As of last Thursday (8), more than 24 candidates had placed deposits at the Election Commission (EC) for the Presidential Election, which is scheduled to be held on 21 September. However, unlike past elections, this election will see a pivotal three-way contest as three alliances are on the run for the ninth Executive Presidency.
Opposition parties have clearly stated that there will be adjustments to the Extended Fund Facility (EFF) by the International Monetary Fund (IMF). However, specifics regarding these adjustments remain undisclosed to the public.
It is no secret that Sri Lanka is at a crucial juncture as the suspension of the IMF programme by any future government would carry great risk, given that the programme is linked to debt restructuring, offering the Debt Sustainability Analysis (DSA) based on which the country’s debt restructuring is being carried out.
Critical to sustain reform momentum: IMF
According to the IMF’s recent statement following its staff visit in the first week of August, the economic reform programme implemented by the Sri Lankan authorities is yielding commendable outcomes as the recovery continues, with real GDP posting three consecutive quarters of expansion and growth accelerating to 5.3% Year-on-Year in the first quarter of 2024.
It states that inflation remains below the Central Bank of Sri Lanka’s (CBSL) 5% target and domestic borrowing rates have declined while gross international reserves increased by $ 1.2 billion during the first half of 2024, reaching $ 5.6 billion.
“Fiscal revenue collections increased during the same period. Going forward, these improvements need to translate into better living conditions for all of Sri Lanka’s people,” the IMF said.
The IMF also emphasised the importance of maintaining reform momentum and ensuring timely implementation of all programme commitments, which it said were critical to cement the hard-won economic progress to date and put the economy on a firm footing.
It added that maintaining macroeconomic stability and restoring debt sustainability required further efforts to raise fiscal revenues and that the 2025 Budget needed to be underpinned by appropriate revenue measures and continued spending restraint so as to reach the medium-term primary balance objective of 2.3% of GDP – a key requirement for restoring Sri Lanka’s debt sustainability.
Further, it said that the planned relaxation of import restrictions on motor vehicles would support revenue mobilisation in 2025 while tax administration reforms could further improve compliance, including by establishing a properly functioning VAT refund system for exporters by April 2025.
“Any proposed measure eroding the fiscal position needs to be offset by compensating measures of high quality. Avoiding new tax exemptions will not only reduce corruption risks and fiscal revenue leakages, but also ensure a more predictable and transparent tax system,” the statement said.
The IMF also said that the authorities had made commendable progress with putting debt on a path towards sustainability and the execution of the domestic debt restructuring and finalising the agreements with the Official Creditor Committee and China Exim Bank were major milestones.
The IMF staff assessed the Joint Working Framework announced at the conclusion of the second round of restricted discussions with the bondholder committee and has provided this assessment to the authorities and, on their request, the financial advisors of the bondholders.
“We encourage a swift resolution of the remaining steps to achieve debt sustainability and regain investor confidence. We will continue to support Sri Lanka’s ongoing debt restructuring efforts,” the statement by the IMF said.
Finally, it stressed that progress in meeting key commitments under the IMF-supported programme would be formally assessed in the context of the third review of the EFF and that the timing of the third review would be discussed with the Government upon the conclusion of the Presidential Elections.
Will make adjustments to tax structure: SJB
Samagi Jana Balawegaya (SJB) MP Dr. Harsha de Silva said that during the last IMF staff visit to Sri Lanka, the IMF had held discussions with both the Government and the Opposition about the course of action of the programme following the Presidential Election on 21 September.
“They (IMF) were wondering whether the taxes for 2025 could be agreed upon now and thereafter to fix the revenue side for 2025,” he said.
However, he said that the SJB did not agree as no one knew who would win the Presidential Election although the SJB expected to win. He added that if the SJB agreed on the taxes for 2025 in a future government, it would not be able to make adjustments to the tax structure after taking office.
“We appreciate the fact that we need to work within an envelope, while we may want to make adjustments in marginal tax rates such as for Personal Income Tax (PIT) or even change the slabs, which is what we want to do,” he added.
He stressed that the SJB believed that the PIT slab could be held between 18-24% so that most people would fall within that slab and those earning very high incomes could be moved to the 30-36% tax slabs.
According to the Inland Revenue Department (IRD), PIT applies if the monthly income is equal to or greater than Rs. 100,001, annual income surpasses Rs. 1.2 million (Rs. 100,000 x 12), and tax rates start from 6% up to 36%, with the rate increasing by 6% for each slab of Rs. 41,667.
