COLOMBO (AFP) – The International Monetary Fund (IMF) warned crisis-hit Sri Lanka yesterday that its foreign debt was “unsustainable”, and called for devaluation and higher taxes to revive the almost bankrupt economy.
Following its annual review of the cash-strapped country, the IMF said its fast-dwindling foreign reserves were inadequate to service the country’s current foreign debt of USD51 billion.
Official data shows Sri Lanka needs nearly USD7 billion to service its foreign debt this year, but the country’s external reserves at the end of January were only USD2.07 billion – just enough to finance one month’s imports.
The IMF stressed “the urgency of implementing a credible and coherent strategy to restore macroeconomic stability and debt sustainability”, recommending a return to a “market-determined and flexible exchange rate” – meaning a devaluation of the Sri Lankan rupee.
While the central bank’s set rate is INR197 to the dollar, a thriving black market offers INR260 for United States (US) currency notes.
This disparity has led to a more than 50 per cent decline in foreign remittances through official banking channels.
But the IMF noted the country’s economic woes began pre-pandemic.
Soon after taking office in November 2019, President Gotabaya Rajapaksa cut several taxes nearly in half, the IMF said, driving down government revenues and forcing it to borrow more.
Among recommendations to address the crisis was to raise income taxes and VAT, “complemented with revenue administration reform”, the IMF said.