An Echelon Media Company
Monday February 6th, 2023

IMF cautions Maldives on money printing to stop rufiyaa fall as Sri Lanka wobbles

ECONOMYNEXT – Maldives should not print money if they wanted to maintain their rufiyaa peg at 15.4 to the US dollar and try to raise funds from bonds and curtail capital spending, the International Monetary Fund has said as Sri Lanka struggles.

Maldives, which is dependent on tourism revenues was badly hit by Coronavirus and their economy contracted 32 percent in 2020, but is expected to grow by 18.9 percent in 2021.

However with the pandemic, the Central Bank had bought Treasury bills, triggering a parallel exchange rate from the demand created.

IMF’s Executive Directors “cautioned against central bank financing of the government and encouraged developing a comprehensive debt management strategy, coupled with public financial management reforms, to manage the risks from large infrastructure projects and state-owned enterprises.

“Directors agreed that a tighter monetary policy stance may be needed to ensure compatibility with the exchange rate peg, lower external imbalances and build up reserves.”

Sri Lanka has been printing money from around the third quarter of 2014 and has only had stability in the external sector in 2017 and up to around July 2019 in the last 7 years contributing to a sharp rise in market debt and possible sovereign default.

Maldives was a stable country until highly volatile income tax replaced a previous stable bed tax and civil service salaries were raised for vote buying with the demise of Mahathir Mohammed.

He had the benefit of the Maldives Monetary Authority which does not usually print money and has no “modernized ” open market operations to bust the peg and has the strongest currency on an absolute basis in South Asia and the country has the highest per capita income.

IMF usually descends into Mercantilism and encourages ‘competitive’ exchange rates and the attendant high inflation and social unrest for central banks with active open market operations and inflating currencies.

Tourism has started to recover with growth projected at 19 percent in 2021. Inflation is expected to be 1.4 percent and set to increase to 2.3 percent in 2022 with high commodity and food prices.

Washington has been pushing countries to adopt income tax for years and Western agencies have been also pushing GCC countries and targeting tax havens through which large volumes of money were channeled as foreign direct investments.

This week a deal was reached for a 15 percent minimum corporate tax rate as a group journalists, who have been periodically targeting tax havens, released the latest findings.

But now it is trying hard to avoid sovereign default.

In addition to the income tax problem, the Maldives had taken large loans including from China to build infrastructure and also has a 200 million dollar international sovereign bond, which has been re-financed with a Sukuk.

“Nonetheless, fiscal and external positions are projected to remain weak over the medium term, underpinned by capital expenditure plans,” the statement said.

“The Maldives remains at a high risk of external debt distress and a high overall risk of debt distress.

“The total public and publicly guaranteed (PPG) debt-to-GDP ratio increased from 78 percent in 2019 to 146 percent in 2020, reflecting mostly the contraction in nominal GDP, but also an expansion in nominal debt.

“PPG debt is projected at 123 percent of GDP in 2026.” (Colombo/Oct08/2021)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Sri Lanka’s banks may have to re-structure loans caught in progressive tax

ECONOMYNEXT – Sri Lanka’s banks should explore restructuring loans of salaried employees hit by progressive tax, Central Bank Governor Nandalal Weerasinghe said as progressive income taxes were imposed at lower thresholds amid high inflation following a sovereign default.

There have been complaints mainly by picketing state enterprise executives and also other workers of such agencies such Sri Lanka Port Authority that high progressive taxes were putting their bank accounts into overdraft after loan installments were cut.

“Yes, they have mentioned that,” Governor Weerasinghe said responding to questions from reporters.

“We have told the banks earlier as well. Because the interest rates are high and their business being reduced, the SME sector, the repaying capability has reduced.

“We have told them to explore their repaying capabilities and restructure their loans in order to safe guard both sides. At this time also we are asking the banks to do that.”

In the case of some state enterprises, the Pay-As-You-Earn tax, through which income tax is deducted from salaried employees in the past was not paid by the employee but the SOE.

