Sri Lanka should aim to get state revenues more than 12 percent of gross domestic product and avoid revenue shortfalls next year, International Monetary Fund Senior Mission Chief Peter Breuer said.

Sri Lanka projected revenues (including non-tax) of 3,408 billion rupee (11.3 -pct of GDP) and the IMF 3,286 billion rupees (about 10.9-pct).Up to July revenues were up 39 percent and tax revenues were up 43 percent, but IMF expects year end revenues to be 15 percent below target.

“Clearly the objective is not to let it happen next year and make up for that shortfall,” Breuer told reporters after Sri Lanka and the IMF reached a staff level agreement incorporating the next set of targets and reforms.

“So, one of the objectives is to get revenue that exceeds 12 percent of GDP and accordingly measures will have to be implemented to achieve that objective.”

Sri Lanka has met all quantitative targets, except for the June indicative revenue target, and most structural benchmarks required up to June have been completed, Breuer said. The new staff level agreement will set the targets and reforms for the next phase of the program.

In 2020 in the worst deployment of macro-economic policy by the country’s official economists and their advisors from the private sector, taxes were also cut on top of rates, eventually driving the country to external default. Revnues collapsed from 11.9 percent in 2019 to about 8.5 percent of GDP by 2021.

As forex shortages build up, Sri Lanka’s economic bureaucrats also ban vehicle and non-essential imports, hitting revenues and further worsening the fiscal picture, in an cascading policy error that repeats often, an economic observer said.

Car imports are still banned

Sri Lanka has now slammed high rates of progressive income tax which are hitting employed workers in the corporate sector, triggering a brain drain, particularly of professionals with young children who cannot make ends meet and keep paying housing loans. There are no exemptions for dependents.

A steep currency collapse has also hit alcohol consumption, with industry officials indicating a 40 percent drop from pre-crisis levels, though some firms are said to be avoiding paying collected taxes amid corrupt practices.

The IMF has recommended a series of reforms in a governance diagnostic report including for revenue authorities. Sri Lanka will have to implement “compensating measures” and improve tax administration to get more revenues, the IMF team said.

In the first stabilization year after rate cuts trigger a currency crisis, revenues are difficult to raise due to the slowdown. This year the economy is contracting and revenues are driven partly by inflation, analysts note.