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Sunday June 23rd, 2024

EXPLAINER: Implications of Modi’s narrow election victory for Sri Lanka

ECONOMYNEXT – Two-time Prime Minister Narendra Modi’s less-than-expected win at the India’s parliamentary election may not change its foreign policy towards Sri Lanka, but aggressive push for connectivity and infrastructure projects in the island nation could be slowed, analysts say.

Modi’s Bharatiya Janata Party (BJP) lost its outright majority in the election and found itself reliant on support from regional parties.

Broader coalition National Democratic Alliance (NDA) led by Modi’s Bharatiya Janata Party (BJP) won 293 seats in the 543-member lower house of parliament, where 272 constitutes a simple majority.

However, Modi’s BJP won only 240, less than outright majority, making two regional parties’ leaders kingmakers in the alliance with their 28 seats in total.

India has been pushing for land, oil, gas, and power grid connectivity in Sri Lanka along with securing lucrative renewable energy and port projects in partnership with Indian private sector.

Here are some Q & A on the implications of Modi’s small margin victory based on analysts’ responses:

Q: What will be the key changes in Indian foreign policy towards Sri Lanka?

A: Despite a reduced margin, Modi’s administration is expected to continue its robust engagement with Sri Lanka, focusing on economic and development initiatives. India has been a key supporter during Sri Lanka’s economic crisis, providing significant financial and humanitarian aid. Most analysts say India will have the same policies on Sri Lanka. It will push for projects that have already discussed, will maintain a tough stance on Chinese influence and ships in Sri Lanka, and help the island nation in building capacity of the public sector.

Some analysts said the winning margin is only an academic interest and Modi’s government will consolidate the power once he takes oath on Sunday (09).  However, they say, there could be a change the aggressiveness and intensity of Indian push on projects and other policies in Sri Lanka. The island nation is the only country which is now in good terms with India after Delhi’s diplomatic relations with Maldives took a hit following new President Mohamed Muizzu’s election with an “India Out” pledge, a move to oust Indian military from Maldivian soil. So, India may slow some of its hard push which has triggered anti-Indian sentiment in the recent past.

“India cannot afford to lose Sri Lanka after what happened in Maldives,” an analyst on diplomacy said.

“So it might soft peddle the policies and projects that are seen against Sri Lanka’s interests. Already we have seen a sudden rise in anti-Indian sentiment in the recent past with Indian firms trying to buy over Sri Lanka government institutions and other projects that are seen as exploitations.”

“India also may compromise on some of the deals in Sri Lanka which are seen as unfair by locals.”

Sri Lanka, however, is benefiting from increased Indian investment in various sectors, including energy and infrastructure. This ongoing support is crucial as Sri Lanka navigates its economic recovery and seeks to strengthen its regional ties, analysts say.

 

Q: Why has Sri Lanka become important for India?

A: Sri Lanka is located just below South India in the Indian Ocean. India in the past had been concerned over its security which could be affected by Sri Lanka’s foreign policy.

Analysts say these concerns pushed India to sign Indo-Lanka deal in 1987 which later saw the start of provincial and local government councils in the island nation along with close ties on matters related to the regional security.

India also has interests on Sri Lanka’s ethnic minority Tamils because of close cultural and religious ties to South India. After the end of a 26-year war in 2009, India has become more concerned over rising Chinese influence in Sri Lanka.

India has interests in strategic, economic, maritime security, cultural and historical ties, and diplomatic relations. These efforts are part of India’s broader policy to maintain regional stability and influence.

 

Q: What is India likely to do in Sri Lanka’s upcoming elections under the current Modi regime?

A: Analysts say Modi’s government, as in the past, wants to see a Sri Lankan government that would not go back close to China.

President Wickremesinghe congratulated Modi soon after his election victory and will take part in his oath taking on Sunday at 6 pm Indian Standard Time (IST).

“But it has been clear that President Ranil Wickremesinghe is not India’s first choice,” one analyst who has diplomatic experience told EconomyNext.

“India is always concerned over its security. So, it would like to see anybody who will protect its interests being elected.”

“India may not directly interfere or influence Sri Lanka’s election process for sure. But definitely it will have an indirect hand at some point.”

Indian High Commissioner Santhosh Jha has been actively meeting most Sri Lanka political leaders from both ruling and opposition parties almost on a weekly basis. Analysts see the move as a strategy to secure Indian interests regardless of the outcome of the upcoming elections.

Anura Kumara Dissanayake, leader of Sri Lanka’s populour Marxist Janatha Vimukthi Peramuna (JVP), was officially invited by India last year and his team was facilitated meetings with Indian Foreign Minister S. Jaishankar and National Security Advisor Ajit Doval.  The move is seen as an Indian tactic to engage with the pressure group which has always been against Indian projects, citing “Indian expansionism in Sri Lanka”.

