The IMF Executive Board after much speculation completed the first review under the 48-month Extended Fund Facility with Sri Lanka, providing the country with access to SDR 254 million (about $ 337 million). This brings the total IMF financial support disbursed so far to SDR 508 million (about $ 670 million) out of the total amount of SDR 2.286 billion (about $ 3 billion). The IMF program according to an IMF statement will continue to support Sri Lanka’s efforts to restore macroeconomic stability and debt sustainability, safeguard financial stability, and enhance growth-oriented structural reforms. This is certainly an endorsement of the President’s firm resolve and commitment to the reform agenda despite being politically very unpopular and gives a huge advantage to the opposition.

Unfortunately for the public many of the reforms are a bitter pill to swallow. The Government on the other hand needs to up their game and walk the talk when selling these austerity measures to the public. In fact, the IMF statement highlights the difficulty of implementing some of the reforms. The statement noted, “Today’s Board approval recognizes the challenging policy actions implemented by the Sri Lankan people to put the crisis behind them. Sri Lanka’s performance under the program was satisfactory. All quantitative performance criteria for end-June were met, except the one on expenditure arrears. All indicative targets were met, except the one on tax revenues. Most structural benchmarks were either met or implemented with delay by end-October 2023. These macroeconomic policy reforms are starting to bear fruit and the economy is showing signs of stabilization, with rapid disinflation, significant revenue-based fiscal adjustment, and reserves build-up.”


Cost of reforms

The IMF has said repeatedly that the key to transitioning from stabilisation to a full and swift recovery is sustaining the reform momentum amid strong ownership by the authorities and more broadly, the Sri Lankan people. The IMF has urged the authorities to continue to build on these hard-won gains and further advance revenue mobilisation, align energy pricing with costs, strengthen social safety nets, rebuild external buffers, safeguard financial stability, combat corruption and enhance governance.


Fiscal consolidation

As the IMF highlights in their latest statement very clearly, strengthening the revenue-based fiscal consolidation with revenue administration reforms is critical to recover from program slippages and to fund the provision of essential Government services. The IMF also points out that accumulating reserves, supported by exchange rate flexibility, remains an important priority under the EFF. They further highlight that implementing the bank recapitalisation plan and strengthening the financial supervision and crisis management frameworks are crucial to safeguarding financial sector stability to remain steadfast on the reform commitments.


Leadership

Despite all the negativity, Sri Lanka has reached several important milestones in putting debt on the path towards sustainability. Timely resolution with external private creditors is now a must, this should help restore Sri Lanka’s debt sustainability over the medium term. However, the imposition of high income and direct taxes to meet revenue targets causes havoc that overshadows its intended economic benefits to a country. Therefore getting the right mix of indirect taxes and direct taxes can prove potent in driving domestic economic growth, capital formation, and attracting foreign investment and domestic investment.


Excessive taxation

The President has said increased tax revenue was essential for improving the country’s financial situation and addressing the debt crisis. Unfortunately excessive direct and indirect taxes can in many instances place a heavy burden on both individuals and businesses. While these taxes are meant to support governments to deliver on its mandate, it can have unintended consequences. Often excessive tax reduces the disposable income for individuals, reducing their ability to spend and invest. For businesses, high taxes can hamper growth, reducing capital for expansions that then create jobs. Numerous examples exist where third-world economies have been forced to raise taxes to demonstrate fiscal responsibility to multilateral agencies. However, this approach often leads to a vicious cycle. Increasing taxes can stifle economic growth, resulting in less revenue collection than expected, ultimately undermining the very goal it aims to achieve – economic growth and poverty reduction.


Way forward

While fiscal responsibility is crucial, it must be balanced with the need to promote economic growth and not hit the poor hard. We need to look at tax reduction strategies, simplification of tax systems, and increased efforts to combat tax evasion (many people don’t pay any taxes, just a few hundred thousand people pay taxes) and increase the pool of taxpayers. The Government by promoting a favourable tax environment, can prevent economic stagnation, encourage savings and attract new foreign investment. We need to improve revenue collection rather than continue to increase tax rates and squeezing the existing tax payers dry. Otherwise the typical middle-class family that is struggling due to the taxes reducing their overall buying power, will continue to negatively affect businesses and retailers across the country.

Sri Lanka has the lowest Government revenue among South Asian countries, amounting to only 9.1% of its GDP. Therefore in the final analysis heaping taxes on the people who actually pay is certainly not an option anymore. There are several other options that can be pursued with a little bit of common sense with in the Government service that can raise serious revenue for the Government and also strengthen the social safety net and thereby safeguarding the poor and the vulnerable of our country.

DailyFT

State Rural Road Development Minister Sivanesathurai Chandrakanthan issued a pressing directive to promptly resume and expedite the completion of rural road development projects in the Eastern Province, originally halted midway under the Integrated Road Development Programme (I Road Project) supported by the Asian Development Bank (ADB).

Speaking on the status of ongoing projects and the challenges faced during their implementation, the State Minister convened a discussion at the State Rural Roads Development Ministry in Sethsiripaya, emphasizing the need for resolution.

