By Mandana Ismail Abeywickrema

The government’s agreement with the International Monetary Fund (IMF) to receive a stand by facility would result in an increase in taxes, economists warn.

Economists observe that regardless of the government’s claim that there would be no curtailment in public welfare expenditure, it would resort to increasing taxes to collect the much needed revenue to bridge the budget deficit.

Economist, Dr. Harsha de Silva has said that the only way to bridge the budget deficit would be to increase revenue and reduce expenditure.

The Central Bank Governor has reportedly committed to a 7% budget deficit for this year. However, the deficit recorded for the first four months of the year alone stands at 4%. Therefore the government would have to look at tightening its monetary policies in order to meet the targeted deficit. According to De Silva, the only way to reduce the budget deficit is to increase revenue through tax hikes.

Increasing taxes

He told The Sunday Leader that the government would look at increasing the existing taxes without opting to introduce new ones. De Silva said the prices of consumer goods have increased due to the increase in the essential commodities levy.

“Increase of certain items would not show in inflation. For example, an increase in taxes on liquor and tobacco would not affect inflation as they have now been removed from the consumer basket,” he said.

As a first step, the government has already turned towards increasing tax compliance and widening the tax network to boost its declining revenue.

The IMF has drawn specific attention to the country’s high budget deficit and supports the effort to rebuild reserves and bridge the fiscal deficit.

High budget deficits

“Persistently high budget deficits have forced the government to rely on short-term financing from international markets. The global financial shock resulted in a sudden stop to this financing, capital outflows, and a significant loss of Sri Lanka’s international reserves. Despite recent capital inflows, international reserves remain at low levels,” IMF Director General Dominique Strauss-Khan has said.

“The end of the conflict provides Sri Lanka with a unique opportunity to undertake economic reform and reconstruction, which would be key to laying the basis for higher economic growth in the years ahead. To this end, the government has formulated an ambitious programme aimed at restoring fiscal and external viability and addressing the significant reconstruction needs of the conflict-affected areas. The IMF staff supports this programme, specifically the government’s goals of rebuilding reserves, reducing the fiscal deficit to a sustainable level, and strengthening the financial sector. It is also essential that the programme cushion the most vulnerable from the needed adjustment,” he added.

The government is to receive the requested stand by facility from the IMF following its agreement to adhere to conditions placed by the international donor agency.

The stand by arrangement

The IMF decided to grant the stand by facility following a staff level agreement reached between the country and the global financial institution. The new stand by arrangement would provide the Central Bank with US$ 2.5 billion, which will be disbursed over 20 months in eight installments of US$ 312 million dollars.

The IMF Executive Board discussed the stand by facility on Friday (24) for final approval.

IMF’s Strauss-Khan said earlier last week, “The reconstruction effort will be a large undertaking, with significant spending needs. The government’s programme aims to meet these needs while safeguarding debt sustainability by boosting revenue and reducing spending in other areas. This programme will also provide a framework for international donors to assist the government in financing its reconstruction effort.

“I would like to call upon the Sri Lankan authorities to work with the donor community to ensure an adequate level of financing for the reconstruction effort to lay the foundation for future growth.”

Adhering to IMF conditions

The government while admitting its agreement to adhere to IMF conditions to receive the stand by facility says the conditions would be in line with its policies.

International Trade Minister Prof. G.L. Peiris told the media last week that the agreement with the IMF does not have “any conditionality that is inconsistent” with the economic vision of the Mahinda Chinthana policies.

“Of course there are decisions that we have taken in our own interest — voluntary decisions- which the Government of Sri Lanka has taken,” he said.

“Apart from that there is nothing in conflict with the goals and objectives of the government of Sri Lanka.” Meanwhile, the government also claimed the deal with the IMF would not include any slashes in the current public welfare measures.

Deputy Finance Minister Dr. Sarath Amunugama said there would not be any curtailment in the subsidies offered to low income groups in the country.  Amunugama told parliament earlier in the week that the government has clearly indicated its stance on the expenditure on public welfare measures to the IMF.

Public welfare expenditure

“We have firmly said we would not be cutting down any public welfare expenditure and the IMF has also changed its policies now and agreed to the importance of not cutting down expenditure on public welfare measures,” he said. According to Amunugama, it was a great achievement on the part of the government.

Apart from boosting the country’s reserves, the government also expected the IMF loan to improve the country’s credit rating. However, the expectation of an upgrading of the country’s rating was short lived, as Fitch Ratings announced it would not revise Sri Lanka’s rating.

Fitch has currently rated Sri Lanka  B+ with a ‘negative outlook’ and says it is still cautious.

“I don’t think the IMF agreement will cause us to revise the outlook,” Asia Pacific Sovereign Ratings Head, James McCormack was quoted as saying, by Reuters last week.

“What we need now is to review the government’s commitments under the IMF programme and get a sense of that ourselves and see where it leads the rating.”

Only time would tell how long the euphoria over the receipt of the IMF stand by facility would last.

SJK MC in contempt of court

By Nirmala Kannangara  

Questions have been raised as to why the Sri Jayawardenapura-Kotte Municipal Council (SJKMC) has failed to honour a court ruling and take action on a wastewater drain built in Embuldeniya, Nugegoda.

In order to assist a politically affiliated party in the area, the SJKMC has cut a wastewater drain that has affected the residents of 1st Kottawa Lane, Embuldeniya Nugegoda. The Mt. Lavinia Magistrate has ordered the Municipal Council to construct drains to prevent the contamination of wells in the vicinity providing drinking water. But so far nothing has been done by the SJKMC to prevent waste water seeping into the nearby wells.

According to area resident Kumar Molligoda, his well water has been contaminated due to the adjoining waste water drain. Molligoda told The Sunday Leader that all attempts to get the drain closed proved futile as the party in question has strong political backing in the area.

“When this was brought to the SJKMC’s notice they failed to close the drain. As a result we had to go before courts and the Mt. Lavinia District Court clearly instructed the SJKMC to build the drain properly. But over the years this has not been done and we have been deprived of getting clean drinking water,” claimed Molligoda.

Molligoda further said that a bacteriological analysis done of his well water by Anala Laboratory Services (Pvt) Ltd., had proved that the water sample that was collected from his well was not suitable for consumption due to the presence of faecal contamination.

“According to the report this is very serious as the contaminated water with faecal matter would certainly make us ill and there is no other option but to sterilise the water for consumption,” said Molligoda.

Meanwhile all attempts made by The Sunday Leader to contact the SJK Municipal Commissioner failed. However Municipal Council officials on the basis of anonymity told The Sunday Leader that the council is not ready to honour the court ruling and added that the council is ready to help politically influencial people no matter whether they are right or wrong. “If the municipal council has failed to honour a court ruling it is a serious offence,” added the officials.