 

Q: What happened to Indian foreign policy under Modi’s previous two terms?

A: India has been pro-active in its foreign policy under Modi’s previous two terms. Analysts say India’s strong influence in Sri Lanka has made regime change in the 2015 presidential poll after the previous regime led by former leader Mahinda Rajapaksa followed a strong pro-Chinese foreign policy while allowing Beijing’s nuclear submarines to be docked in Colombo port without Delhi’s permission.

Apart from its strong and consistent foreign policies, Modi also has spread Hindutva or Hinduness, a political ideology encompassing the cultural justification of Hindu nationalism and the belief in establishing Hindu hegemony, in Sri Lanka’s North and East. Analysts also said the island nation has seen “unprecedented interference” by India under Modi while protesting against all Chinese activities including commercial projects and exchange programs with state-owned universities in the island nation’s North and East.

Last year, Modi’s administration was able to successfully ban Chinese research vessels coming to Sri Lankan waters for research purposes, Colombo government officials say. The move has hurt Sri Lanka’s diplomatic relations with China after Colombo allowed a German research ship before President Ranil Wickremesinghe government clarified the ban.

India also has been focusing on changing its negative perception that has led to strong anti-Indian sentiment in Modi’s second term. Despite many helps, many Sri Lankans still have strong anti-Indian sentiments due to the past experiences in Indian diplomatic relations including helping Tamil youths to fight against the state military, providing weapon trainings in the initial stage of the civil war, and atrocities by Indian Peace Keeping Force (IPKF) in late 1980s. Many Sri Lankans also see India exploiting island nation’s valuable resources including oil tanks in the Eastern port district of Trincomalee.

Q: What is India’s contribution in Sri Lanka’s economic recovery?

A: Massive. It was India which came to help Sri Lanka when the International Monetary Fund (IMF) delayed its loan program to Sri Lanka. India granted $1 billion credit line to buy essentials and also extended some repayments to ease the island nation’s unprecedented economic crisis which saw queues for fuel, cooking gas, and medicines along with long power cuts. (Colombo/June 08/2024)

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Sri Lanka central bank appoints two Deputy Governors

ECONOMYNEXT – Sri Lanka’s central bank said Assistant Governors A A M Thassim and J P R Karunaratne were promoted to the post of Deputy Governor.

The full statement is reproduced below:

APPOINTMENT OF NEW DEPUTY GOVERNORS OF THE CENTRAL BANK OF SRI LANKA

In terms of the provisions in the Central Bank of Sri Lanka Act, No. 16 of 2023, Hon. Minister of Finance, as recommended by the Governing Board, has appointed Mr. A A M Thassim, Assistant Governor and Secretary to the Governing Board, and Mr. J P R Karunaratne, Assistant Governor, as Deputy Governors of the Central Bank of Sri Lanka with effect from 20.06.2024 and 24.06.2024, respectively.

Mr. A A M Thassim

Mr. A.A.M. Thassim has over 31 years of service at Central Bank of Sri Lanka (CBSL) in different capacities in the areas of Supervision and Regulation of Banking Institutions, International Operations, Communication, Payments and Settlements, Employees Provident Fund, Finance, Risk Management, Deposit Insurance, Security Services and Information Technology.

He has served as the Director of Bank Supervision (DBS), Director of International Operation (DIO) and Director of Communications (DCM) and has contributed towards strengthening the legal framework, governance, implementation the Basel 3 international guidelines for capital and liquidity and adoption of International Financial Reporting Standards (IFRS) 9 to the banking sector, thereby strengthening the resilience of the Financial Sector.

Further, as the DIO, Mr. Thassim was responsible for the investments and management of foreign reserves of the country and exchange rate management. Mr. Thassim has also gained experience and knowledge in the field of payment systems and was involved in the implementation of the Cheque Imaging and Truncation System. In addition, he has also served on several high-level internal committees including in the areas of monetary policy, financial system stability and international reserves.

Prior to the appointment as the Deputy Governor, Mr. Thassim held the position of Assistant Governor and was in charge of several key departments including the Bank Supervision Department. He also served as the Secretary to the Governing Board, Monetary Policy Board, Audit Committee, Board Risk Oversight Committee, Ethics Committee and Financial Sector Crisis Management Committee.

At present, Mr. Thassim is a board member of the Sri Lanka Export Credit Insurance Corporation and the Vice Chairman of the Institute of Bankers of Sri Lanka (IBSL). Further, he has also served as a board member of the Credit Information Bureau of Sri Lanka and LankaClear (Pvt) Ltd.,

Mr. Thassim is an Associate member of the Chartered Institute of Management Accountants (ACMA) United Kingdom and possesses a Masters in Business Administration (MBA) from the Postgraduate Institute of Management (PIM), University of Sri Jayewardenepura (USJ). He has also completed a programme on Gold Reserves Management from Hass School of Business, University of California, Berkeley, USA.