During the meeting, the State Minister urged the Project Director overseeing the I Road Project to prioritize the completion of rural road development initiatives in Ampara, Trincomalee, and Batticaloa districts, emphasizing the immediate need to expedite these endeavors.

Furthermore, the project engineer received directives to accelerate the installation of essential road infrastructure such as signboards, white lines, and pedestrian crossing markings on completed roads.

The progress review meeting witnessed the participation of several officials, including MPs D. Weerasinghe and Kapila Athukorala, alongside Rural Road Development State Ministry Additional Secretary B. Ranaweera, and the Project Director of the Integrated Road Development Programme, collectively strategizing to overcome obstacles and propel the swift completion of vital rural infrastructure projects in the region.

Health Minister Dr. Ramesh Pathirana underscored the critical need for revitalizing Sri Lanka’s primary, secondary, and tertiary healthcare services, emphasizing the significance of restoring credibility within the population. Speaking to the media following an inspection tour of Maharagama Apesksha Hospital, the Minister highlighted key insights into the current state of healthcare in the country.

Addressing the country’s abundant human resources within the healthcare system and its robust infrastructure, the Minister emphasized the need for a structured network to efficiently deliver health services. He expressed concern over the escalating number of children affected by cancer in Sri Lanka, stressing the urgency of implementing awareness programs to combat both communicable and non-communicable diseases effectively.

Dr. Pathirana acknowledged Sri Lanka’s unique healthcare landscape, extending from basic medication like Paracetamol to advanced treatments such as radiation therapy, alongside provisions for food and drink, all without the necessity of insurance coverage.

During the visit, the Minister inspected the ongoing construction of a four-story ward complex, funded by the Ruhunu Maha Kataragama Temple at a cost of Rs. 150 million, demonstrating collaborative efforts to enhance healthcare infrastructure.

Recognizing the challenges faced by hospital staff, Minister Pathirana emphasized the continuous maintenance of adequate medicine stocks within the hospital premises.

The event saw the presence of Hospital Director Dr. Aruna Jayasekara, Basnayake Nilame of Ruhunu Kataragama Temple Dishan Gunasekara, Deputy Director of the Hospital, administrative officers, doctors, and dedicated hospital staff, collectively engaging in discussions aimed at advancing healthcare services in the region.

The Agriculture Department has issued a crucial warning to farmers regarding three destructive insect pests currently ravaging paddy cultivation across multiple districts of the island. With approximately 22,000 hectares of paddy fields affected by the White Back Plant Hopper, Gray Plant Hopper, and Leaf Curl worm, Agriculture Director General Malathi Parasuraman stressed the urgency for farmers to be vigilant.

Parasuraman urged farmers to promptly notify Agriculture Department officials upon detecting these insects in their fields and to strictly adhere to the guidance provided by agriculture consultants.

Asserting that preventive measures can mitigate these insect damages, Parasuraman highlighted that agricultural consultants and officials across all areas have been duly notified. Furthermore, Parasuraman disclosed the deployment of specialized agriculture teams for comprehensive field inspections.

In a cautionary advisory, Parasuraman warned against the use of substandard insecticides or following recommendations from sources lacking expertise in handling these pests. Mixing insecticides with other substances was discouraged, emphasizing that ineffectual application of chemicals could prove futile due to the pests’ resistance to harmful compounds.

The Director General stressed the significance of employing only the pesticides recommended by the Agriculture Department, emphasizing the importance of strategic steps to combat these resilient pests effectively.

The Minister of Urban Development and Housing, Prasanna Ranatunga, disclosed ongoing negotiations between the Sri Lankan and Japanese governments to revive the dormant Japan-funded Light Rail Transit (LRT) initiative. Amid diplomatic discussions, both parties are recalibrating the project’s scope and estimated costs, primarily impacted by the COVID-19 pandemic and economic challenges. Ranatunga expressed optimism, foreseeing the project recommencing shortly.

The recalibration process, central to the bilateral dialogue, is slated to lead the way for next year’s reactivation of public facility relocation and land acquisition efforts. Following discussions between Sri Lanka and Japan, decisions have been charted to propel the project’s progression. An initial feasibility study laid the groundwork for this venture, appointing an international consulting firm to devise comprehensive blueprints, contracts, tender documents, estimates, and monitoring services for the Malambe to Pettah LRT route, with an initial allocation of US$120 million.

Commencing in April 2019, this preparatory phase was slated for a 91-month completion. However, the project encountered a halt on December 31, 2020, after a 21-month consultation period. Notably, despite the cessation of activities, 60% of the fundamental scheme plans and 78% of the detailed blueprints were already finalized. Soil tests and pre-feasibility studies were also completed until the Malambe section.

The acquisition of land for the project initiated, identifying a total area of 22 hectares. Although much of the land acquisition phase is near completion, compensation for the acquired lands remains outstanding.

With substantial progress made in planning and preliminary groundwork, the Sri Lanka-Japan negotiations are pivotal in rekindling hopes for the LRT project’s revival, poised to alleviate transportation challenges and enhance connectivity across targeted areas.