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Sri Lanka readies tax and investment reforms, says official

[Reuters, Thursday, 4 March 2010 10:01 No Comment]

Sri Lanka will initiate tax and investment reforms in its next budget following a parliamentary election in April, a government official said on Thursday, amid pressure from the IMF to rein in a budget deficit.

Last week the International Monetary Fund delayed the third tranche of a $2.6 billion loan after Sri Lanka failed to achieve its 2009 IMF budget deficit target. [ID:nSGE61O0GP]

The budget deficit last year hit an eight-year high of 9.7 percent, well over the IMF target of 7 percent. On Tuesday, Sri Lanka said it would miss the 2010 IMF deficit target as well. [ID:nSGE6210HH]

"The aim of the reforms is to change the current investment climate to attract massive inflows into the country," a senior government official, who is privy to the government’s planned reforms, told Reuters on condition of anonymity.

"There will be clarity in our tax regime for a sustainable government revenue and productivity improvement will be the key in the public sector."

Another government official confirmed the reforms, saying they were at an "initial stage".

Economists say the persistently high fiscal deficit has been due to low tax collection and high government expenditure mainly due the 25-year long civil war and a bloated public sector.

"The reforms will widen the tax net so that the effective tax rates will be reduced as more people pay taxes, while efficiency, effectiveness and no wastages will be ensured in the public sector," the official said.

The reforms will pay special attention to restructuring the state’s loss-making petroleum corporation and electricity firm, which the government had agreed with the IMF, he said.

"But all the changes will be gradually implemented in a manner that won’t have any drastic impact on the labour force or the stability of macroeconomic fundamentals."

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