Sri Lanka approves VAT hike to 18% ahead of IMF review

Sri Lanka plans to implement the VAT hike with effect from Jan 1, 2024. PHOTO: REUTERS

Published Mon, Dec 11, 2023 · 08:58 PM

SRI Lanka’s parliament approved a hike in value-added tax (VAT) to 18 per cent from 15 per cent on Monday (Dec 11) ahead of the International Monetary Fund (IMF) preparing to approve the second tranche of a US$2.9 billion bailout for the crisis-hit country.

The country’s parliament approved the VAT increase with 100 parliamentarians of the 225-member house voting in favour of the legislation, Speaker Mahinda Yapa Abeywardena said. A total of 55 parliamentarians voted against the legislation.

Sri Lanka plans to implement the VAT hike with effect from Jan 1, 2024 and also include fresh items such as fuel, fertiliser and cooking gas to increase government revenue by about 378 billion rupees (S$1.6 billion), which is essential to meet targets set out under a four-year IMF programme.

The South Asian island nation is recovering from its worst financial crisis in seven decades and awaiting the finalisation of its first review from the global lender on Dec 12, after which Sri Lanka will receive about US$334 million as a second tranche.

The VAT increase will boost the government’s tax revenue to 12.5 per cent of GDP next year from 9.1 per cent, State Minister of Finance Ranjith Siyambalapitiya told parliament.

“This is part of multiple economic reforms being implemented by the government to ensure that we increase revenue to 15 per cent of GDP by 2025,” he said.

Sri Lanka to receive about US$600 million ADB funding post-IMF approval

The bondholder group, which represents creditors holding some of the country’s US$12 billion of outstanding bonds, said a lack of transparency between public and private creditors was making it more difficult for them to strike a deal with Sri Lanka that is compliant with IMF rules.

Sri Lanka bondholders raise concerns over debt deal transparency

The agreement with the group of creditor nations comes about a month after the heavily indebted island nation reached a deal with the Export-Import Bank of China covering about US$4.2 billion of outstanding debt.

Sri Lanka creditor nations agree in principle on debt restructuring

“We expect this rate reduction to continue normalising the economy in the short term,” says Governor P Nandalal Weerasinghe.

Sri Lanka cuts rates to boost growth, will pause easing for now

“Implementing this revenue measure is essential to ensuring Sri Lanka emerges from its current economic challenges.”

Inflation could spike by 2 per cent after the tax increase, according to Finance Ministry estimates. Sri Lanka’s inflation doubled to 3.4 per cent in November from 1.5 per cent the previous month.

Sri Lanka will hold off on any further monetary policy easing in the near term, the Central Bank of Sri Lanka (CBSL) said last month, projecting that inflation will settle at 5 per cent in the medium term after the VAT increase is implemented. REUTERS

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