“By adjusting to these tax slabs, equity could be brought into the taxation process because, when looking at the point at which 24%, 30%, or even 36% tax rates kick in, within the tax structures of the regional competitor countries – even those countries Sri Lankans are migrating to – there is a certain disposable income in hand before you start paying really high marginal rates of tax,” he explained.
De Silva said that middle-class people who were used to a particular way of life were finding it challenging to maintain their lifestyle. “The SJB is focusing its attention on seeing what kind of balance it can bring so that the middle class can continue their lifestyle.”
Meanwhile, he said that high-income earners could be charged with a higher tax rate and a surcharge tax temporarily while adding that the SJB had explained to the IMF that it was not happy with the tax structure that the Government had agreed to.
Further, he said that the SJB agreed with the IMF that Budget 2025 would tie the hands of the incoming government when it came to fiscal issues due to the programme targets. “We did agree to work within the broad targets of revenue to GDP and we have our own plans to increase revenue outside of just taxing the people who are being taxed now,” de Silva said.
He added that the SJB had explained its plan within digital public infrastructure to the IMF and how they were going to ensure that the person selling coconuts on the road and the person drawing up architectural plans were both caught up in the tax net.
He also said that the Government had collected more than expected through PIT, while it had failed to collect even 25% of the income tax target from voluntary taxpayers.
According to the Finance Ministry, PIT on income and profit recorded a collection of Rs. 911 billion as at the end of 2023 when the target was Rs. 863.5 billion.
“They perhaps didn’t agree with everything we said,” de Silva said, adding that the SJB would have reforms with relief and, based on that, had told the IMF that it would amend the programme going ahead.
Looking to cut taxes, reduce expenditure: NPP
Despite attempts by The Sunday Morning to contact the Economic Council of the National People’s Power (NPP) on the future of the IMF programme under a NPP government, it did not respond to the queries at the time of going to print.
However, speaking at a public forum in the last week of July, NPP Leader Anura Kumara Dissanayake said that a government under him would definitely reduce PIT as tax collection through PIT had overachieved the target in 2023 by 60%.
He said that some of the conditions of the IMF programme needed to be renegotiated and that the primary surplus target which the IMF wanted to achieve by increasing taxes such as Pay-As-You-Earn (PAYE) Tax should be reduced as it had overperformed while expenditure needed to be cut down to maintain the primary surplus target.
He said the Treasury was not getting the actual tax revenue it should be getting annually due to political and administrative issues and that therefore an NPP government would look to sort out those issues and get the revenue back to the Government through the introduction of legislation and processes.
He added that it was important to work with the IMF to ensure economic stability in the country while continuing the debt treatment agreements.
Following IMF results in less risk
State Minister of Finance Shehan Semasinghe said that reducing the rates of PIT and Corporate Income Tax to 24% and reducing the Value-Added Tax (VAT) as mentioned by an SJB or an NPP government would result in the Treasury losing more than Rs. 600 billion of tax revenue annually.
He asked how any future government would manage the economy if it were to cut Rs. 600 billion in revenue.
In 2019, the tax cuts introduced by the former Gotabaya Rajapaksa Government led to a Rs. 550 billion tax revenue loss annually, which led to the default and crisis in 2022.
Semasinghe said that as long as Sri Lanka went ahead with the IMF programme and as long as the Government took steps to fulfil the agreements with the creditors, there was less risk that the country would fall back to the situation it found itself in April 2022.
He added that the current Government was governing the country without taking such a risk. Moreover, he said that President Ranil Wickremesinghe, who was also contesting the election, was not giving any election promises even though the election would be held on 21 September as the Treasury was not in a position to fulfil such promises.
Prog. adjustment possible with supplementing
Speaking to The Sunday Morning, Frontier Research Senior Macroeconomist Thilina Panduwawala said that if any future government wanted to make adjustments to the IMF programme, it would have to do so within the parameters of the programme.
For example, he said that if it wanted to adjust the IMF’s primary surplus target, the IMF would then have to do an overall debt assessment because the dynamics would change. “It is different when assuming a 2.3% surplus vs. a 1.5% surplus – in that case there would be an adjustment as there are other targets that need to be adjusted to this change,” he added.
Panduwawala said that it was possible that the IMF would retain the debt targets for convenience, but may change other targets in line with a new government’s requirements.
By the time of going to print, The Sunday Morning had not received a response from the IMF.