Feb 14, Colombo: The International Monetary Fund (IMF) said that Sri Lanka's tax revenues is among the lowest in the region and advised the authorities to broaden the tax revenue base and to adjust the rate structure to put Ceylon Electricity Board and Ceylon Petroleum Corporation, the two state institutions running at a loss, on a sustainable footing to boost economic growth.
The global lender pointed out that Sri Lanka's tax revenues have fallen to below 11.5 percent of GDP, reflecting slowing activity, falling imports, exemptions and issues with tax administration and suggested the authorities to take measures broaden the revenue base and strengthen administration to support fiscal consolidation.
Relying too much on reductions in spending, especially capital spending, would have the potential to undermine medium-run growth, the IMF said.
Issuing a statement Wednesday at the conclusion of an IMF staff mission to Colombo led by John Nelmes from January 30 - February 13 to conduct discussions for the Article IV consultation, the IMF said it discussed possible financial support for Sri Lanka's economic reform agenda under an Extended Fund Facility.
The mission had met with government and Central Bank officials, as well as representatives of civil society and the private sector.
The mission said it discussed with the authorities the possibility of a new IMF program designed to build on Sri Lanka's achievements under the SBA.
Although productive discussions took place on a number of issues, including further fiscal and related reforms that would consolidate and extend these achievements, Sri Lankan authorities while agreeing on the broad thrust of reforms, had noted that they already had plans which they would undertake at the appropriate time.
The mission commended Sri Lanka's progress on a number of economic fronts over the past few years.
It noted Sri Lanka's robust economic growth, decline in inflation to single digits, fiscal and external consolidation, narrowed trade deficit, and the successful completion of US$ 2.6 billion Standby Arrangement approved in July 2009.
The mission observed the continuing down trend in external demand due to the weak global economic recovery hampering Sri Lanka's exports and the temporary setbacks in the agriculture sector brought about by the prolonged drought last year.
"As a consequence, real GDP growth is estimated to have slowed to 6 percent last year, and inflation rose to upper single digits," the mission pointed out. The IMF expects the GDP growth to increase to around 6.25 percent this year.
The mission said it agreed with Sri Lankan authorities that lowering inflation to mid-single digits in coming years would bolster macroeconomic stability. This, along with structural reforms to enhance productivity and competitiveness, would support robust growth over the medium term, it projected.
The mission had also discussed the financial performances of the Ceylon Electricity Board and Ceylon Petroleum Corporation, the two state institutions adversely affected by last year's drought, and emphasized the need to move toward cost recovery pricing to place them on a sustainable footing.
Sri Lanka Tuesday announced that it would not pursue an IMF loan since the country's gross reserves have now increased to US$ 7 billion and additional support to increase gross reserves is not needed.
The Sri Lankan authorities had expressed their interest only in a future IMF support to finance the budget to achieve government target of 5.8 percent of GDP fiscal deficit in 2013 and below 5 percent in years ahead.
The Mission has indicated to the authorities that it is not in a position to consider any direct or indirect budget support to Sri Lanka, since the current improved state of the country does not warrant unconventional and exceptional financial support.
The mission said it will stay in close touch with the authorities and continue the close partnership between Sri Lanka and the IMF.