June 29, 2010 (LBO) - The International Monetary Fund has released 407.8 million US dollars to Sri Lanka held back after a budget went off the rails, and extended the deal by a year on the promise of more responsible fiscal management.
The IMF held back the disbursement of a third tranche in a two year program in February 2010 after a lavish spending pushed budget deficit to 9.8 percent of gross domestic product from a planned 7.0 percent.
The government is due to present a formal budget to parliament today and has already raised several taxes.
"Despite the weaker-than-programmed 2009 fiscal performance, the government’s 2010 budget proposal, if carried out, would significantly address past fiscal slippages, mainly through comprehensive tax reforms and sizeable cuts in recurrent spending," Naoyuki Shinohara, IMF's deputy managing director said in a statement.
"At the same time, the budget would allow for much needed reconstruction-related infrastructure investment, while protecting the society’s most vulnerable and addressing the humanitarian needs of those adversely affected by the conflict."
Sri Lanka is recovering from a 30-year war. The government has appointed a tax commission whose recommendations were originally expected to be implemented during a 2010 budget.
Sri Lanka has given sweeping tax holidays to some companies under an investment regime operated by the Board of Investment dating back 30 years.
Over the past few years the state has also undermined a neutral value added tax regime and slapped ad hoc import taxes and 'cesses' to restrain the people's freedom of exchange and help vocal special interest groups.
The country's income tax regime itself is discriminatory. Salaries and pensions of Sri Lanka's rulers and state workers have been freed from income taxes and it is now an exclusive oppressive burden on private citizens.
Recently the state cut excessive taxes on motor vehicles which has almost halted new imports and also reduced taxes on some other imported goods.
"The authorities’ efforts to reform trade and excise taxes and the Board of Investment’s tax concession regime are a signal that they recognize the importance of a broader tax base and higher revenue in achieving the program’s original goals of fundamental and sustainable reduction of the deficit and the public debt," Shinohara said.
"These efforts should be followed by important steps to permanently reform tax concessions and broaden the VAT and income tax bases to be introduced as part of the 2011 budget."
The release of 407.8 million US dollars to Sri Lanka would bring the total disbursements from the program to 1,019.4 million US dollars, the IMF said.
The full program, started in July 2009 for 1,653.6 special drawing rights (SDR) is valued at 2,446.7 million US dollars at current exchange rates.
IMF said the two year deal has been extended by one year at Sri Lanka's request and future disbursements would be seven quarterly tranches of 137.8 million special drawing rights or 203.9 million US dollars.
source - www.lbo.lk
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