Sri Lanka approves VAT hike to 18% ahead of IMF review

By Uditha Jayasinghe

COLOMBO (Reuters) – Sri Lanka’s parliament approved a hike in value-added tax (VAT)to 18% from 15% on Monday ahead of the International Monetary Fund (IMF) preparing to approve the second tranche of a $2.9 billion bailout for the crisis-hit country.

The country’s parliament approved the VAT increase with 100 parliamentarians of the 225-member house voting in favour of the legislation, Speaker Mahinda Yapa Abeywardena said. A total of 55 parliamentarians voted against the legislation.

Sri Lanka plans to implement the VAT hike with effect from Jan. 1, 2024 and also include fresh items such as fuel, fertiliser and cooking gas to increase government revenue by about 378 billion rupees ($1.1 billion), which is essential to meet targets set out under a four-year IMF programe.

The South Asian island nation is recovering from its worst financial crisis in seven decades and awaiting the finalisation of its first review from the global lender on Dec. 12, after which Sri Lanka will receive about $334 million as a second tranche.

The VAT increase will boost the government’s tax revenue to 12.5% of GDP next year from 9.1%, State Minister of Finance Ranjith Siyambalapitiya told parliament.

“This is part of multiple economic reforms being implemented by the government to ensure that we increase revenue to 15% of GDP by 2025,” he said.

“Implementing this revenue measure is essential to ensuring Sri Lanka emerges from its current economic challenges.”

Inflation could spike by 2% after the tax increase, according to Finance Ministry estimates. Sri Lanka’s inflation doubled to 3.4% in November from 1.5% the previous month.

Sri Lanka will hold off on any further monetary policy easing in the near term, the Central Bank of Sri Lanka (CBSL) said last month, projecting that inflation will settle at 5% in the medium term after the VAT increase is implemented.

(Reporting by Uditha Jayasinghe, Editing by Louise Heavens and Bernadette Baum)