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Sunday March 26th, 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 seeks to settle India ACU debt, credit lines over 5-years

ECONOMYNEXT – Sri Lanka has requested India to settle payments due to the country under the Asian Clearing Union mechanism and credit lines given in 2022 over 5 years, Indrajit Coomaraswamy, an advisor the island’s government said.

Sri Lanka is negotiating with India to settle the money over a 5-year period, Coomaraswamy, a former central bank governor told an online forum hosted by the Central Bank.

“Our request from the Indians is to settle it over five years,” he said. “That I think is still in the early stages of negotiation. The same with the one billion line of credit.”

Sri Lanka’s central bank owed the ACU 2.0 billion US dollars to the Asian Clearing Union according to a year end debt statement, issued by the Finance Ministry.

Sri Lanka owned India, 1,621 million dollars according to ACU data by year end, excluding interest.

India has given a 1 billion US dollar credit line to Sri Lanka as well a credit line for petroleum.

Sri Lanka in March 2024 has paid 121 million US dollar out of a 331 million US dollar IMF tranche to settle an Indian credit line.

Indian credits were given after the country defaulted in April 2022 as budget support/import when most other bilateral lenders halted giving money. (Colombo/Mar26/2023)

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Sri Lanka coconut auction prices up 1.16-pct

ECONOMYNEXT- Sri Lanka’s coconut auction prices went up by 1.16 percent from a week ago at an auction on Thursday, data showed.

The average price for 1,000 nuts grew to 83,219.45 from 82,260.58 a week earlier at the weekly auction conducted by Sri Lanka’s Coconut Development Authority on March 23.

The highest price was 92,500 rupees for 1,000 nuts up from the previous week’s 90,600 rupees, while the lowest was 76,500 also up from 70,000 rupees.

The auction offered 900,010 coconuts and 583,291 nuts were sold. (Colombo/Mar 26/2023)

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Sri Lanka in talks for billion dollar equivalent Indian rupee swap

ECONOMYNEXT – Sri Lanka is in talks with India for a billion US dollar equivalent Indian rupee central bank swap, to facilitate trade, Indrajit Coomaraswamy, ad advisor to the government said.

“The amount is still uncertain it could be up to the equivalent of a billion US dollars,” Coomaraswamy told an online forum hosted by Sri Lanka’s central bank.

The money will be used to facilate India Sri Lanka trade, he said.

India has been trying to popularize the use of Indian rupees for external trade and also encouraged Sri Lanka banks to set up Indian rupee VOSTRO accounts.

However the first step in popularizing a currency for external trade is to get domestic agents, especially exporters, to accept their own currency for trade, like in the case of the US or EU, analysts say.

India’s billion US dollar credit to Sri Lanka given during the 2022 crisis is settled in Indian rupees (transaction need).

However the Indian government itself has chosen to denominate it in US currency for debt purposes (future value).

In most South Asian nations, receivers of remittances are willing to accept domestic currencies, leading to active VOSTRO account transactions.

Sri Lanka is expected to repay a 400 million US dollar swap with the Reserve Bank of India next year under an International Monetary Fund backed program for external stability and debt re-structuring.

Central bank swap proceeds sold to banks, which are then sterilized with inflationary open market operations, can trigger forex shortages and currency crises, analysts warn.

Sri Lanka went to the International Monetary Fund after two years of inflationary monetary operations by the central bank’s issue department (money printed to suppress interest rates) triggered the biggest currency crisis in its history and external sovereign default.

Sri Lanka had gone to the IMF 16 times with similar external troubles except for the April 2003 extended fund facility under Central Bank Governor A S Jayewardene which was a purely reform-oriented program with the World Bank (PRGF/PRSP) program at a time when he was collecting reserves with deflationary monetary policy and perhaps the lowest inflation since the Bretton Woods collapsed. (Colombo/Mar26/2023)

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