Sri Lanka can expect to see greater focus on addressing weaknesses in broadening its tax base and increasing tax compliance within the Medium Term Revenue Strategy (MTRS), which is to include the consultative input of the International Monetary Fund (IMF), IMF Resident Representative to Sri Lanka Martha Tesfaye Woldemicheal said in a recently published (24) exclusive webinar held by CT Smith last month.

“These two points: broadening the tax base and addressing compliance and so on, are best addressed also in a holistic manner in the development of a Medium-Term Revenue Strategy (MTRS) and this is something very important that we are discussing with the authorities and also providing support on,” she said.

The need for Sri Lanka to develop a Medium-Term Revenue Strategy (MTRS) was underscored in the end-of-mission statement of the Seventh EFF review in September.

Stressing on the importance of sustaining Sri Lanka’s revenue target achievements under the Extended Fund Facility (EFF), Woldemicheal said that the significance of the achievements would be naught unless they were to be upheld in the long term.

“The country has achieved marco-stability – now the focus is on growth. While thinking about growth, it is also important to safeguard this macro-economic stability, it’s not a given. What does Sri Lanka need to be able to respond to shocks, or absorb shocks? It all boils down to rebuilding fiscal buffers – that’s through maintaining the fiscal discipline we have seen so far. That’s exactly what enabled the Government to respond very quickly when Ditwah hit.  They were able to approve a supplementary budget,” Woldemicheal said.

With Fitch Ratings’ long-term issuer default rating upgrade of Sri Lanka from ‘CCC+’ to ‘B-’ with a stable outlook, the international credit ratings agency also noted Sri Lanka’s fiscal position as a key reason for the upgrade.

Further, the agency noted that while continued improvements in public debt ratios and foreign exchange reserves could support a future upgrade, weaker fiscal discipline or renewed external liquidity pressures could lead to negative rating action.

“It’s very important to acknowledge the very good performance the country has been showing on the fiscal targets. Tax revenue, the primary balance – all these key fiscal targets are performing really well and I agree that going forward, the focus should also be on broadening the tax base and also strengthening compliance, which is an area where we still see weaknesses,” Woldemicheal said.

Referring to the EFF Fifth and Sixth review statements published by the IMF, Woldemicheal said that the IMF’s tax diagnostics are to also feed the upcoming MTRS. “If you look at our latest published document, the authorities commit under the EFF arrangement to conduct a tax diagnostics just to take stock of the tax system. And then the outcome of this exercise will feed into the development of a medium-term revenue strategy.”

Woldemicheal explained that the purpose of the MTRS is to anchor revenue reforms in the medium-term, which includes identifying relevant policy or administrative reforms that need to be implemented to ensure that the revenue mobilisation effort is sustained.

“It’s very important to acknowledge that the fiscal support that the Government was able to extend in 2026 was made possible by the overperformance from last year and there’s still this commitment to return to the original target starting from 2027,” she said.

Sri Lankan academics have raised that though Sri Lanka’s tax policy adjustments made in the recent past under the EFF programme have reaped major fiscal gains and enabled target outperformance, the lack of parallel institutional reforms, particularly on tax administration strengthening, fail to ensure long-term sustainability of gains.