IMF team in town; talks on reforms, support begin

A high-level team from the International Monetary Fund (IMF) is in town for nearly two weeks, during which time it is likely to provide a lifeline for Sri Lanka’s economy and bolster higher growth through key structural reforms.

The team is led by Mission Head for Sri Lanka Todd Schneider while IMF Deputy Director of the Asia and Pacific Department Kalpana Kochhar is also part of the delegation. 

The IMF was originally scheduled to visit Sri Lanka to hold an Article 4 Executive Board Consultation but has decided to combine this with discussions with the Government for a new support program.

The last Article 4 Consultation with Sri Lanka was in May 2013. In November last year, the IMF concluded the fourth session of Post-Program Monitoring (PPM) with Sri Lanka while an IMF staff visit was conducted in February this year. 

During its current visit, which will conclude ahead of the April Sinhala-Tamil New Year holidays, the IMF team will hold a series of meetings and negotiations. These will include meetings with Prime Minister Ranil Wickremesinghe and his economic team as well as Finance Minister Ravi Karunanayake and Central Bank Governor Arjuna Mahendran.

The country has been facing a Balance of Payments crisis in recent months. The Balance of Payments deficit by end 2015 was $ 1.5 billion as opposed to a surplus of $ 1.37 billion during the previous year.  

IMF support will provide Sri Lanka with a safety net against further capital outflows, pressure on the Balance of Payments and loss of reserves.  There have been reports that IMF support will be around $ 1.5 billion while some speculate that the final figure will be higher.

As in all IMF programs, Sri Lanka will have to agree within the Government to improve fiscal and financial discipline, boost Government revenue and facilitate economic growth through some key structural reforms. 

Following the staff visit in February, during which it met with multiple stakeholders, the IMF said that the country’s recent economic performance had been positive in a number of respects. It also commended a host of measures taken by the Government to achieve growth.

However, it noted that the Government fiscal deficit for 2015 remained a key concern. The IMF mission advised the Government to urgently make a stronger effort to narrow the fiscal deficit and put public finances on a sustainable path.  

It also urged the authorities to take a growth- and investment-friendly approach to lowering the size of the 2016 budget deficit—focusing mainly on measures to raise revenues by broadening the tax base, simplifying the tax system and making it equitable and improving tax administration, to lay the groundwork for further consolidation and debt reduction while also allowing higher public investment.

Govt. delays capital gains tax after investors turn bearish

Reuters: Sri Lanka has postponed a plan to reintroduce capital gains tax by six months, a senior official said on Friday, after the move dented foreign investor sentiment.

Prime Minister Ranil Wickremesinghe last month told Parliament his Government would increase value added tax (VAT) to 15% from 11 and collect capital gains tax for the first time since 1987, ahead of talks on a $ 1.5-billion IMF loan.

The measures were to have come into force from the start of April.

“The implementation of capital gains tax is postponed by six months,” Deputy Treasury Secretary S.R. Attygalle told Reuters on Friday. He said the increase in VAT had also been postponed.

Wickremesinghe’s Government has changed several revenue proposals announced in its 2016 budget in November, after meeting opposition.

The budget deficit is expected to have hit 7.2% of GDP in the last year, missing the target of 4.4%. Finance Minister Ravi Karunanayake last week blamed the increase on the high cost of refinancing loans raised by the former government of Mahinda Rajapaksa without parliamentary approval.

On Tuesday, the Central Bank said Sri Lanka was planning to return to international capital markets to issue international sovereign bonds and raise up to $ 3 billion this year.

Foreign investors have sold 1.3 billion rupees ($ 8.81 million) worth of shares since Wickremesinghe’s announcement.

The IMF has long called on Sri Lanka to reduce its budget deficit, raise revenues and bolster its foreign exchange reserves. These are likely to be the main conditions for the grant of the loan, economists say.