The Banker says Karunanayake secured a $ 1.5 billion International Monetary Fund (IMF) loan program that the country needed to avoid a balance of payments crisis, replenish reserves and rebuild confidence among international investors.
“We were not desperate to go to the IMF. But [to others], securing an IMF loan [is a mark of] financial discipline, so our prime objective was achieved. We wanted to show that it is best to have abundance of prudence,” says Karunanayake.
Sri Lanka’s latest bond issues in the international capital markets suggest Karunanayake has indeed reached his objective. In 2015, the sovereign issued a $ 1.5 billion dual-tranche note – its largest since 2007. A year later, it printed a second bond of the same size, with order books of $ 6.6 billion, despite market volatility after the UK voted to leave the EU.
In line with the IMF program, Sri Lanka is also working towards fiscal consolidation. Sri Lanka’s budget deficit has dropped from 7% when Karunanayake took office in January 2015 to 5.6% in 2016 – just below expectations.
After a visit in September 2016, the IMF said Sri Lanka’s tightening of fiscal and monetary policies has been effective and that it met the IMF program’s targets through to the end of June 2016.
Meanwhile, Sri Lanka’s total government revenue grew from Rs. 1,195 billion ($ 8 billion) in 2014 to Rs. 1,455 billion in 2015. Tax revenue rose from Rs. 1,050 billion to Rs. 1,356 billion in the same period. This is crucial for Sri Lanka, which has a very low tax revenue-to-gross domestic product ratio.
To raise tax revenue further, Parliament has passed a bill to increase value-added tax from 11% to 15%. Karunanayake is also keen to continue simplifying the tax system as well as change people’s mindset towards taxes.
“We have inculcated in the minds of the people that paying taxes is not something bad, but a must for the country. Every person needs to pay a reasonable charge instead of relying on the Government for everything,” he says. As a result, Sri Lanka’s tax records have grown from having 700,000 files in January 2015 to having 1.4 million today. (Daily FT)