Sri Lanka says IMF bailout talks in ‘final stage’

Cash-strapped Sri Lanka’s president announced further tax hikes and sweeping reforms on Tuesday, saying that bailout talks with the International Monetary Fund were in the “final stage”.

The country of 22 million people has suffered months of dire shortages and protests culminating in the ouster of Gotabaya Rajapaksa last month.

Presenting a new budget, his successor Ranil Wickremesinghe said Tuesday that Value Added Tax (VAT) would rise from 12 to 15 percent for all goods and services from Thursday.

He said a dedicated debt management agency was being set up to restructure borrowings. In April, Colombo defaulted on its $51 billion external debt.

“Negotiations with the International Monetary Fund have successfully reached its final stage,” Wickremesinghe told parliament.

“Discussions on debt restructuring will be held with the main countries that provide loan assistance to our country,” he said referring to China, Japan and India, the top three creditors of the island.

Debt restructuring is crucial to clinching an agreement with the IMF, which resumed its talks with Colombo last week after political upheaval in July held up negotiations.

Beijing has not publicly shifted from its offer of issuing more loans rather than taking a haircut on existing credit.

Wickremesinghe said he would press ahead with the politically unpopular “restructuring”, seen as meaning the privatisation of state enterprises subsidised by taxpayers.

First in line are the state-run energy companies as well as two state-owned banks that dominate commercial banking in the country, he said.

His government has already raised prices of fuel and electricity more than threefold and removed energy subsidies, a key pre-condition for a possible IMF bailout.

Last week, Wickremesinghe tightened import restrictions with a ban on more than 300 additional items, as the crisis showed no signs of abating.

Worker remittances, a key source of foreign exchange, have dropped by more than 50 percent to $1.6 billion in the six months to June compared to the same period last year.

Inflation is officially estimated to peak at about 65 percent by next month while the import-dependent economy is forecast to contract by a record eight percent this year.

“This crisis will not be solved by accusing one another, nor by faulting the past,” Wickremesinghe told parliament while presenting the budget for the rest of the year.

Shortly after the president’s speech, police in the capital Colombo fired tear gas and water cannon to break up a protest march by hundreds of university students unhappy with the government’s handling of the crisis.  

Police said they arrested six students for disrupting traffic.