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Monday June 24th, 2024

Sri Lanka battered by unceasing ‘regime uncertainty: Bellwether

GREAT INTERVENTIONS: Many interventions that follow episodes of monetary instability were first implemented during the Great Depression, which came after the ‘Roaring 20s’ bubble of the Federal Reserve burst.

ECONOMYNEXT – When the government changes ground rules and conditions or the operating regime suddenly, like in Sri Lanka, it is very difficult for ordinary people or businesses to operate and survive.

Countries that suddenly up-ends policies cannot grow fast and their people would be poor.

Sri Lanka can change taxes suddenly without going to parliament and debating about it. While cutting taxes may increase the freedom of citizens, certainly raising taxes doesn’t.

Uncertainty is not just in taxes. Virtually no certainty can be given about any policy, tax or any other rule, or its continuity, in countries like Sri Lanka.

Fluid Regime

Sri Lanka has a habit of suddenly raising import duties by midnight gazette.

Markets have all kinds of uncertainties.

But when governments add to this uncertainty, individuals and businesses in that country have to bear higher risks than a person or enterprise in countries with stable policies.

Such countries will lag behind, relative to others were individuals and businesses face no such risks.

In 2015 there was an outcry by people who had ordered cars after taxes were suddenly raised when the car had already arrived in the country. In Sri Lanka cars are expensive. If a person is suddenly asked to fork out a million rupees extra, they will fall in to extreme difficulty.

Then a policy was evolved that cars already ordered would be allowed to be imported at the old tax rate if the letter of credit was opened before the tax was announced.

Pettah traders face this problem often. When they go the port to clear a consignment in the morning, they suddenly find, that taxes have been raised or cut.

While a duty cut can be said to be beneficial, it can also cause losses because the value of all existing stocks fall. The man who cleared a stock the day before will face a substantial loss.

Executive Power, Royal Prerogative

It was sudden tax hikes that led to the Magna Carta being drawn by English Barons that eventually paved the way to moderating executive power and the creation of a parliament. In Sri Lanka laws were announced by Ana Bera before being implemented under ancient Kings.

But since independence, laws are implemented before the Government Gazette, started by the British, is even seen by the people. No time is given before a new law is implemented.

President Gotabaya Rajapaksa suddenly ordered by decree that plantations sector wages would be raised to 1,000 rupees, while a collective agreement was in force. An unexpected wage hike suddenly hit plantations companies which were already facing low global tea prices.

Any enforced wage hikes ends up expropriating the cashflows of a company, like a new tax imposed to finance a subsidy.

Before 2015, personal income taxes were brought down to 16 percent rate by a previous regime as part of efforts to create a competitive playing field for a highly skilled services-based economy.

It was suddenly changed to a progressive tax rate with the highest rate at 24 percent by the last administration under an International Monetary Fund program.

Personal income tax has now been brought back down to 18 percent – without going to parliament. The PAYE tax threshold has also been raised – without going to parliament. Value-added taxes have been cut from 15 to 8 percent – without going to parliament.

This may increase the freedom of citizens, but with budget deficit expected to grow, it has generated more uncertainty over interest rates, exchange rates and economic stability itself.

European-style governments – which Sri Lanka became under British rule – publish budgets to give certainty, recognising that government taxes and spending are a source of instability as the single largest player in an economy with coercive power.

More than the income tax, the VAT cut has fundamentally altered the 2020 mini-budget up to April, which has already been presented and ratified in parliament.

Monetary Instability

The taxes were cut as a ‘stimulus’ after economic growth slowed in the wake of a currency collapse in 2018.

What happens to car taxes from time to time is symptomatic of the overall problems facing Sri Lanka.

Sri Lanka’s car taxes are suddenly jacked up usually ‘to reduce imports’ after the central bank generates pressure on the currency by printing money to reduce short term interest rates.

In countries with monetary stability, such changes do not occur.

Government policies, involving ‘stimulus’ and other interventions that change the operating regime, also rapidly increase after a currency, credit and economic collapses, delaying a eventual recoveries by heaping more uncertainty and risks.

