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Tuesday May 30th, 2023

Crisis-hit Sri Lanka targets more tax revenue in 2023 budget; concerns on SOEs, spending remain

ECONOMYNEXT – Sri Lanka has aimed at increasing tax revenue by 69 percent to fund government spending in the crisis-hit economy, but analysts say the 2023 budget failed to address core issues on excess spending and articulate strong policies on restructuring loss0making state owned enterprises (SOEs).

President Ranil Wickremesinghe in his capacity as the finance minister presented the 2023 budget on Monday November 14 which he said will lay the foundation for a strong and modern economy that creates opportunities for the island nation’s youth.

The budget has aimed at increasing tax revenue by 69 percent to 3,130 billion rupees next year from this year’s 1,852 billion rupees while bringing down the budget deficit to 7.9 percent in 2023 from this year’s revised 9.8 percent.

The high tax revenue target comes as millions of Sri Lankans face the impacts of the ongoing economic crisis – 66 percent inflation, job losses, and shrinking disposable income.

Wickremesinghe in his budget speech announced measures to improve tax administration in a move to broaden the tax net and increase the revenue, though most of the tax hikes including personal income tax were proposed last month.

“While the requirement for everyone over 18 to open a tax file is a first step, many of those who open files will be below the tax-free threshold,” Wickremeinghe said.

“Therefore, it is important to introduce measures that identify high income earners specifically and get them into the tax net.”

Analysts said the budget ended some speculations on increasing taxes further.

“Fears of additional taxes such as wealth tax, increase in VAT (value added tax), additional taxes on revenue etc came to rest with the announcement of the 2023 budget proposals,” Danushka Samarasinghe,  Chief Executive Officer/Director at Nation Lanka Equities (Pvt) Ltd told EconomyNext.

“Ending uncertainty and speculation is a positive. But it would have been better if there were time-bounded targets for increasing government revenue from measures such as divesting state owned assets and SOEs,” he said.

“Just a mere mention of the intention of divestiture may not hold water. Also any significant reforms to reduce the public sector headcount was the need of the hour and seems to be omitted.”

Wickremesinghe in his budget named five SOEs that will be considered for restructuring without any time frame and the proceedings from such a process are expected to boost the foreign currency reserves and a faltering rupee currency.

High expectations 

Markets had been expecting a strong reform-oriented budget from Wickremesinghe mainly to reduce government expenditure, strong measures to reduce the state sector and minimise corruption, as well as stringent restructuring of SOEs.

However, many analysts said the anticipated strong policy measures were missing from the budget.

“The president should have explained how he plans to restructure bleeding SOEs like the CPC and CEB,” a senior market analyst told EconomyNext referring to state-run fuel retailer Ceylon Petroleum Corporation (CPC) and state-owned Ceylon Electricity Board (CEB).

“These institutions are run at the cost of all other institutions in the country. The restructuring he has suggested has been discussed for the past seven years. There is no timeline for the restructuring he has announced.”

“There are no bold policies. There is no reduction in government expenditure. There is a looming banking sector crisis, but there is no single word about it. There is no solid plan to slim down the state sector. It is only about taxing the same people who have been paying the tax. This budget is off the mark. It lacks vision, courage, and sense of urgency.”

The CPC and CEB are the top loss-making SOEs in the country. The institutions have been bleeding because successive governments failed to set market-based prices for electricity and fuel fearing electoral defeat.

However, the economic crisis following the foreign exchange shortage forced the government to raise the prices of both electricity and fuel to record highs in the second half of this year.

Wickremsinghe, before the budget, had repeatedly spoken about reforms in these two loss-making government’s institutions. However, analysts say, the budget was not as strong as it was expected to be.

Tight rope

Wickresinghe is also under pressure due to a geopolitical cold war between India and China. International powers want Sri Lanka to move away from China while Beijing has been one of the trusted lenders to the island nation.

He needs the support of all the countries if Sri Lanka wants to successfully receive a 2.9 billion US dollar, four-year International Monetary Fund (IMF) loan to instill investor confidence in Sri Lanka.

But more than international pressure, Wickremesinghe is walking a tight rope locally since his appointment as president as he has to depend on the ruling Sri Lanka Podujana Peremuna (SLPP) lawmakers.

The SLPP had a two-third parliament majority before President Gotabaya Rajapaksa was ousted by protesters who demanded that he resign over his mismanagement of the economy.

Wickremesinghe, who has been in parliament for 45 years, is the leader of center-right United National Party (UNP). The UNP has only one seat in the 225-member parliament.

Political analysts had predicted that Wickremesinghe would be forced to go for only mild changes during the budget because bold measures could be unpopular for the centre-left and nationalist SLPP.

The president needs the support of the SLPP to pass the budget but has to also allow many opposition lawmakers to cross over to the government benches to pass the budget and implement other crucial economic policies.  (Colombo/Nov14/2022)

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Sri Lanka rupee appreciation squeezes exporters

ECONOMYNEXT – Sri Lanka’s recent appreciation is starting to squeeze apparel exporters as their domestic costs including wages and energy, were hiked over recent months, when the rupee fell steeply, an industry official said.

Companies had raised salaries and emoluments at rates averaging 25 percent for workers while transport costs have also gone up but not has come down, Yohan Lawrence Director General of the Join Apparel Association Forum said.

Apparel factories in particular also provide transport and some meals for workers.

