Sri Lanka's continuing failure to strengthen its tax administration could force the its government to spend less, which would hit economic growth, the International Monetary Fund (IMF) said on Friday. Since the Fund extended a $2.6 billion loan in 2009, it has regularly called for the government to raise more revenue by broadening the tax base and reducing tax exemptions.
However, tax revenue as a percentage of gross domestic product has been declining. It hit 11.6 percent last year, from 13.3 percent in 2008. In its annual report on Sri Lanka, the IMF said achieving Colombo's 2014 budget deficit target of 5.2 percent of GDP will be "challenging". The global lender said a failure to increase tax revenue will cause pressure to cut capital spending "with possible adverse impact on growth."
After failing to reach past tax revenue targets, the island nation has cut public investment to meet its budget deficit and debt targets. "Fiscal consolidation and debt reduction need to continue, but the burden of adjustment needs to shift decisively to revenue generation," the IMF said.
The Fund expects Sri Lanka's economic growth to remain at a robust 7 percent this year and 6.5 percent in each year from 2015-2019, well below the estimates by the Sri Lankan authorities. On Thursday, a government document showed Sri Lanka aims to have .8 percent growth this year, and gradually increase that to 8.4 percent by 2017. The IMF said it expects tax revenue growth to be sluggish and remain below 13 percent through 2019.