The IMF emphasized that debt relief from Sri Lanka’s creditors and additional financing from multilateral partners “will be required” to help ensure debt sustainability and close financing gaps.
Sri Lanka, opting for a preemptive sovereign default in April, owes $51 billion to international sovereign bondholders, multilateral institutions, and bilateral lenders such as India, Japan, and China.
Sudhanshu Kumar, an economist at the Center for Economic Policy and Public Finance, said Sri Lanka needs significant support through a grant or long-term loans at low interest rates.
“As part of the staff-level agreement with the IMF, the loan comes with conditions related to structural reforms in the economy to ensure fiscal sustainability in the coming years. For this, it is necessary to ensure that the government revenue from taxes goes up and subsidies are minimized—this will help minimize fiscal deficit,” Kumar told Sputnik.
However, Kumar acknowledged that expanding the tax base is difficult when the economy is not functioning well.
The IMF expects the Sri Lankan government to increase fuel and electricity prices to support fiscal consolidation.
The IMF agreeing to a massive 2.3 percent of gross domestic product primary surplus by 2024 signals the need for significant fiscal consolidation driven by substantial revenue increase.
“The program will implement major tax reforms. These reforms include making personal income tax more progressive and broadening the tax base for corporate income tax and value added tax,” an IMF official said in Colombo on Thursday.
While presenting the interim budget on Tuesday, Ranil Wickremesinghe announced an increase in indirect taxes on all goods to 15 percent from the current rate of 12 percent. He also made tax registration mandatory for all residents above 18 years of age without considering their annual income and tax-free thresholds.
Former President Gotabaya Rajapaksa, who fled the country in July after an uprising over the economic crisis, had earlier announced tax cuts and populist measures to win voters in the elections.
The IMF has tasked the Wickremensighe government with targeting social safety net programs to reduce financial loopholes.
Implementing a targeted subsidy program may pose a significant challenge to the government as UN data suggests around six million people are on the verge of poverty due to the food and fuel crisis triggered by foreign exchange shortages.
R.K. Radhakrishnan, a senior journalist who has extensively covered Sri Lanka, reckoned that opposition parties would protest any government action that would burden people due to the IMF deal.
“It is actually inhuman to raise taxes at this point. But IMF conditionality is not just about raising taxes. IMF conditionalities are more extensive. It might try to take away existing benefits in education and healthcare,” Radhakrishnan told Sputnik.
Opposition parties have been raising their voices against the privatization of state enterprises while suggesting that the Wickremesinghe government increase efficiency rather than sell these public assets.
Last week, the government announced selling stakes in national carrier SriLankan Airlines and indicated privatization of state electricity producers in the near future.
Radhakrishnan said that the Wickremesinghe government might skip presenting the IMF document in the parliament, making it impossible to find details on the conditionalities imposed under the program.
“There is a possibility that the IMF bailout package does not even come to parliament, and it might be a general kind of paper which says that we have got loans, which comes with some riders,” he underlined.
The Washington-based lender promised to rebuild the country’s foreign reserves by restoring a market-determined and flexible exchange rate, supported by the comprehensive policy package under the EEF program.
Kumar underlined that given the recent experience of bad fiscal management, no country or agency could extend grants or long-term loans at low-interest rates to ensure macroeconomic stability.
Therefore, now that the economy has faced the worst kind of crisis, the country has no other option but to implement the suggested reforms, Kumar concluded.
The $81 billion economy is expected to contract by 8.7 percent in 2022, and inflation recently exceeded 60 percent.