As Sri Lanka grapples with its worst economic crisis, Finance Minister Ali Sabry has revealed that the government has no choice but to hike the country's sales tax. In an exclusive interview with the BBC, Mr. Sabry conceded that the government made a mistake when it almost halved the rate of value-added tax (VAT) to 8% in 2019.
The finance minister emphasized that the nation needs $4 billion over the next eight months to pay for imports of daily essentials, including fuel, food, and medicine. He also admitted that the current level of VAT is 'definitely not sustainable' for a country like Sri Lanka that is dependent on imports.
Mr. Sabry has been leading negotiations with the IMF as well as other lenders such as India and China. He has proposed raising the VAT rate to 13% or 14% to bridge the revenue gap and expenditure. The move is part of a broader effort to secure an IMF bailout package.
Earlier this month, the Sri Lankan government announced that it would temporarily default on $35.5 billion in foreign debt. Since then, it has officially requested emergency financial help from the IMF as bailout talks got underway in Washington.
China is one of Sri Lanka's largest creditors, and talks between the two countries may be tough after Beijing signalled its displeasure over Colombo approaching the IMF for help. However, Mr. Sabry remains optimistic that the country will be able to start paying its international creditors again by next year.
