key IT systems (RAMIS, ITMIS, and ASYCUDA ++).

“The mission welcomed the recent tightening of monetary policy given the steady increase in core inflation and high private credit growth. Given the long lags in monetary transmission and continued increase in core inflation and private credit growth, however, the Central Bank of Sri Lanka (CBSL) should be prepared to tighten policies further if these trends continue. The mission also recommends the CBSL take active steps to rebuild non-borrowed reserve buffers.

“The financial system appears well capitalized and liquid, but the authorities should nevertheless remain vigilant to the risk of a potential rise in non-performing loans. The mission welcomes steps toward supervision on a consolidated basis and shifting to Basel III and concurs with continued efforts needed to strengthen the legal framework for crisis preparedness and resolution.

“Achieving medium-term growth and reserve objectives and building greater resilience to external shocks will require a renewed effort toward greater integration into regional and global supply chains, higher levels of foreign direct investment, and enhancing prospects for private sector investment. To boost trade and private sector development, the mission recommends addressing protectionism by reviewing tariffs and para-tariffs. The mission welcomes ongoing efforts to enhance competitiveness through other means, including removal of the EU fisheries import ban, and the reinstatement of Generalized System of Preferences Plus status. Further steps are needed to increase the efficiency of trade facilitation (including through full implementation of use of electronic customs documentation), remove barriers to foreign investment entry and establishment, enhance access to finance, and strengthen financial market infrastructure.

“The mission met with Prime Minister Wickremesinghe, Finance Minister Karunanayake, Minister of Development Strategies and International Trade Samarawickrame, Governor of the Central Bank of Sri Lanka Mahendran, other public officials, and representatives of the business community, civil society and international partners.”


 


 

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