Sri Lanka wins agreement with IMF for tax relief: President Dissanayake

COLOMBO: President Anura Kumara Dissanayake on Wednesday announced that Sri Lanka has achieved flexibility with the IMF on its rigid state revenue tax regime, something that was part of his election promise. Also, import of private cars -- banned from 2020 -- would be allowed from February 2025, Dissanayake, who is also the Minister of Finance, told the parliament.

Speaking about the agreements reached with the International Monetary Fund (IMF) during its third review of the USD 2.9 billion Extended Fund Facility (EFF), the president said his government has been able to raise the tax threshold.

"We have been able to raise the tax threshold of pay as you earn (PAYE tax) so that those who have bigger incomes pay more while those who earn pay less," Dissanayake said, adding there would be other VAT exemptions and withholding tax on interest incomes for the retired.

"An income of Rs 1,50,000 per month will be tax free," Dissanayake said referring to the current free amount upto only Rs 1,00,000.

Fresh from his return from an official visit to India, Dissanayake said the ban on vehicle imports would be gradually lifted.

"From December 14, we have allowed the importation of the first category - vehicles for passenger transport and cars for special purposes."

From February 2025 all imports of private cars would be allowed.

Sri Lanka had stopped vehicle imports from 2020 during the Covid19 outbreak due to the dwindling foreign reserves.

With the economic recovery through the IMF bail out since 2023, the IMF had allowed vehicle imports by preventing any adverse impact on the need to build forex reserves.

He said all such proposals would be incorporated in the 2025 budget to be presented in mid-February.

There will be concessions to improve the small and medium scale industries for whom there will be debt restructuring relief based on a cap of the loan amounts.

Dissanayake's government has just concluded its third review of the IMF bail out and is awaiting the fourth tranche of the nearly USD 3 billion facility.

Sri Lanka had on November 26 announced that it has ratified the agreement for debt restructuring for USD 14.2 billion, compulsory to maintain debt sustainability by the IMF through an exchange of new bonds for the existing bonds.

A week prior to it, the National People's Power (NPP) government got the IMF approval for a staff-level agreement to secure the fourth tranche of the nearly USD 3 billion bailout package, something that President Dissanayake backed despite his pre-presidential election rhetoric to renegotiate with the global lender to water down tough conditions.

The NPP was highly critical of the cost recovery based utility tariffs and high taxes, which came conditional to the bail out.

The debt restructuring agreement was reached in the last week of the then President Ranil Wickremesinghe's regime in September, days before the presidential polls.

He highlighted that the exchange would provide substantial debt relief, free resources for development and ensure long-term fiscal stability.

Sri Lanka had plunged into an economic crisis when the island nation declared sovereign default in mid-April of 2022, its first since gaining independence from Britain in 1948. Almost civil-war-like conditions and months of public protests led to the fleeing of the then president Gotabaya Rajapaksa.

Wickremesinghe took over and the negotiations with the IMF began soon after. His government then clinched the bailout a year later in March 2023.

As of July 2024, Sri Lanka's external debt stood at a total of USD 37 billion, which includes USD 10.6 billion in bilateral credit and USD 11.7 billion in multilateral credit. The commercial debt was USD 14.7 billion, of which USD 12.5 billion is in sovereign bonds.