Sri Lanka promises to reform Airline, public sector, fuel pricing to IMF

SriLankan-Airlines-Airbus

June 15, 2016 (LBO) – Sri Lanka has committed to reforming government finances and the public sector, in its letter of intent to the International Monetary Fund.

Structural benchmarks include a “resolution strategy” for SriLankan Airlines by September 2016, in which it will take the loss-making airline off its books.

Other reforms include enhancing oversight and discipline of the six largest state-owned enterprises, and implementing automatic fuel and electricity pricing by end of this year.

Sri Lanka’s foreign reserves have fallen sharply due to an outflow of capital, partly due to lack of confidence in the government’s fiscal consolidation and reform plans. The IMF said the support programme intends to address these issues.

As part of the 1.5 billion dollar 3-year arrangement, the government intends to record the fiscal cost of non-commercial obligations and subsidies for SOEs in the central government budget, starting in 2017.

According to the Letter of Intent published on the IMF website, the Ministry of Finance (MOF) is expected to introduce automatic fuel pricing mechanism that ensures retail prices are above cost-recovery levels, by December 2016.

Automatic electricity pricing will ensure retail prices are above cost-recovery levels, with implementation due this year.

In terms of debt obligations, the government has already committed to creating a comprehensive database of financial obligations of state-owned enterprises, including a breakdown of arrears and non-arrears to be certified by the Auditor General. A registry of such obligations will be created, the letter states.

The list of commitments by the government are below.

Structural Benchmarks and timeline
Fiscal Policy Management
Submit to Parliament the 2017 budget in line with the program targets. November 2016
Submit to Parliament the 2018 budget in line with the program targets. November 2017
Submit to Parliament the 2019 budget in line with the program targets. November 2018

Tax Policy Reform
Publish a tax expenditure statement as part of the official government budget. December 2016

Approve by cabinet a time-bound strategy (agreed with IMF staff) to reduce or eliminate tax expenditures. December 2016

Submit to Parliament a new Inland Revenue Act with a view to simplifying and broadbasing the income tax. March 2017

Complete by Ministry of Finance (MOF) a diagnostic review of the VAT system. June 2017

Tax Administration Reform
Adopt by MOF Inland Revenue Department Key Performance Indicators on the number of risk-based VAT audit. September 2016

Adopt by MOF Inland Revenue Department a VAT compliance strategy that includes a time-bound plan to implement risk-based audit. September 2016

Fully roll out by MOF Inland Revenue Department new IT systems (RAMIS) for major domestic taxes (including income tax and VAT), including web-based tax filings for income tax and VAT. December 2016

Adopt by MOF Inland Revenue Department compliance strategies for corporate and personal income taxes. June 2017

Public Financial Management
Establish by MOF a commitment record system (with quarterly reports produced no later than one month after the end of each quarter) and quarterly expenditure commitment ceilings for the 2016 budget and the 2017 budget. July 2016

MOF to roll out ITMIS with an automated commitment control module for Ministry of Finance. December 2016

MOF to roll out ITMIS with an automated commitment control module for Ministry of Health. April 2017

State Enterprise Reform
Cabinet to approve a resolution strategy for Sri Lankan Airlines. September 2016

Record the fiscal cost of non-commercial obligations (including subsidies) for SOEs in the central government budget, starting in 2017. November 2016

MOF, line ministries, and SOEs to sign and publish Statements of Corporate Intent for the six largest SOEs (Ceylon Petroleum Corporation, Ceylon Electricity Board, Sri Lankan Airlines, National Water Supply and Drainage Board, Airport and Aviation Services Limited, and Sri Lanka Ports Authorities).
December 2016

MOF to introduce automatic fuel pricing mechanism that ensures retail prices above cost-recovery levels and a financial position of Ceylon Petroleum Corporation capable of covering debt service.
December 2016

Cabinet to introduce automatic electricity pricing mechanisms that ensure retail prices above cost-recovery levels and a financial position of Ceylon Electricity Board capable of covering debt service. December 2016

Prior Actions
Cabinet to issue a Memorandum requiring the Ministry of Finance to complete by end-October 2016 a time-bound strategy to address the issue of outstanding arrears of the central government and obligations of state enterprises. The Memorandum will specify that the strategy include: (i) completion (by end-2016) of a comprehensive database of SOE’s financial obligations, including a breakdown of arrears and non-arrears to be certified by the Auditor General, for use in creating a registry of such obligations; (ii) clarification of the government’s responsibility over existing obligations related to subsidies and other non-commercial obligations of the SOEs.
Prior action -Met

Ministry of Finance to issue circulars to (i) formally implement tax policy and other revenue measures outlined in the Cabinet Memorandum of March 4, 2016; (ii) detail revised expenditure ceilings for government ministries and agencies consistent with the overall budget deficit target for 2016.
Prior action -Met

Cabinet to issue a resolution to adopt a framework note (agreed with IMF staff) for a new Inland Revenue Act, which embodies key tax policy drivers, overarching legal design framework, and the tax law reform roadmap as outlined in the March 2016 IMF Legal Department technical assistance mission Aide Memoire.
Prior action -Met

Formally suspend by Cabinet order the Board of Investment’s capacity to grant tax exemptions, tax holidays, and special tax rates until such time as the BOI Act can be formally amended.
Prior action -Met