No need of IMF if we manage debt - Cabraal | Sunday Observer

No need of IMF if we manage debt - Cabraal

21 November, 2021

Seeking a bailout from the International Monetary Fund (IMF) is out of the question as it would only lead to trouble, Central Bank Governor Ajith Nivard Cabraal  told a post-budget forum  held virtually last week.

He said no one would want to go through a painful exercise having to adhere to conditions.

“If we are able to deal with debt repayment and manage it well there is no need to seek help from the global lender who would want us to follow its guidelines,” Cabraal said, adding that the Central Bank is looking at syncretising loans, monetisation of assets, increasing exports and foreign remittances value to ensure the debt position is sustainable.

However, according to co-cabinet spokesman Udaya Gammanpila, the  Cabinet of Ministers had held extensive talks weighing the pros and cons of seeking help from the global lender although a final decision had not been made as the foreign exchange crisis had worsened.

Treasury Secretary S.R. Attygalle said sustainable growth could be achieved only through investment reforms, strengthening the external position and supporting the vulnerable in a targeted manner.

Steps to rate exporters and reforms to support the sector, moves to boost renewable energy, green initiatives such as promotion of organic fertiliser and road development will be expedited, he said.

However, economists and  think tanks have been harping on the need to seek assistance from the global lender given the appalling state of the level of  foreign reserves in the country. Professor of Business Economics, University of Colombo,  H.D. Karunaratne said the move to curtail expenditure and boost state revenue is a commendable move of the  2022 Budget which has addressed income inequality and the change in life expectancy in the country. “The move to tax income instead of earnings and grant the salary revision of teachers and principals and increasing the pension age of public sector workers to 65 are noteworthy steps of the Budget.

The Budget proposed a one-off tax surcharge of 25% to be imposed on individuals or companies  earning an annual taxable income of Rs. 2,000 mn in the financial year 2020-21.

Former Central Bank Deputy Governor W.A.  Wijewardena said  Budget 2022 has been presented when the country was facing a major  economic crisis.

The nature of the crisis was aptly described by Minister Basil Rajapaksa a month ago when he presented the Tax Amnesty Bill and the new Securities and Exchange Commission Act.

He said that Sri Lankans were a nation licking a honeycomb while facing the threats of three deaths; the three deaths at that time were falling foreign reserves, mounting death problem, and pressure for the rupee to depreciate in the market.

Since then three more deaths have been added to the list: possibility of a severe shortage of food, inability to import essential fuel, medicine and food, and the government being short of funds.

Hence, in my view, the Budget is a firefighting exercise, and after the fire has been extinguished, the country will have to start from scratch.

That is why the Finance Minister had resort to measures like one-off tax surcharge on high income earners exceeding Rs 2 billion per annum and increase in VAT on financial services by banks from 15 to 18%, and a superannuation tax of 2.5% on enterprises earning over Rs 120 million per annum. These taxes are needed to bridge the gap in revenue and expenditure, though they have been criticised as Saradiel type of income redistribution, that is, taking from the rich and giving to the poor. Since this type of taxes have a long-term negative impact on growth, it is essential that the Minister restricts them to one year, and seek funding from other sources in the medium to long term.

Net reserves had slipped to around US$ 2 billion from US$ 3.5 billion in September this year.

The government plans to cut the Budget deficit to around 4.5-5 percent of the GDP by increasing revenue.

The budget deficit last year reached nearly 14 percent of the GDP. 

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