World Bank Economist Richard Walker emphasized the need for corrective action to address Sri Lanka’s low tax-to-GDP ratio, which experienced a significant decline of approximately 7.3% in 2022. Speaking in Colombo, Walker attributed this situation to a poorly designed tax policy and challenges in tax administration.
He also stressed the importance of broadening the tax base and targeting non-taxpaying sectors rather than repeatedly taxing the same segment of the population. Walker noted that even the International Monetary Fund (IMF) has identified weaknesses in Sri Lanka’s tax revenue collection.
Walker emphasized the need for a concrete and consistent plan to strengthen the tax system, which should not be subject to frequent changes with changes in government leadership.
Additionally, he recommended the strengthening of capital taxation and highlighted the importance of ongoing efforts to mobilize tax revenue. He suggested that these efforts should be coupled with transparency in expenditure to build public confidence and improve the delivery of public services.
Walker urged the government to curtail government expenditure and enhance its efficiency. He emphasized the need to focus on revitalizing state-owned enterprises (SOEs) and improving governance in various sectors.
Regarding the Small and Medium-sized Enterprise (SME) sector, the World Bank encouraged the government to stay committed to the IMF reform agenda, which can contribute to good governance and anti-corruption efforts.
Walker expressed optimism about Sri Lanka’s potential for a “V-shaped” economic recovery, with expectations of a rebound in tourism and remittances. He noted that tourism had performed better than expected in the first half of the year.
Despite the removal of import restrictions, the World Bank expects the current account deficit to narrow further in the near term due to liquidity constraints. However, they anticipate that it will stabilize with the recovery in tourism. The World Bank also cautioned against prolonged debt restructuring, as it could exert financial pressure on the country.
Walker highlighted concerns about a potential global economic slowdown and the issue of “brain drain,” emphasizing the need for prompt action to address these challenges in Sri Lanka.