This shows that monetary instability and overall policy instability is closely connected. In 2018 rates cuts and injections from April, plunged the country into a new currency crisis, as it was recovering from an earlier one, triggering two busts in a row.

That is the cost of sacrificing stability for monetary stimulus.

Now banks are being asked to give debt moratoriums, reduce credit standards by ignoring credit information bureau data.

The list of interventions can go on.

The entire misguided approach dates back to the Great Depression in particular and Keynesianism in general.

During the Great Depression, the US rapidly expanded both the sizes and scope of government, by creating new agencies at a rate never before seen, which increased the burden of the state on the public on top of the economic downturn.

New Dealers in the US, in particular, created many new interventions after the Great Depression, in two episodes (the first and second New Deals) generating uncertainty for businesses to invest, and busting the first recovery.

Regime Uncertainty

Economists called this fluid and operating environment, Regime Uncertainty.

In Sri Lanka regime uncertainty is ever-present, with or without an economic collapse.

But most ‘developed countries’ have lower levels of regime uncertainty and more certain policy for several years. A key reason for their prosperity is the lack of regime uncertainty.

When developed countries change policies suddenly or adopt policies like those in Sri Lanka, their effects have also been devastating.

Britain became a shadow of its former self after World War II, pursuing Keynesian interventionist policies and socialist expropriation.

But Germany and Japan, which were occupied by the US, and the American military allowed German-like policies to be followed, zoomed head.

Hong Kong, which also eschewed stimulus through its ‘positive non-interventionism’, placed stability before interventions and stimulus, allowing it to power ahead. (Lessons for Sri Lanka from Hong Kong’s positive non-intervention: Bellwether)

America’s economy is now being buffeted by President Trump’s antics, though his party is for low direct taxes and de-regulation. But his capricious policies will reduce the benefits of the better ones.

The US was also severely hit by policy instability during the Great Depression.

The term ‘Regime Uncertainty’ was used by Robert Higgs, an economist who tried to find out why the US, which was recovering from the Great Depression, suddenly slumped with private investment again collapsing under Roosevelt’s New Deal.

Policy uncertainty is linked to business confidence, and property rights.

“To narrow the concept of business confidence, I adopt the interpretation that business people may be more or less “uncertain about the regime,” by which I mean, distressed that investors’ private property rights in their capital and the income it yields will be attenuated further by government action,” explains Higgs.

“Such attenuations can arise from many sources, ranging from simple tax-rate increases to the imposition of new kinds of taxes to outright confiscation of private property.

“Many intermediate threats can arise from various sorts of regulation, for instance, of securities markets, labour markets, and product markets.

“In any event, the security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens presumptive rights.”


In Sri Lanka, the threat of expropriation is ever-present.

Expropriation can be outright – like the nationalisation of businesses, land reform or the Rajapaksa expropriation act.

Indirectly private property can be expropriated through high taxes, price controls or mandated wage hikes.

Under the last UNP administration, with an International Monetary Fund program, all sorts of new taxes were slapped by politicians who originally said they were coming to reduce the total number of taxes.

There were also retrospective taxes.

Higgs pointed out that economist like Joseph Schumpeter and many others had also pointed to the problem created by new laws and controls by New Dealer Keynesians.

“The subnormal recovery to 1935, the subnormal prosperity to 1937 and the slump after that are easily accounted for by the difficulties incident to the adaptation to a new fiscal policy, new labour legislation and a general change in the attitude of the government to private enterprise…” Schumpeter had said of the Great Depression.

“I for one do not see how it would otherwise be possible to account for the fact that this country which had the best chance of recovering quickly was precisely the one to experience the most unsatisfactory recovery.”

New Dealers also busted the US dollar from 22 to 35 dollars an ounce and prohibited US citizens from holding gold, much like present day central banks prohibit citizens from holding foreign exchange in the un-backed paper money era through exchange control laws.

After accepting his party’s nomination for the presidency in 1936, Roosevelt had blasted “economic royalists” allegedly seeking a “new industrial dictatorship”.

Former Prime Minister Ranil Wickremesinghe also blasted big businessmen, who had previously backed the Rajapaksa regime.

