IMF Approves Stand-By Arrangement For Sri Lanka

by Mary Swire, Tax-News.com, Hong Kong

29 July 2009

The Executive Board of the International Monetary Fund (IMF) has approved a 20-month USD2.6bn Stand-By Arrangement for Sri Lanka to support the country's economic reform programme. That programme contains the fiscal policies Sri Lanka intends to pursue with the objective of reducing its large budget deficits.

Within its Letter of Intent to the IMF, the Sri Lankan government stated that:

“Effective actions will be needed to reverse the declining trend in tax revenues (in percent of GDP) and bring the fiscal deficit in line with the Fiscal Responsibility Act and Government policy. The Government’s fiscal framework targets a reduction in the overall central Government deficit to 5% of GDP by 2011 to maintain macroeconomic stability. Specifically, the Government is committed to increasing tax revenue by at least 2% of GDP by 2011 with measures to broaden the revenue base, significantly reduce tax exemptions, and further improve tax enforcement.”

The government is to try to restrict the 2009 budget deficit to 7% of GDP. In that respect, it said:

“We have already taken a number of measures that demonstrate our commitment to our fiscal targets. We have introduced a nation building tax and raised excise taxes on liquor, cigarettes, and other consumer items. We have taken steps to limit the length and the scope of tax exemptions granted under the Board of Investment Act and the Inland Revenue Act with the intention of broadening the tax base.”

With regard to future tax measures to be contained in the 2010 budget and to assist in bringing the budget deficit down to the 5% target, it continued:

“The Government has formed a Tax Commission to review current tax policy and to make recommendations on a comprehensive approach to improve the tax system aimed at the strengthening of tax collection, improve tax auditing and enforcement, and simplifying the tax system. In its proceedings, the Commission will draw on the required tax expertise and submit an interim report by mid-October 2009. The report will contain proposals for base broadening including further rationalization of income tax holidays under the Board of Investment for consideration in preparing the 2010 budget. We also intend to phase out temporary taxes, including import surcharges, as new revenue measures yield results.”

Recommended