IMF urges 15 % VAT, to retain NBT at 2 %, consolidate debt reduction
The International Monetary Fund (IMF) has stepped into provide technical assistance for a financial review on 2016 fiscal accounts in determining the status of unpaid claims, contingent liabilities and other information related to appropriation and spendng in that year.
This was revealed in a memorandum submitted by the Central Bank (CB) to a government Sub-Committee on Economic Affairs recently.
This memorandum (a copy of which was seen by the Business Times) was based on the IMF staff mission report handed over to the authorities recently following its meetings with government and CB officials, as well as representatives of academia, civil society and the private sector.
Although the IMF has agreed to the government’s request for a bailout package to tackle the balance of payment issue, it has not mentioned about any financial assistance for Sri Lanka in its recent report. The mission has advised the government to urgently make a stronger effort to narrow the fiscal deficit and put the public finances on a sustainable path. The bulk of fiscal consolidation should be primarily through (1) raising revenue emphasis on requirement to broaden the tax base, (2) simplified tax structure, (3) bolster efficiency and fairness of tax administration, increase the VAT rate to 15 per cent including retail and wholesale, and keeping NBT rate at 2 per cent, the report revealed.
The mission 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 and making equitable the tax system, and improving tax administration, to lay the groundwork for further consolidation and debt reduction while also allowing for higher public investment.
Extracts from the report: ”The 2016 fiscal accounts need to be subjected to a financial review to determine the status of unpaid claims contingent liabilities and other information related to appropriation and spending in that year-all of which would need to be verified with the financing flows. The IMF is prepared to provide technical assistance in support of this effort.
Overall budget deficit for 2016 should be reduced to 5.4 per cent of GDP to (1) reduced overall borrowing requirement (2) lower micro fiscal risk (3) avoid crowding out of private credit and investment and credible down payment towards the Prime Minister’s stated fiscal consolidation objectives. Bulk of fiscal consolidation should be primarily through (1) raising revenue emphasis on requirement to broaden the tax base, (2) simplify tax structure, (3) bolster efficiency and fairness of tax administration, increase the VAT rate to 15 per cent including retail and wholesale, keeping NBT rate at 2 per cent measures to broaden tax base.Short term benefits from the proposed fiscal reforms in 2016, would include (1) lowering the government financing requirement and starting public debt on a downward path.
(2) establishing a clear anchor for macroeconomic policies and bolstering market and investor confidence which should help to stem capital outflows and relieve pressure on the balance of payment and exchange rate. Government statements on the medium term should be clear about (1) further growth friendly fiscal consolidation, (2) reduction of risk on debt sustainability, (3) creation of fiscal space and a steady increase for room for public investment and (4) creation of simple efficient and equitable tax system where responsibility is shared more equally and room for discretionary treatment and corruption is curtailed. Fiscal consolidation needs to be accompanied by a renewed commitment to an exchange rate flexibility coordinated response from monetary policy; additional tightening is needed and structural reforms to enhance the role of market forces in the economy bolster competitiveness and promoting and outward orientation.
The mission has advised the government to urgently make a stronger effort to narrow the fiscal deficit and put the public finances on a sustainable path, while several measures in the budget (such as eliminating of several special purpose levies and the commitment to eliminate tax exemptions and bolster the efficiency of tax administration) are welcome. The mission highlighted the macro economic and financial risk of a large deficit and the associated need to borrow from domestic and international market. The mission urged the authorities to take a growth and investor friendly approach to lowering the size of the 2016 budget deficit mainly on measures to raise revenues by broadening the tax base simplifying and making an equitable tax system and improving tax administration to lay the groundwork for further consolidation and debt reduction while also allowing for a higher public investment.”