Under Wickremesinghe price controls were imposed money was effectively expropriated from diary and gas companies. An entirely new price control agency was established for pharmaceuticals.

Higgs says Roosevelt later changed new Dealer interventionists in government as the US entered the war, replacing them with private sector people to get the production machinery geared to arms and other military needs.

During the war, private investment was not very high. The real prosperity (called the Great Escape) happened after the War, Higgs says.

“…[G]iven the unparalleled outpouring of business-threatening laws, regulations, and court decisions, the oft-stated hostility of President Roosevelt and his lieutenants toward investors as a class, and the character of the anti-business zealots who composed the strategists and administrators of the New Deal from 1935 to 1941, the political climate could hardly have failed to discourage some investors from making fresh long-term commitments.”

After the war, the economy took off, in the ‘Great Escape’ despite many Keynesians forecasting that the depression would return.

Same Old, Same Old

The current administration is perceived as being more business-friendly. But midnight gazettes, sudden import bans, price controls are continuing unabated.

The last administration also expropriated depositors, first by depreciating the currency and then by slapping price controls on deposits.

Economist Steve Hanke calls the tendency to intervene and expand the government in the wake of a downturn the Law of the Ratchet.

Interventions and new government programs are ratcheted up after a downturn, and new agencies are created.

The public service is going to be expanded by 10 percent, with 100,000 ill-educated persons who had passed 8th grade and 50,000 graduates who are ill-suited for productive work and cannot get jobs being absorbed and to be paid by taxpayers to ‘reduce poverty’.

The interventions that were created during the Depression (like farm subsidies) could never be could not be reversed fully. In fact they were adopted by other countries, creating problems and distortions in those countries. The agencies that are created will find reasons to exist.

The uncertainty from budgets is also very present. As the Great Depression showed, monetary instability is a great driver of state interventions and stimulus.

There is also no real prospect of monetary instability ending either.

Under ‘flexible’ inflation targeting, there is a high degree of bureaucratic discretion. In January the central bank cut rates as inflation was spiking up and the threat of a higher deficit.

Executive Power

Most of Sri Lanka’s nationalism and state interventionism is copied from Europe.

Sri Lanka’s ancient rulers never engaged in such tactics. They also did not have the tool – the police, the jails, customs department or inland revenue – income tax itself is a new phenomenon – to effectively enforce controls on economic players like modern governments do.

Under Roosevelt Presidential power was increased, to a level not seen before and allowing him to generate uncertainty, though he was partly thwarted.

In 1937 and 1938 Roosevelt tried to pass a new law to give more powers to the executive branch in what critics described as an attempt by a would-be dictator “to subvert democratic institutions” by “importing European totalitarianism into the United States”, Higgs says, including the creation of a National Planning Board.

In India the National Planning Commission, which created much of the havoc in the Nehru Era 5-year plans, was finally abolished by Modi, after sitting around doing nothing much since the 1990s reforms that reduced the role of the state, allowing India to take off.

After Roosevelt’s bill was defeated, a watered-down replacement was passed in 1939, which gave more power to the President.

He used it to create the Executive Office of the President and the Office of Emergency Management. He was also accused of undermining the judiciary by so-called ‘court packing’.

It is through the Executive Office that President Trump now issues many controversial Executive Orders. Obama also issued several, many of which were uncontroversial.

Through his executive orders, Trump, a loose cannon and a nationalist, is creating Regime Uncertainty around the world, destabilizing the global economy.

In Sri Lanka, Regime Uncertainty is ever-present though a cyclical recovery is underway from the last balance of payments crisis.

On top of that, many policies are New Dealer-like in Sri Lanka, and have been for decades, which undermines both economic freedom and the rule of law. The threat of expropriation is ever present.

Monetary instability is always over the horizon with a soft-peg, threatening both the currency, which is the economic foundation of the poor, and debt repayment, regardless of the party or the leader in power.

This column is based on ‘The Price Signal by Bellwetherpublished in the February 2019 issue of the Echelon Magazine. To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here.

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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:


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…”


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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