Economists express their opinions | Sunday Observer
Is there an alternative to IMF assistance?

Economists express their opinions

29 January, 2023

Sri Lanka is now facing a severe financial crisis and has sought the assistance of the International Monetary Fund (IMF). The Government is expected to implement certain economic reforms for this purpose. Currently the Sri Lankan authorities have reached a Staff-Level Agreement with the IMF. The bailout expected from the IMF is a whopping US$ 2.9 billion.

The controversial decision by the Government to implement a tax and electricity tariff hike, has been interpreted by many as an attempt by the Government to implement conditions put forward by the IMF. Academics and experts have presented various opinions on the topic.

According to Prof. Sirimal Abeyratne, Department of Economics of the University of Colombo, Sri Lanka will have to agree to many conditions of the IMF in return for the bailout package granted by the organisation.

“Sri Lanka’s economic woes are not a concern of the IMF. The country’s problems are those that were created on its own during the past years. Expenditure overtook revenue leading us to debt. We have reached the end of our tether and if the country is to recover without IMF help the Government must cut down its expenditure and increase its earnings. While these decisions could have been taken earlier, it did not happen.”

Prof. Navaratne Banda, Head of the Department of Economic Studies at the University of Kelaniya, said that in order to seek IMF assistance, according to their conditions, the country’s welfare benefits must be curtailed. He said accordingly taxes and electricity tariff hikes will have to be implemented.

“The real reason Sri Lanka did not seek IMF support previously is due to the strict conditions that will be put forward by the IMF. Sri Lanka will be forced to curtail welfare benefits offered by it if it is to qualify for IMF support. The IMF has said that the Government must increase taxes to boost its revenue.

Therefore, taxes have now been increased by 36 percent resulting in some citizens having to pay one-fourth of their salary as tax even though people have taken loans of up to 40 percent of their income.”

According to Prof. Priyanga Dunusinghe if the people are enjoying welfare then they must pay taxes for benefits such as free education, healthcare and highways.

“People must pay taxes. There is no way to not pay taxes while enjoying services such as electricity, security, roadways, education and health. There is no doubt about it. Other countries have imposed higher taxes on their citizens. Why should a business not pay taxes? They use roads, security and other services offered by the Government. A country cannot go forward without taxes. The tax burden must be divided fairly. There is a significant disparity in the tax system. The Inland Revenue Department (IRD) must be held accountable for this phenomenon.

Prof. Priyanga Dunusinghe further analysed the tax situation “The tax burden has significantly increased. Every person earning more than Rs. 100,000 has been taxed. But there are those who earn more in addition to those receiving salaries but not taxed. Identifying them and not including them in the tax net is an issue. Therefore, they must be identified as dealt with. Instead State only sector employees and private sector employees are being taxed.”

Prof Milton Rajaratne of the University of Peradeniya holds a different view on taxes.

“Though the people have been burdened by taxes the mismanagement of many sections continues to this day. An export tax has been imposed. Therefore, the prices of our products in the international market have seen an increase.

But this leads to a reduction in demand. Higher taxes make exports difficult. But this is a time when we need foreign exchange. A tax is imposed on production, and by imposing a tax again on the producing sectors, the price of goods has increased. Production now remains stagnant. A new tax has also been imposed. Pay-as-you-go tax hits the middle class hard. The tax rate has increased tremendously.

A large portion of the monthly salary is now levied as tax. This will reduce local consumption delivering a major blow to local production. This will lead to more economic issues. Investments will also drop due to the lack of demand.”

Prof. Vijithapure Wimalarathana Thera, President of the Association of Sri Lankan Economists, said maintaining a balance between income and expenditure is a must for individuals, households and governments at the national and global levels. Otherwise, it will be a difficult task to cover the deficits. This is commonly referred to as consumption beyond one’s means. Sri Lanka has been on this wrong track for a long time. It should be fixed soon.

“Raising taxes is a way out of bankruptcy. This is like collecting money from everyone in the family when there is financial difficulty in a household. But the money collected in a family is not wasted. The tax money collected at the national level is wasted in various ways.”

Commenting on this, Prof. Sirimal Abeyratne said that we need to increase taxes and reduce expenses, for ourselves and not the IMF. Therefore, this is not an issue that should involve the IMF. But there are two advantages of IMF presence. So far we want to implement reforms but we have not been able to do it, therefore we have been forced to agree to do these through the IMF agreement. “This will also improve Sri Lanka’s image. The IMF agreement will change the view that Sri Lanka is unsuitable for lending, and is a country that cannot adjust its macroeconomic stability.”

According to Dr. Priyanga Dunusinghe electricity tariffs must be increased. Those who consume more must pay higher tariffs.

“The Government should indirectly give some relief to the lower income people on the electricity bill, because the lower income people cannot afford the electricity bill. But the Government should plan to provide relief for that. For example it can be done through the Samurdhi. The reason for this is that electricity consumption should be made efficient. Saving must be encouraged. People who use more electricity must pay for it. Everyone should be taxed to erase the loss due to electricity bills.”

“However, the IMF has not mentioned that there should be an increase in the electricity bill. Also, it has not been mentioned how the taxes must be increased. A country can’t move forward like this if it has to borrow.”

But Pro. Wijithapure Wimalarathana Thera holds a different view in this regard.

“If the electricity board is running at a loss, there is no balance of credit and debit. A problem arises as to who will come forward to accept that deficit. Consumers or the Government? Both of them are now bankrupt. No one is giving aid to cover this deficit.

The same principle should be expressed in relation to the Government budget deficit and loss-making enterprises. It has to be done willingly or unwillingly. The IMF does not support us willy-nilly. First, the existing mistakes should be corrected. Though the people can be tricked through words the IMF and other countries cannot be tricked in that manner. So one must get used to the existing unpleasant environment. Even though it is bitter, medicine should be taken to cure the disease.”