Sri Lanka's economic growth dependent on tax reform and debt restructuring

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Sri Lanka's economic growth dependent on tax reform and debt restructuring

The World Bank, in its latest Sri Lanka Development Update, has indicated that Sri Lanka's economy is projected to grow by 1.7% in 2024, following a contraction of 3.8% in 2023. Released on Tuesday, the report underscores the importance of improved revenue mobilization for the country's return to macroeconomic stability. However, it also warns that the growth outlook remains uncertain and largely hinges on progress with debt restructuring and the implementation of critical structural reforms.

The World Bank points out that Sri Lanka has one of the world's lowest tax-to-GDP ratios. As of 2022, the country's tax system was plagued by low, multiple, and frequently changing rates, a high tax burden on labor rather than capital incomes, an over-reliance on indirect taxes, and a weak administration with poor compliance outcomes.

To address these issues, a government-led tax reform package has been under implementation since May 2022. The reform includes the introduction of new taxes, adjustments to existing tax rates and bases, and measures to improve tax collection efficiency and compliance.

"Sri Lanka has carried out critical reforms since the start of the economic crisis. Staying the course on reforms while managing fiscal risks is crucial to restore a sustainable growth path,” said Faris H. Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka. He added that current efforts to mobilize tax revenue should be coupled with continued reforms towards expenditure transparency to build public confidence and deliver better public services.

The update emphasizes the importance of effectively implementing a Tax Administration Modernization Strategy to ensure that tax policy reforms translate into a sustained increase in revenue collection. Key priorities include promoting e-filing, utilizing third-party information for compliance risk management, streamlining dispute resolution, recovering defaulted taxes, and improving taxpayer segmentation for targeting large and high-net-worth individuals. The report also highlights the need for investment in strengthening the IT infrastructure, which will serve as the foundation for these interventions.

The Sri Lanka Development Update is released twice a year by the World Bank to examine economic developments and prospects in the South Asia region, analyze policy challenges faced by countries, and provide short and long-term policy recommendations to manage fiscal risks and accelerate growth. The October 2023 edition titled Toward Faster, Cleaner Growth indicates that growth in South Asia is higher than any other developing country region in the world, albeit slower than its pre-pandemic pace and not fast enough to meet its development goals.

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