The IMF has agreed a $1.5bn loan for Sri Lanka in support of economic reforms aimed at reversing a two-decade decline in tax revenue and reviving growth, it said yesterday.
The International Monetary Fund’s chief for Sri Lanka, Todd Schneider, said a staff-level agreement was reached to release $1.5bn over a three-year period in support of the island’s reform agenda.
“This agreement will be subject to completion of prior actions and approval by the IMF’s Executive Board, which is expected to consider Sri Lanka’s request in early June,” he said in a statement.
The island has already announced an increase in value added tax (VAT) from 11 to 15% from Monday. It has also said it will scale down tax exemptions and promised to simplify revenue
collection.
The IMF said the Sri Lankan government will seek to raise its tax-to-GDP ratio to 15% by 2020 from the current level
of 11%.
Schneider said the IMF’s Extended Fund Facility (EFF) to Sri Lanka was expected to “catalyse an additional $650mn in other multilateral and bilateral loans, bringing total support to about $2.2bn”.
An EFF is designed to help countries resolve serious balance of payment problems brought on by structural weaknesses in the economy.
Sri Lanka enjoyed a blistering economic growth rate averaging more than 8% for two years after a prolonged civil war ended in 2009.
But the pace of expansion has since slowed, falling to 4.8% in 2015, down from 4.9 in the previous year, according to official data.
The new government in Colombo sought an IMF bailout immediately after taking power in January last year, but the fund turned down the request, saying the country’s reserves were at a comfortable level then.
However, the government faced a balance of payments crisis after the government went on a huge spending spree to implement its election pledges of higher public sector salaries and lower prices.
In 2009, Sri Lanka received $2.6bn from the IMF to boost its financial reserves, which dropped below $1bn at the height of fighting between Tamil Tiger rebels and troops.