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Thursday June 8th, 2023

Human Rights Watch sceptical of Sri Lanka IMF deal, warns of rights erosion

ECONOMYNEXT – Presenting a not-overly-optimistic outlook on Sri Lanka’s latest International Monetary Fund (IMF) programme, Human Rights Watch has called for policies that don’t further erode economic and social rights, days after Amnesty International expressed similar sentiments.

In a statement titled ​​’Sri Lanka: IMF Loan Risks Eroding Rights’, HRW said on March 30 that the IMF could use findings of the international lender’s governance diagnostic for the island nation in terms of anti-corruption measures to “set conditions later in the loan programme”.

HRW said that Sri Lanka should ensure that anti-corruption reforms provide accountability.

“Official corruption and tax rules that benefitted the wealthiest were key drivers of Sri Lanka’s economic crisis, for which Sri Lankans struggling to make ends meet should not have to carry the burden,” HRW South Asia director Meenakshi Ganguly was quoted as saying in the statement.

“The government should recognise that the public deserves real accountability, whether it’s for past war crimes or ongoing misgovernance and repression of critics,” she said.

Experts have blamed Sri Lanka’s latest currency crisis, the worst in decades, on several factors including excess money printing, misplaced subsidies that don’t go to the deserving, gross mismanagement and ill-considered state participation in the economy at a colossal cost to the state coffers.

Acknowledging that the IMF loan is intended to provide the country with a lifeline while addressing deep-seated problems that contributed to the crisis, HRW said that under international law, governments and financial institutions have an obligation to respond to economic crises in a way that advances rather than further jeopardises human rights, and should avoid pursuing policies that reduce low-income people’s access to essential goods and services.

“Currently, the IMF programme’s anti-corruption measures are centred on the government passing legislation in line with the United Nations Convention Against Corruption and the IMF carrying out a governance diagnostic that assesses Sri Lanka’s strengths and weaknesses in six areas, including the rule of law and fiscal governance. The conclusions could be used to set conditions later in the loan programme,” the IMF said.

For the analysis to be effective, civil society should play a prominent role, the international nongovernmental organisation said.

“Subsequent anti-corruption reforms should ensure that the government enforces its rules and holds corrupt officials and private businesspeople to account, including for past malfeasance. These efforts should include recovering stolen assets, imposing back pay and penalties for tax evasion, and stemming illicit financial flows out of the country,” it said.

The IMFprogramme’s focus on increasing government revenues, rather than reducing public spending as a percentage of Gross Domestic Product (GDP), will better protect rights, the organisation noted.

“When the crisis began, Sri Lanka had among the world’s lowest tax-to-GDP ratios at 7.3 percent. That ratio is expected to nearly double to 14 percent of GDP. However, while some of the new measures are designed to increase taxes on the wealthy and eliminate tax exemptions that benefit them, the heavy reliance on value-added taxes can worsen the cost-of-living crisis,” it said.

Sri Lanka’s trade unions affiliated with leftist parties and a number of professional associations have demanded that the government reverse an IMF-backed progressive income tax hike on the country’s highest earners. The government has so far not given in to the demand but has said more acceptable tax rates can be discussed in six months’ time when the IMF deal comes up for review.

“The programme reduces the threshold for taxing annual income to 1.2 million rupees (3,694 US dollars), a change that some have protested as burdening families who are already struggling to realise their rights. The government should publish data on the percentage of the population that is subject to income taxes under this change. It should also consider advancing the introduction of taxes on property, gifts, and inheritance, which the programme mandates by 2025,” the HRW statement said.

“The government has already increased corporate tax rates and removed all sector-specific tax exemptions, according to the IMF staff report. But most new tax revenue will come from value-added taxes (VAT), which were raised from 8 to 12 percent in May 2022 and again to 15 percent in September. Basic food items remain exempt from VAT, but the government committed to VAT reform by 2024 that would remove “almost all” product-specific exemptions,” it added.

HRW claimed that the programme includes other measures that could harm low-income people.

“Public services are central to delivering rights and are an important source of employment. The programme calls for keeping any increase in public wages to less than inflation, effectively reducing real salaries, and reducing total spending on wages from 5 to 3.6 percent of GDP. It also eliminates subsidies for both fuel and electricity and imposes an excise tax on fuel, but does not ensure that these critical measures are carried out in a way that fulfills rather than erodes rights. To protect rights when removing subsidies and introducing taxes for fossil fuels, the government should adequately invest in social protection, the use of renewable energy sources, and other measures to move toward a rights-aligned economy.”

HRW also questioned the adequacy of a social spending floor prescribed by the IMF that would “gradually raise” spending on four cash transfer programmes to help cushion the potential impact of macroeconomic adjustment on the poor and vulnerable groups.

“Recognising the pervasive flaws in the country’s targeted cash transfer programmes, it also mandates overhauling eligibility criteria in partnership with the World Bank to make them ‘based on objective and verifiable characteristics of households,’ and notes the government is working with the World Bank on a new electronic registry for selecting beneficiaries.

“While the floor brings up total spending on these programs to 0.6 percent of GDP, it is set at far less than developing countries’ average spending on safety nets, which is 1.6 percent.

“Furthermore, the insistence on targeting benefits based on eligibility criteria also risks continuing to exclude people who are unable to access goods and services essential for an adequate standard of living. The details of the new eligibility criteria and electronic registry have not been made public, but research has shown pervasive problems with targeting benefits, including high error and exclusion rates.”

For example, a proposal to use electricity consumption as a proxy measure – to overcome the lack of data on household income as well as the risk of corruption in selecting beneficiaries – would leave out about 35 percent of the bottom half of the population, HRW said. Because current beneficiaries who are ineligible under the new criteria would be removed by January 2024, this could mean people losing benefits they are currently receiving, it added.

“Contrary to this approach, the IMF’s technical note on social safety nets advises that in countries with “low administrative capacity” efforts should focus on enhancing tax capacity to ‘claw back’ benefits from high-income households, rather than lowering benefits or excluding low-income beneficiaries.

“When half of Sri Lankan families are buying food on credit, it’s not the time to experiment with fixing chronic and pervasive problems with targeted cash transfer programmes,” said Ganguly. “Instead of investing precious funds in new registries, the government’s focus should be on building a tax system that makes sure the wealthy pay their fair share.”

The HRW’s less than optimistic outlook on what is now Sri Lanka’s 17th IMF programme came two days after a visiting top Amnesty International official said he planned to meet IMF representatives in Colombo to discuss the socioeconomic implications of the deal.

Speaking to EconomyNext on the sidelines of Amnesty’s South Asia regional launch of its State of Human Rights Report for 2022/2023 in Colombo, Muchena said on Tuesday March 29 that he would be meeting IMF officials this week to better understand the 2.9 billion dollar extended fund facility (EFF).


Top Amnesty International official to meet IMF representatives on Sri Lanka deal


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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed as deflationary policy and weak credit reduced ‘above the line’ outflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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