Financial Times

IMF team to ascertain UPFA policies
A team from the International Monetary Fund (IMF) visiting Sri Lanka this week is expected to clarify from the government three points: "Do you have a policy? What is your policy? When do you hope to start implementing it?"

Asked about the visit, Jeremy Carter, IMF's Senior Resident Representative in Colombo, confirmed a team would be in Colombo this week and said they would be meeting senior government officials. He said the team would be discussing policy issues and not the IMF's current programme or any economic targets.

The delegation comprises the Bank's deputy chief for Sri Lanka Jehangir Aziz, Senior Economist Andrea Richter-Hume and Economist Enric Fernandez. Carter said this is the first time an IMF mission is meeting ministers and officials of the new government.

Other sources said given the criticism of the IMF by UPFA partners like the JVP, the team is also likely to clarify whether the government needs the IMF. "The IMF has said in the past that it is in Sri Lanka by invitation and has not forced itself in. This would be one of the clarifications sought," one source added.

The sources said most donors and international lending agencies were concerned that major decisions on the economy have not been taken since November (after President Chandrika Kumaratunga took over some key ministries from the then ruling UNP).

"The excuse trotted out by officials (Treasury and others) has been that 'we have to wait for this election or that election'," the source said adding that "it has been a no work period and wait-and-see policy since November." He said what is even more disappointing is that two parliament sessions have discussed nothing other than procedural matters with the next session in June too likely to end up this way.

Economists said the government would find it tough to raise revenue and increase tax collections particularly since revenue has always shown a shortfall since the early 1990s. The government has said it hopes to fund some new items like new jobs and subsidies from better tax collection but in the context of successive regimes being unable to achieve revenue targets, there are doubts whether improved tax collection is possible. While expenditure has had some up and down swings since the mid-1990s, revenue has fallen by five percent of GDP in the same period. This fall in revenue targets is about the size of the social welfare, education and health budgets put together.

One of the biggest negatives to tax collection was last year's tax amnesty which saw anything between Rs 50 billion to Rs 150 billion in revenue being lost to the government, economists said.

Another problem is the legitimacy of Inland Revenue amendments by parliament last year and tax proposals from the 2004 budget. Due to the dissolution of parliament, these bills have to be either submitted afresh or were not certified by the then Speaker. Officials at the Finance Ministry said however that the new VAT in last year's budget is being enforced as the Treasury Secretary has authority to implement budget proposals pending authorisation.

"That is not a problem and it should be certified soon as it was introduced by the former government," one official said. However economists and private sector officials, who raised concerns about a serious crisis in the tax system because of delays in certifying tax amendments, said even in the new VAT levy, someone could challenge the levy in court on the grounds that it is not legitimate.

Officials also said due to complications in tax policy, many companies and individuals are using the confusion to evade taxes. Some of it includes backdating the sale of condominiums, which is subject to a new VAT levy from last January, and claims for VAT refunds.

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