Sri Lanka raises taxes in effort to secure IMF bailout

Sri Lankan president Ranil Wickremesinghe has said the government will raise taxes and strengthen social safety schemes in a budget designed to help secure an IMF support deal and steer the bankrupt country out of a severe economic crisis. Wickremesinghe was inaugurated last month after his predecessor Gotabaya Rajapaksa fled the country amid huge anti-government protests.

The president used his first budget to outline plans to increase value added tax from 12 per cent to 15 per cent, strengthen central bank independence and reallocate government funds towards relief programmes. Wickremesinghe said these and other policies would help to reduce the country’s debt and inflation “in the medium term”. “This crisis will not be solved by accusing one another, nor by faulting the past,” he said. “It can only be solved by adopting short- and long-term plans.”

The government has already undertaken measures, including raising utility prices and some taxes. Rajapaksa cut taxes sharply two years ago, eroding government revenues and triggering a cycle that many economists blame for tipping the island into crisis. Sri Lanka in May became the first Asia-Pacific country to default in more than two decades after effectively running out of foreign reserves to service its overseas debt, which totalled more than $50bn. The lack of foreign currency led to import shortages of everything from fuel to medicine, plunging the island into chaos.

Wickremesinghe has sought to agree a multibillion-dollar IMF bailout that would pave the way for debt restructuring and a gradual recovery. An IMF team is in Colombo for negotiations and the president has said he hopes for a preliminary agreement by next month. Dimantha Mathew, head of equity research at First Capital financial group in Colombo, said the budget was in line with market expectations and would probably be enough to secure a preliminary, staff-level agreement with the IMF.

“We believe all the IMF’s requirements would be met through the budget in terms of fiscal consolidation,” he said. Recommended Anjali Garg Sri Lanka’s crisis highlights the importance of budget transparency Sri Lanka has partly been a victim of global pressures, such as the surge in commodity prices which left the import-dependent island of 22mn struggling to pay for essential goods. But the crisis was also blamed on chronic mismanagement by the Rajapaksa dynasty, which has ruled the island for the better part of two decades.

Rajapaksa and his brother Mahendra, who was president between 2005 and 2015, borrowed heavily from international bondholders and countries such as China to fund “white elephant” infrastructure projects that failed to generate returns. The economic hardship and drop in living standards have triggered months of demonstrations across the island, culminating with protesters storming Rajapaksa’s residence in July.

Some of the shortages have eased, thanks to an uptick in remittances from overseas, new supplies of basics such as cooking gas and a new QR code-based fuel distribution system that has reduced queueing.

“There is some significant improvement. We’re seeing some level of political stability,” Mathew said. But he added that higher utility prices were exposing already vulnerable Sri Lankans to further pain. “It’s hitting the people at an individual level very hard. It’s going to be very difficult for the consumers.”

Financial Times.

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