As the country faces its worst-ever economic crisis, Sri Lanka’s finance minister says he has no choice but to raise the country’s sales tax.
Ali Sabry admitted in an exclusive interview that the government made a mistake by practically halving the amount of value-added tax (VAT) to 8% in 2019.
Mr Sabry estimates that the country will require $4 billion (£3.2 billion) in imports of daily necessities during the next eight months.
His remarks come amid widespread opposition to the government’s economic policy.
Mr Sabry, who is leading talks with the IMF and other lenders, including India and China, one of the country’s main creditors, said that hiking taxes was only one of the painful decisions he would have to make as the rescue talks progressed.
The Sri Lankan government announced earlier this month that it would temporarily default on $35.5 billion (£27.3 billion) in international debt due to the pandemic and the crisis in Ukraine, which rendered payments to overseas creditors “difficult.”
As bailout talks in Washington began, it publicly requested emergency financial assistance from the IMF.
Mr Sabry is in charge of negotiations with the country’s various creditors on loan restructuring, which is a need for an IMF package.
India has offered a $1.5 billion credit line for petroleum imports, and Mr Sabry claims that India has agreed in principle to another $500 million credit line.
The coronavirus pandemic, rising energy prices, tax cuts, and rapidly dwindling foreign currency reserves have left Sri Lanka with insufficient money to pay for critical fuel, food, and medical imports.
As thousands of people took to the streets across Sri Lanka, hundreds of workers from state-run banks joined other bank trade unions in a protest march to the president’s office.
The amount of foreign currency arriving in Sri Lanka shows no signs of improving, as money sent to the country by Sri Lankans living and working abroad decreased to $318 million in March, roughly half of what it was last year.