By Channa Fernandopulle:

The Sri Lankan economy remains on target for 7 percent growth in the short to medium term; however low tax revenue, high public debt and potential climate and external shocks continue to generate down-side risks, according to International Monetary Fund (IMF) Mission Head Todd Schneider.

“Sri Lanka’s macroeconomic performance in 2013 largely exceeded expectations. The external account strengthened supported by a robust recovery in exports and growth in services and inward remittances. The near-term outlook appears positive, aided by a recovery in advanced economies.  

Strong export growth is likely to continue and may facilitate a further reduction of the external current account deficit, leaving room for additional accumulation of international reserves by the Central Bank of Sri Lanka,” he stated.

Commenting briefly on recently highlighted issues around government spending in the education sector, Schneider denied allegations that the IMF had recommended a cut in education spending.

“Education spending was not an area of discussion during our current visit or in previous missions to Sri Lanka. However, given the country’s current growth trajectory, we believe that education and development of human resources is vital and this is one of the reasons that the government needs to increase its revenue,” he noted.

Elaborating further on the country’s current revenue issues, Schneider reiterated efforts to remedy Sri Lanka’s low tax base would be of critical importance and commended the extension of value-added tax (VAT) and parallel reduction in the threshold for VAT.

“Extension of VAT was the right move and steps are already being taken to automate tax collection. These measures will take some time but once they pass through the system, it should help to mitigate low levels of tax revenue.

The granting of tax holidays and exemptions however is another area which creates inefficiencies in tax collection. In the past such exemptions were granted in a relatively ad-hoc manner and steps have since been taken to make to rationalize tax exemptions which are broadly in-line with our key recommendations,” Schneider stated.

Given Sri Lanka’s continuing transition into middle-income country status, he noted that the country’s borrowing costs would likely be driven up due to the lack of concessional funding and its replacement with commercial borrowing resulting in more risk being generated by the country’s public debt levels.

“This is an issue which has been highlighted before and public debt remains a key risk factor which we will continue to carefully monitor. Since Sri Lanka’s borrowing costs are likely to rise, we believe it is vital that the projects to which these funds are channelled generate strong returns,” he noted.