IMF urges revenue measures and spending cuts for 2025 budget

Peter Breuer
PIC BY PRADEEP PATHIRANA

• States need is to reach medium-term primary balance objective of 2.3% of GDP
• Recommends establishing properly functioning VAT refund system for exporters by April 2025
• Observes protecting poor through improved targeting, better cash transfer coverage critical

The International Monetary Fund (IMF), during its recent mission to Sri Lanka, said the 2025 budget needs to be underpinned by appropriate revenue measures and continued spending restraint.

This is needed to reach the medium-term primary balance objective of 2.3 percent of gross domestic product (GDP)—a key requirement for restoring Sri Lanka’s debt sustainability, IMF Head of Mission Peter Breuer said.

While noting that the planned relaxation of import restrictions on motor vehicles would support revenue mobilisation in 2025, he said the tax administration reforms could further improve compliance, including by establishing a properly functioning Value Added Tax (VAT) refund system for exporters by April 2025. 

“Any proposed measure eroding the fiscal position needs to be offset by compensating measures of high quality. Avoiding new tax exemptions will not only reduce corruption risks and fiscal revenue leakages but also ensure a more predictable and transparent tax system. Continuing to maintain energy prices at cost-recovery levels is critical to avoid the potential fiscal cost,” said Breuer in the end-of-mission statement.

The IMF team was in Sri Lanka from July 25 to August 02, 2024, to discuss the recent macroeconomic developments and progress in implementing economic and financial policies under the authorities’ economic reform programme supported by the IMF’s Extended Fund Facility (EFF) arrangement.

The mission team observed that protecting the poor and vulnerable through improved targeting and better coverage of cash transfers remains critical and policy slippages could jeopardise the recovery. 

Breuer acknowledged that the recent parliamentary approval of two key pieces of legislation—the Public Financial Management Act and Public Debt Management Act—is a milestone that would improve fiscal discipline and prudent debt management, bolstering transparency and accountability. 

Developing a holistic debt management strategy and establishing a well-structured and integrated Public Debt Management Office would help lower the government’s financing risks, he said.

While inflation has been well-contained, Breuer said monetary policy should remain prudent and prioritise the anchoring of inflation expectations. Maintaining price stability also hinges on safeguarding the Central Bank’s independence, whereas continued reserve accumulation and exchange rate flexibility remain key priorities.

“The recent amendments to the Banking Act and the related implementing regulations will help safeguard financial stability. To allow the financial sector to contribute to economic growth, the authorities need to ensure the banking sector is adequately capitalised,” he said.

Meanwhile, he commended the authorities for the progress in putting debt on a path towards sustainability and noted that the execution of the domestic debt restructuring and finalising the agreements with the Official Creditor Committee and China EXIM Bank are major milestones. 

The IMF staff assessed the Joint Working Framework announced at the conclusion of the second round of restricted discussions with the bondholder committee and have provided this assessment to the authorities and on request, to the financial advisors of the bondholders. 

“We encourage a swift resolution of the remaining steps to achieve debt sustainability and regain investor confidence. We will continue to support Sri Lanka’s ongoing debt restructuring efforts,” said Breuer.

Progress in the meeting key commitments under the IMF-supported programme will be formally assessed in the context of the third review of the EFF. 

The timing of the third review will be discussed with the government after the recently announced presidential election.