He is also an Alumni of Harvard University, USA having successfully completed the executive programme on Leaders in Development conducted by the John F. Kennedy School of Government.

Mr. J P R Karunaratne

Mr. J P R Karunaratne has over 33 years of service at the Central Bank of Sri Lanka in different capacities in the areas of supervision and regulation of Banks and Non-Bank financial institutions, Currency management, public debt, Secretariat, Finance, policy review and monitoring. He has served as the Director of Supervision of Non-Bank Financial Institutions (DSNBFI) and the Superintendent of Currency (SC) and has contributed towards strengthening the legal and regulatory framework in the Non-Bank Financial Institutions sector and has played a prominent role in the consolidation of the Non-Bank Financial Institutions sector. Prior to the appointment as a Deputy Governor, Mr. J P R Karunaratne held the position of Assistant Governor and was in-charge of the Department of Supervision of Non-Bank Financial Institutions, Finance Department and the Facilities Management Department.

As an Assistant Governor Mr. Karunaratne has previously overseen several other departments namely, Macroprudential Surveillance, Resolution and Enforcement, Foreign Exchange, Currency, Regional Development, Legal and Compliance, Risk Management, Center for Banking Studies, Security Services and Staff Services Management.

He has also served as the Secretary to the Monetary Board, Secretary to the Board Risk Oversight Committee, Monetary Board Advisory Audit Committee and the Ethics Committee. Further, He was on release to the Ministry of Defence, where he served as a Financial Advisor. He was also appointed as the Chief Operating Officer for the Secretariat of Committee of Chartered Accountants appointed by the Supreme Court in 2009.

He has served as the Chairman of the Sri Lanka Accounting and Auditing Standards Monitoring Board and has been a Council Member of the Certified Management Accountants (CMA) of Sri Lanka. Mr. Karunaratne was awarded the CMA Sri Lanka Business Excellence Award at the CMA Sri Lanka National Management Accounting Conference 2023 in recognition of his service to the profession. He has also received “Long Service Award” of the IBSL in 2019 in recognition of his long career and contribution as a resource person at IBSL.

He was the Project Team Leader of the South East Asian Central Banks (SEACEN) Malaysia, research project on “Implementation of Basel III Challenges and Opportunities in SEACEN Countries” and SEACEN published the research in 2013. He serves as a member of several internal and external committees at present.

Mr. Karunaratne holds a Master of Commerce Degree in Finance from the University of New South Wales, Australia and a Postgraduate Diploma in Applied Statistics and a Bachelor of Science (Physical Science) Degree with a First class from the University of Colombo. He is a Fellow Member of the Chartered Institute of Management Accountants (CIMA), UK and a Chartered Global Management Accountant (CGMA). Further, he is an Associate Member of the CMA Sri Lanka.

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Sri Lanka opposition questions claims that IMF housing tax is only for kulaks

ECONOMYNEXT – Sri Lanka’s opposition has questioned claims made by government spokesmen that a tax on housing proposed in an International Monetary Fund deal is only limited to rich people but if as promised by President one house is exempt, it is welcome, legislator Harsha de Silva said.

Sri Lanka President Ranil Wickremesinghe made a promise in parliament that the first house of a citizen will be excluded from the property tax.

Related Sri Lanka to exempt one house from imputed rent wealth tax: President

But opposition legislator Harsha de Silva pointed out that the IMF program documents clearly says taxes will be levied on owner occupied houses on ‘imputed taxes’, not second houses.

Under current inland revenue laws, actual rent income from a second house is already captured as part of taxable income.

The IMF document mentions a threshold value from which taxes will be exempt but not that a whole owner-occupied primary residence will be exempt.

“The tax is imposed on the income of individuals (rather than real property itself) and thus raises central government revenue in accordance with the constitution,” IMF staff said in their report.

“A similar tax was previously included in the Inland Revenue Act. No. 10 of 2006.

“Under this regime, primary residences were exempt and the assessed values for rating purposes were used to determine the base.

“Given the broad exemption and the use of outdated and downward biased annual values, the tax generated hardly any revenue.”

Meanwhile Sri Lanka has promised to impose the housing tax from April 01, 2025.

“…[W]e will introduce an imputed rental income tax on owner-occupied and vacant residential properties before the beginning of the tax year on April 1st, 2025,” the memorandum of economic policies agreed with the IMF said.

“An exemption threshold and a graduated tax rate schedule would make this tax highly progressive.

“The full revenue yield from this tax is estimated at 0.4 percent and would materialize in 2026 (with a partial yield of 0.15 percent in 2025).

