Breather for Sri Lanka after IMF agrees to give $1.5 billion

The total amount of support will be $ 2.2 billion..

Governor of the Central Bank of Sri Lanka Arjuna Mahendran says the country is expected to achieve fiscal consolidation and improvement in the performance of State Owned Enterprises (SOE), areas in which the progress of the island nation leaves much to be desired.

Sri Lanka, which is in the midst of a crisis over the deterioration of the balance of payments (BOP) position, has got the much-needed reprieve with the International Monetary Fund (IMF) agreeing to provide $ 1.5 billion through a three-year-long Extended Fund Facility (EFF).

The facility is expected to yield an additional $650 million in other multilateral and bilateral loans. The total amount of support will be $ 2.2 billion.

IMF conditions

Asked about conditions of the IMF, Governor of the Central Bank of Sri Lanka (CBSL) Arjuna Mahendran replied that the country was expected to achieve fiscal consolidation and improvement in the performance of State Owned Enterprises (SOE), areas in which the progress of Sri Lanka leaves much to be desired.

The IMF’s release said the government would seek to raise the tax-to-GDP (Gross Domestic Product) ratio to near 15 per cent by 2020 by implementation of a new Inland Revenue Act, reform of the VAT and the customs code. Together with more efficient management of government expenditure, the EFF would support a “steady reduction” of the overall fiscal deficit to 3.5 per cent of the GDP by 2020 —“equivalent to a shift from primary (excluding interest costs) fiscal deficits to primary surpluses that will underpin a much-needed reduction of public debt,” the release added.

Fiscal deficit up

Talking of fiscal consolidation, the just-released Annual Report of the CBSL for 2015 explained how the fiscal deficit increased from 5.7 per cent of GDP in 2014 to 7.4 per cent of GDP in 2015. This was in contrast to the government’s original target of 4.4 per cent.

The Central government’s debt to GDP ratio increased to 76.0 per cent in 2015 from 70.7 per cent in 2014, “highlighting the need for strong fiscal reforms to reduce the budget deficit and accumulation of debt.”

Identifying the trend of declining ratio of revenue to GDP as a major chronic problem, the Central Bank advised the government to simplify the tax structure; broaden the tax base and increase tax compliance besides minimising tax exemptions and concessions.

‘Unavoidable reforms’

Describing as “unavoidable” reforms in the SOEs, the Bank called for reforms “based on a carefully thought strategy” and implementation “within the country’s socio-economic and political context.” It wanted the government to explain adequately to and educate stakeholders and the public on the rationale and potential medium to long-term consequences in the absence of such reforms.