IMF, budget, taxes and Sri Lanka’s crisis

By Uncle Conomics

A few months back the IMF was seen as the only savior who could put the house in order, but that belief amongst the masses has been eroded by the politicians since all austerity measures to be adopted are blamed on the IMF. Could politics and cheap talk again mess up public opinion and pave the way for a resurrection of corrupt, self-serving politicians to return to power? 

The IMF would not want to preach and micro-manage fiscal reforms, instead, they will want to give statistical targets such as generating a primary surplus, achieving +18% of GDP as government revenue, strive towards government expenditure to be funded through government revenue, etc. while they will not go into details on how to do this. How best to do this considering the situation faced by the country would be the job of the government and the policymakers. However, the question that remains is whether the government taking a holistic view in the best interest of the country.

Sweeping tax reforms are announced, burdening and squeezing the already taxed. Uncle is of the opinion that the proposed tax reforms are not equitable while taking a band-aid approach of trying to somehow increase tax revenue in the easiest possible way. Hopefully, the finance minister and officials will try to address the weaknesses of the proposals without just putting the blame on the IM. Increasing the tax burden/rates on the very few who genuinely pay or are compelled to pay taxes, since they are employed in the private sector should be revisited in the interest of Sri Lanka’s future. The focus should be on widening the tax blanket. If there is a will there is a way. No need to wait till all systems are perfect and the digital IDs are introduced. Why not start with the politicians and their families, business owners in all cities/townships? Surely checking if they have tax files and are paying taxes would be an easy task!!!   

Also, government revenue is not limited to tax revenue. Selling SOEs and government assets too will increase government revenue, while partially divesting minority stakes in large government institutions such as BOC, People’s Bank, and SLIC would bring in much-needed capital to the government and improve transparency and accountability amongst the institutions.

Uncle is also flabbergasted by how some SOEs are spending like crazy in times of hardship. The CEB which should have been unbundled and privatized decades ago and marred by massive corruption scandals is building a brand-new head office in Colombo 5. Why is the government allowing this? Is it because construction contracts could be a massive money-making mechanism for a selected few? Shouldn’t the CEB be looking at selling that land parcel and using that money to install a CEB-owned solar/wind power generation project? Why can’t the CEB rent office space if needed; for sure there is underutilized government buildings.

Then comes the big question. What is the government doing to cut its expenditure?

Sri Lanka is in a break-or-make situation. Taxes are increased as a stopgap measure, but what is the tax money used for? Is it going to build future productive capacity in renewable energy, cost efficiencies, effective digitalization, healthcare, education etc., or is it just been used to oil the recurrent government spending?

Uncle feels that the people of Sri Lanka who have suffered enough at the hands of corrupt politicians and officials who have robbed the future of the nation, will still tolerate the huge tax burden only if it is justifiable and if the government genuinely reduces wastage and corruption, cuts down the public sector salary bill and trim the benefits and power of politicians.