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Monday February 6th, 2023

Looming global recession threatens dollar earning of Sri Lanka’s top exports

ECONOMYNEXT – A looming recession in Sri Lanka’s main export markets is threatening the island nation’s top export garment sector as orders have slowed down significantly from January next year, government and industry officials said.

The dip could slow down Sri Lanka’s efforts to move out of the unprecedented economic crisis resulted after failed economic policies and heavy money printing under previous President Gotabaya Rajapaksa.

The apparel industry accounts for nearly half of the island nation’s total export earnings. Textiles and garments contributed $5.4 billion last year out of the total annual $9.7 billion export earnings. Apparel exports have accounted for 57 percent of export earnings of $8 billion in the first nine months of this year.

“Normally, we receive apparel orders six months ahead of time. Now we have not received the orders as they already have stocks with them and they don’t have storage facilities,” Indumini Kodikara, Export Services Director, Export Development Board (EDP), told EconomyNext.

“In the next six months, there will be a very low amount of orders.”

The world’s leading economies are sliding into recession as the global energy and inflation crises sparked by Russia’s invasion of Ukraine cut growth by more than what was previously forecasted.

The Joint Apparel Association Forum (JAAF) admitted that the industry has started to see a decline in export orders.

“We are projecting over the next two-three months we will see a drop of 25-30 percent in the order volumes”, JAFF Secretary General Yohan Lawrance told EconomyNext adding that a drop has already been experienced in October.

EDB’s Acting Director of Industrial Products Manoja Dissanayake said the country has seen a decline in some other exports as well.

Sri Lanka has so far seen over $1 billion in monthly export earnings almost throughout this year as the country depreciated the rupee currency by over 50 percent in the last eight months.

Some exporters predict a slowing down of exports from December as the government has raised tax rates. However, the government has said it had not taxed exports.

As a result of the disruption caused by Russia’s invasion of Ukraine, Sri Lanka’s traditional markets such as Europe and USA have been reducing exports amid tightening monetary policy to curb increasing inflation.

Sri Lanka is forced to push itself to look into alternate markets such as India, Russia, Taiwan, and regional countries such as Malaysia and Singapore to boost its exports with or without free trade agreements. (Colombo/Nov23/2022)

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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)

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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)

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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)

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