Bad loans of the banking system overall had risen after the rupee collapsed, reducing the spending power in the economy, while rates also went up as money printing was scaled back, foreign funding stopped and the budget deficit widened.

The rate hike has prevented possible hyperinflation and a bigger implosion of the economy by stabilizing the external sector in the wake of previous mis-targeting of interest rates.

In the current currency crisis a delay in an IMF program due to China not giving debt assurances as well as fears of domestic debt re-structure has kept interest rates elevated.

Sri Lanka’s economic bureaucrats in 2020 cut taxes and also printed money, in a classic ‘Barber Boom’ style tactic implemented by UK economists and Chancellor Anthony Barber in 1971 to boost growth and employment.

The ‘Barber Boom’ ended in a currency crisis (at the time the UK did not have a floating rate and the Bretton Woods system was just starting to collapse under policies of Fed economists) and inflation of around 25 percent in the UK.

The UK implemented a three-day working week to conserve energy after stimulus while Sri Lanka saw widespread power cuts as forex shortages hit.

Read more:

Anthony Barber budget of 1971

Anthony Barber budget of 1972

Similar policies saw a worldwide revival as the US Fed economists injected money during the Covid crisis mis-using monetary policy to counter a real economic shock and boost employment while the government gave stimulus checques.

Now the world is facing an output shock as a hangover the Covid pandemic recedes.

The re-introduction of progressive tax at a maximum rate of 36 percent while tax brackets high jumped with the rupee collapsing from 200 to 360 to the US dollar had reduced disposable incomes further.

Salaries employees were encouraged to get loans in 2020 with the central bank mandating a 7 percent ceiling rate for five years.

However, any borrower who got loans on floating rates long before the scheme are now facing higher rates. (Colombo/Feb06/2023)

Continue Reading

Sri Lanka to address SME tax problems at first opportunity: State Minister

ECONOMYNEXT – Problems faced by Sri Lanka’s small and medium enterprises from recent tax changes will be addressed at the first opportunity, State Minister for Finance Ranjith Siyambalapitiya said.

Business chambers had raised questions about hikes in Value Added Tax, Corporate Income Tax and the Social Security Contribution Levy (SSCL) that’s been imposed.

It should be explored on how to amend the Inland Revenue Act, Siyamabalapitiya said, adding that the future months should be considered as a period where the country is being stabilized.

Both the VAT and SSCL are effectively paid by customers, but the SSCL is a cascading tax that makes running businesses difficult.

In Sri Lanka SMEs make up a large part of the economy, accounting for 80 per cent of all businesses according to according to the island’s National Human Resources and Employment Policy.

(Colombo/ Feb 05/2023)

Continue Reading

Sri Lanka revenues Rs158.7bn in Jan 2023 up 51-pct

ECONOMYNEXT – Sri Lanka’s government revenues were 158.7 billion rupees in January 2023 but expenditure and debt service remained high, Cabinet spokesman Minister Bandula Gunawardana said.

In January 2022 total revenues were Rs104.5 billion according to central bank data.

Sri Lanka’s tax revenues have risen sharply amid an inflationary blow off which had boosted nominal GDP while President Ranil Wickremesinghe has also raised taxes.

Departing from a previous strategy advocated by the IMF expanding the state and not cutting expenses, called revenue based fiscal consolidation, he is attempting to do classical fiscal consolidation with spending restraint.

President Ranil Wickremesinghe has presented a note to cabinet requesting state expenditure to be controlled, Gunawardana told reporters.

State Salaries cost 87.4 billion rupees.

Pensions and income supplements (Samurdhi program) were29.5 billion rupees.

Other expenses were 10.8 billion rupees.

Capital spending was   21 billion rupees.

Debt service was 377.6 billion rupees for January which has to be done with borrowings from Treasury bills, bonds and a central bank provisional advance of 100 billion rupees, Gunawardana said.

Interest costs were not separately given. (Colombo/Feb05/2023)

Continue Reading