“This yield would still fall short by 1 percent of GDP relative to the expected yield of 1.2 percent of GDP from the property tax envisaged for 2025 onwards.”

Presidential Undertaking

“Whatever the President said the IMF agreement says owner occupied house,” De Silva told in parliament.

“It is not the second house that is mentioned in the agreement.

“But there is one thing. I am happy as Samagi Jana Balawegaya, that we have been able to save the middle class in society from a massive tax that was to be imposed.”

In Sri Lanka there is a belief that the most productive citizens are fair game for excessive or expropriationary taxation, just like kulaks were targeted in the Soviet Union for actual expropriation, critics say.

Wealth taxes have had disastrous effects on some US cities like Baltimore, leading to falling populations and dilapidated houses.

Sri Lanka is currently facing a brain drain due to high income tax after on top of depreciation from severe monetary debasement from a flexible exchange rate, which is neither a hard peg nor a clean float.

Sri Lanka has imposed a wide range of taxes on the people to maintain a bloated state, after inflationists engaged in extreme macro-economic policy (tax and rate cuts) glorified in Saltwater-Cambridge doctrine to boost growth, throwing classical economic principles and monetary stability to the winds and driving the country into external default.

The IMF itself gave technical assistance the central bank to calculate potential output inviting the agency to cut rates to close the perceived econometric ‘output gap’.

In the run up to the default, rate cuts triggered multiple external crises, leading to output shocks as stabilization programs were implemented.

Macro-economic Policy

Macro-economic policy as known now was devised by Cambridge academic J M Keynes in the wake of the Great Depression triggered by the Federal Reserve after it invented open market operations and policy rates in the 1920s and also popularized by Harvard academic Alvin Hansen among others.

Macro-economic policy started to de-stabilize countries in peacetime in the interwar years and after World War II it led to the collapse of the Bretton Woods system.

The Great Depression was also a peacetime collapse of what was later known as the roaring 20s’ monetary bubble.

“They have blithely ignored the warnings of economists,” classical economist Ludwig von Mises wrote of European nations which got into trouble from rate cuts and Keynesian stimulus, which brought currency depreciation and protectionism in its wake from the 1930s.

“They have erected trade barriers, they have fostered credit expansion and an easy money policy, they have taken recourse to price control, to minimum wage rates, and to subsidies.

“They have transformed taxation into confiscation and expropriation; they have proclaimed heedless spending as the best method to increase wealth and welfare.

“But when the inevitable consequences of such policies, long before predicted by the economists, became more and more obvious, public opinion did not place the blame on these cherished policies…”

Who….?

In Sri Lanka however there is some understanding of the role played by macro-economists in the most recent crisis.

There are rumblings of unhappiness about ‘central bank independence’ given to an agency to create 5 to 7 percent inflation and currency debasement under a flexible exchange rate and its constitutional status relating to parliamentary control of public finances.

Sri Lanka’s central bank’s current flexible inflation targeting (inflation targeting without a floating rate) regime as well as its 1980s money supply targeting without floating rate has busted the national currency for decades and made it impossible to run budgets, made it difficult for people build houses which are now to be taxed, and also for millions to live and work in the country of their birth.

Fiscal metrics deteriorate each time rate cuts drive the country into currency crises and new taxes are brought in stabilization programs, ousting reformist governments and leading to policy reversals.

Sri Lanka’s citizens have suffered for decades from the privilege given to a few macroeconomists to print money to cut rates with inflationary open market operations and trigger forex shortages.

Related How Sri Lanka’s elections are decided by macro-economists and the IMF: Bellwether

Critics have pointed out that since 1954 in particular, central bank rates cuts which drive the country into external crises and the stabilization programs that follow, have been the main determinant of elections in the country and election of fringe political parties. (Colombo/June13/2024)

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India supports Sri Lanka Coast Guard to boost maritime security

ECONOMYNEXT – India has given 1.2 million US dollars’ worth spare parts to Sri Lanka’s Coast Guard to be used in a vessel also gifted to the Indian Ocean Island on an earlier occasion, the Indian High Commission in Colombo said.

“Handing over of the large consignment of spares symbolizes India’s commitment to support capability building towards addressing the shared challenges of Maritime Security in the region,” the Indian High Commission said

The spare parts were brought to Sri Lanka on the Indian Coast Guard Ship Sachet, an offshore patrol vessel that was on a two-day visit to the island.

The spares were formally handed over to the Sri Lanka Coast Guard Ship Suraksha which was gifted to Sri Lanka in October 2017 by India.

India has gifted spare parts for the ship in June 2021 and April 2022 and also provided assistance in refilling of Halon cylinders in January 2024. (Colombo/June23/2024)

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