3 July 2023
Dear Ms. Kristalina Georgieva
The Managing Director
International Monetary Fund (IMF)
Re: IMF assistance to Sri Lanka
We are writing this open letter to you to express our concerns on the International Monetary Fund’s (IMF) approach to the ongoing negotiation of financial assistance to Sri Lanka.
As you have repeatedly noted, the world is currently facing multiple and interlinked crises that are greater, deeper, and potentially more catastrophic than ever before. These crises have left many developing countries facing a surge in energy and food prices, general inflation, higher interest rates and significant economic distress, affecting a large portion of its most vulnerable population. Excessive debt in many developing countries has added to these problems, constraining public spending on crucial sectors such as healthcare, education, and infrastructure, impeding poverty reduction efforts, and hampering socio-economic advancement.
Sri Lanka is one of these countries going through a severe economic crisis. The country has gone through a debt default, continues to face a balance of payments crisis and runaway inflation, and has experienced significant sociopolitical unrest as a result. In addition to global factors, the rapid accumulation of both domestic and foreign debt that culminated in the current crisis was related to weak fiscal management that provided inadequate revenue generation in the context of large-scale borrowing for infrastructure projects.
In early 2023, the government of Sri Lanka sought to increase its fiscal revenues by considering the adoption of a Digital Service Tax, to tax the digital multinationals who are making profits through sales to customers in Sri Lanka.
Along with three other countries (Pakistan, Kenya, and Nigeria), Sri Lanka did not endorse the October 2021 Statement of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on the Two Pillar solution. Furthermore, the proposed multilateral convention to implement Amount A has still not been agreed upon. Indeed, even once it is finalised it would need ratification by a critical mass of countries, which is a major political challenge. In the meantime, many states have adopted digital services taxes, with no obligation to withdraw them until such a convention comes into force.
This helps to explain why the government of Sri Lanka has taken the entirely rational decision to opt for a digital services tax. Such a tax is easy to administer, and could quickly raise much-needed revenue, as has been found by other similar countries, such as Pakistan.
Revenue estimates by the South Centre and the African Union’s Coalition for Dialogue on Africa show that Sri Lanka could expect to generate USD 104.5 million from a 4% digital service tax such as the one being considered, contrasted with only an estimated USD 29.5 million from Amount A of Pillar One.
Without such revenues, Sri Lanka may have to rely more on indirect taxes and energy price increases that will disproportionately fall on the poor. A digital services tax also does not deter inward investment, since it applies to non-residents and residents alike.
However, we are alarmed to be informed that the Sri Lankan Ministry of Finance is now under severe pressure from the IMF to drop their plans for a digital service tax and to sign on to the Two Pillar solution as a condition for receiving additional lending from the IMF.
It is unacceptable that a small and distressed country such as Sri Lanka is being pushed to give up its sovereign right to introduce a tax policy, digital taxation, at a time when it is most needed, especially so before there is a ratified global agreement providing for alternatives. We urge the IMF to stop pressuring Sri Lanka to withdraw its digital services tax proposal.
In addition, it is our view that the Two Pillar solution agreement is not grounded on a proper consider and understanding of the interest of developing economies, as it reinforces global inequities. (We’ve also questioned the economic principles underlying Pillar I—or even whether there are such principles, but that is another matter.)
The current outcome of the OECD tax negotiations is unlikely to yield meaningful or sustainable revenues for developing countries, so they should not be restricted from pursuing alternative measures. We believe that developing countries must retain their sovereign rights to set domestic tax and fiscal policies while awaiting a more comprehensive reform based on a fairer reallocation of taxing rights.
This is even more true for Sri Lanka, which has neither signed up to the political agreement in October 2021 nor signed any binding multilateral treaty ceding its powers to set its domestic fiscal policies.
We believe that the IMF should consider carefully, before offering advice, whether developing countries should sign up to the Two Pillar solution or pursue alternatives that are available, feasible, and generate public resources to invest in recovery and climate mitigation and adaptation.
In any case, the IMF should not put pressure on any country to drop any such alternative measure to raise much-needed public resources in the absence of any legal requirement to do so under an agreed international convention.
As a Commission, we stand ready to engage with the Fund in a dialogue on this issue to ensure that we continue to work together towards an international tax architecture that works for the benefit of all countries.
Jayati Ghosh (ICRICT co-chair)
Joseph E. Stiglitz (ICRICT co-chair)
José Antonio Ocampo