Sri Lanka should avoid tax exemptions, focus on passing budget, IMF says

COLOMBO: Sri Lanka should avoid tax exemptions and focus on passing a national budget that is in line with parameters set by the International Monetary Fund to continue with a $2.9 billion program from the international lender, an IMF official said on Tuesday.

Sri Lanka mounted a “remarkable” recovery from a deep financial crisis triggered by a record shortfall of dollars three years ago, the global lender said after approving a fourth tranche of $334 million under a Extended Fund Facility (EFF) program.

However, the South Asian island nation must now boost tax compliance, improve targeting of social welfare, and smoothen capital spending to support better management of public finances, Peter Breuer, IMF’s senior mission chief for Sri Lanka told reporters in an online briefing.

The IMF also backed restoring cost-recovery electricity pricing to bolster finances of the island nation’s power monopoly after Sri Lanka reduced tariffs by 20% in January.

“At the next tariff setting it is important to ensure that tariffs are once again set to recover the cost,” Breuer said.

“Another important issue for the next review will of course be that the budget that is finally passed this month is consistent with the parameters so this is something we will be watching very carefully.”

Additionally, he said it is crucial that Sri Lanka finalises bilateral agreements with official creditors including Japan, India and China after Colombo secured a preliminary agreement on a $10 billion debt rework last June.

IMF to examine corruption vulnerabilities in govt

The IMF finalised the third review after Sri Lanka’s new president Anura Kumara Dissanayake rolled out his first full-year budget last month, which included committing to a primary surplus target of 2.3% of GDP for 2025 set under the IMF program.

The IMF bailout secured in March 2023 helped stabilise financial and business conditions after Sri Lanka’s economy contracted by 7.3% at the depth of its financial crisis and by 2.3% in 2023.

Sri Lanka’s economy is projected to have grown by 4.5% last year with growth forecast at 3% in 2025, according to latest IMF data.