You are currently viewing Sri Lanka struggles to bag the second IMF tranche

Sri Lanka struggles to bag the second IMF tranche

By: Madhuri Ranasinghe

Sri Lanka stands at a crossroads, caught in the ebb and flow of multifaceted financial challenges. Not only did it suffer from financial setbacks, but it was also drained by several socio-economic strains that had a positive effect on the countrymen at their worst times. To worsen the burden on common citizens, the recent second IMF tranche of the $2.9 Billion rescue package did not come to a conclusion. Despite positive economic indicators Sri Lanka has witnessed in the recent past, the elusive IMF staff-level agreement prompts a critical examination of the nation’s reliance on external financial aid.

The IMF identifies inadequate fiscal and monetary policies as key contributors to Sri Lanka’s economic crisis. Addressing these issues requires urgent measures such as enhancing tax administration, eliminating exemptions, and combatting tax evasion. Building external buffers through robust reserve accumulation is crucial amid ongoing uncertainties. Although it may look like gloomy and dark, there were few silver rays on dark clouds. S&P Global ratings’ upgraded the Sri Lankan rupee and its long- and short-term local currency sovereign credit ratings to ‘CCC+/C’ from ‘SD/SD’. The promise of improved sustainability and economic metrics whispers the potential for further upgrades, but the nation’s financial commitments remain unforeseen till we adhere to the IMF conditions.

Sri Lanka’s net general government debt will exceed 100% of GDP until 2026. The forecasted interest burden, a heavyweight expected to surpass 70% of revenues in 2023, adds weight to the nation’s economic struggle. The desired outcomes, like elusive treasures, hinge on a combination of factors—GDP growth, fiscal consolidation, revenue growth, and the unpredictable consequences of future restructuring.

Recent tax impositions aimed at relieving financial burdens have seen a substantial increase in income tax revenue. To add on a brand new wealth tax is to be introduced to expand the tax revenue in Sri Lanka. Many name it as a progressive tax, while the others point out that this could be another blowout of the water. It is said to benefit the common people as the tax will be imposed upon inheritance and property. IMF plan suggests this to be a revenue component for 2025 as it requires thorough research and analysis, in which IMF will provide technical assistance. “However, two significant incidents—the Liquor Sticker Scam and the Electrical Vehicle Importation scandal—have siphoned off billions in tax revenue, posing a threat to fiscal relief” The Liquor Sticker Scam involves counterfeit revenue stickers on alcohol bottles, leading to a substantial loss of tax revenue. Simultaneously, the Electrical Vehicle Importation scandal has cost approximately Rs 35 billion in revenue. Such scams playing the ground make us wonder how we can trust the process to be on the side of the people. Not long ago, we witnessed massive tax frauds and scams related to sugar imports and alcohol which in return made us suffer billions of losses. That’s why we believe robust mechanisms and stringent measures are crucial to curbing tax evasion and ensuring increased tax revenue benefits the government.

Amidst the crisis and scams as above, modifications in electricity tariffs have sparked protests and discontent among Sri Lankan citizens and concerned groups of civil activists around the country. The growing wealth gap and economic challenges have led professionals to seek opportunities abroad which have crippled industries like IT slowing the much-needed foreign revenue inflow to the country.

Economic justice is at risk, and the hurdles to obtaining the IMF loan tranche require vigilant attention. Not only that but also the nation must implement comprehensive reforms, address tax evasion, and foster economic justice to turn back the economic crisis into economic recovery. The road ahead is challenging, but with strategic measures, Sri Lanka can navigate its financial challenges towards stability and prosperity.