Electricity prices have also been hiked, based on the rupee which was weaker. A tariff cut is expected from June after the rupee appreciated and imported fuel prices fell.

Sri Lanka’s rupee collapsed in 2022 from 200 to 360 to the US dollar as interest rates were suppressed with liquidity injections and a failed attempt was made to float the rupee with surrender requirement in place.

From the second half of 2022, with higher interest rates and negative private credit, the central bank has avoided printing money under conditions which are generally accepted to be difficult, and is broadly running deflationary open market operations, triggering a balance of payments surplus and putting the rupee under upward pressure.

Central bank net credit to government which was 3,302 billion rupees in September in 2022, was down to 3,209 billion rupees by March 2023, part of which was due to rollovers, analysts say.

Market pricing of fuel and electricity by the Ministry of Energy and also spending controls and tax hikes buy have also helped contain domestic credit.

Sri Lanka also has mandatory conversion rules, imposed on exporters, which is a concern for exporters.

“We believe rupee should be at its natural level, but with forced conversions you won’t get the correct picture,” Lawrence said.

Sri Lanka has to release a plan to remove import controls, exchange controls and other restrictions imposed in the period where policy rates were suppressed with liquidity injections (so-called multiple currency practices and capital flow measures) by June under the IMF program.

Apparel exporters have also seen orders fall amid tighter conditions in Western markets.

The central bank has to peg (intervene actively in forex markets and create money) to meet reserve targets under an IMF program and cannot free float (avoid creating money through international operations) the rupee.

The newly created money has generally been absorbed in an overnight liquidity shortage.

There have also been foreign purchases of rupee Treasuries. Amid a contraction in credit, the inflows also do not turn into imports fast as the money if the money is spent.

By making purchases a little below what is allowed by the contraction in domestic credit, the rupee can be allowed to appreciate, analysts say.

The central bank has so far allowed the rupee to appreciate to around 300 to the US dollar from 360 levels under a transparent guidance peg up to February.

Except after the 2008/2009 currency crisis, Sri Lanka’s central bank has not previously allowed to the rupee to appreciate under IMF programs where the first year in particular sees balance of payments surpluses, before private credit and domestic investments picks up again.

One of the considerations used by third world central banks are Real Effective Exchange Rate indices.

The REER of the Sri Lanka rupee based on a basket of currencies calculated by the central bank was 61.12 points in February before the rupee was allowed to appreciate by lifting a surrender rule.

In March the index went up to 69.55 points, but remained steeply below 100. Real effective exchange rates are calculated also taking into account inflation in counterpart trading nations.

Sri Lanka’s inflation index had hardly risen since September amid rupee gains. Falling food prices can help contain pressure for further wage hikes, analysts say. (Colombo/May30/2023)

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Sri Lanka forum to discuss central bank independence vs sound money

ECONOMYNEXT – Central bank independence and sound money will be under discussion at a public event organized by the Sri Lanka chapter of the Bastiat Society today, May 30, as island is recovering from the worst episode of monetary instability since independence.

The forum will feature Lawrence H White, Professor of Economics at George Mason University in the US, and W A Wijewardene, former Deputy Central Bank Governor, of the Central Bank of Sri Lanka.

“The discussion will compare the current system against alternative systems and explore the relationship between such banking systems and sound money,” the organizers said.

White specializes in the theory and history of banking and money. He is the author of “The Clash of Economic Ideas” (2012), “The Theory of Monetary Institutions” (1999), “Free Banking in Britain” (2nd ed., 1995), and “Competition and Currency” (1989).

Wijewardene has been speaking on central bank independence in Sri Lanka long before it became a topic of wider discussion, but also on accountability.

In April, a Central Bank Independence and Other Matters, which includes a collection of his orations on the subject over the years as well a recent development was published.

The discussion comes as independent central banks in the West have created the worst inflation since the 1970s and early 1980s and are apparently unaccountable to parliaments and the public.

The early 1980s also saw the first wave of external debt crises in so-called soft-pegged countries in Latin America and Eastern Europe in particular as the US and UK tightened policy to end the Great Inflation.

The discussion will be held at 7.00 pm at the Lakmahal Community Library and those interested can register online, the organizers said. (Colombo/May30/2023)

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Sri Lanka teachers withdraw from A/L paper marking again over unresolved payments

ECONOMYNEXT – Paper marking of GCE Advanced Level exam has been delayed again as teachers withdrew from duties after Sri Lankan government failed to pay the promised allowances, All Ceylon Teachers Union said.

Teachers were promised an allowance of 15,000 rupees, however, the Union complained that only 10,000 rupee was given by the government for the teachers who have been involved in paper correction in over 30 centers across the country.

“As many teachers are stationed in examination centres away from their home towns, the government promised a 15,000-rupee allowance for these teachers,” Joseph Stalin, the Secretary of the All Ceylon Teacher’s Union, told EconomyNext.

“However, due to the constraints imposed by the dwindling treasury, the examinations department states they can only pay 10,000 rupees. This is insufficient to cover the teacher’s expenses and has led to protests.”

Meanwhile, upon inquiry denying the allegations, the Examination Commissioner Amith Jayasundara said, allowance was specified earlier.

“There was no such promise of a 15,000 rupee advance,” Jayasundara told EconomyNext.

“This was merely a consideration that was discarded after consulting the financial regulations. We have decided on a performance-based pay system with 10,000 rupees being paid after five days of paper marking.” (Colombo/May 29/2023)

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