Sri Lanka urged to raise taxes and devalue its currency

COLOMBO, Sri Lanka — The International Monetary Fund on Thursday warned crisis-hit Sri Lanka that its external debt was “unsustainable” and called for devaluation and higher taxes to revive the nearly bankrupt economy.

The pandemic has pushed the South Asian island’s tourism sector – a key foreign exchange earner – off a cliff, and the government in March 2020 imposed a broad import ban in an attempt to bolster the foreign currency.

But more than two years later, Sri Lanka is grappling with food and fuel shortages, which this week saw its public transport paralyzed as buses ran out of diesel and the state imposed blackouts. .

Following its annual review of the cash-strapped country, the IMF said its rapidly declining foreign exchange reserves were insufficient to service the country’s current external debt of $51 billion.

Official data shows that Sri Lanka needs nearly $7 billion to service its external debt this year, but the country’s external reserves at the end of January were just $2.07 billion, just enough to finance a month’s imports.

The IMF underlined “the urgency of implementing a credible and coherent strategy to restore macroeconomic stability and debt sustainability”, recommending a return to a “flexible and market-determined exchange rate”. i.e. a devaluation of the Sri Lankan rupee.

While the central bank’s fixed rate is 197 rupees to the dollar, a thriving black market is offering 260 rupees for US banknotes.

This disparity has led to a drop of more than 50% in foreign remittances through official banking channels.

But the IMF noted that the country’s economic difficulties began before the pandemic.

Shortly after taking office in November 2019, President Gotabaya Rajapaksa slashed several taxes by almost half, the IMF said, lowering government revenue and forcing him to borrow more.

Among the recommendations to deal with the crisis were the increase in income taxes and VAT, “complemented by tax administration reform”, the IMF said. AFP

The lack of dollars to import fuel has led to a severe energy crisis.

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