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Tuesday April 23rd, 2024

Sri Lanka has little tax money left after paying state workers, economy in historic crisis: Bandula

ECONOMYNEXT – Sri Lanka is in the biggest economic crisis after independence from British rule and there was hardly any tax money left for other expenses after paying state workers, Trade Minister Bandula Gunewardene said.

“In 2020 the revenue of the government was 1,373 billion rupees,” he told parliament. “To pay the salaries of state workers 794 billion rupees are used. To pay pensions another 258 billion rupees are spent.

“To pay salaries and pensions only 1,052 billion rupees have been spent. To government’s total revenue is 1,373. It is with these taxes that state workers and paid salaries.

“So to pay interest on loans interest was 980 billion rupees, subsidies and transfers were 717 billion.

“When 1,052 billion rupees out of the 1,373 billion in revenues go to pay salaries and pensions of state workers only 321 billion rupees is left.”

The elected ruling class gets lifetime pensions after five years in office and so do a few personal staff. Members of parliament usually appoint their wives or family members as personal secretary and similar position to get the pension.

JVP State Expansionist Counter Revolution

Sri Lanka started expanding the state worker cadre after the Janatha Vimukthi Peramuna led a counter-revolution against privatization and spending controls, brought by two administrations from 1995 to 2004 and wanted unemployed graduates to be given jobs and lifetime pensions.

JVP lambasted spending cuts as ‘rajya sevaya kappadu kireemer’ and privatization of state enterprises as ‘selling national assets’

Then opposition legislator Mangala Samaraweera, advocated the ‘mixed economy’ the favoured strategy of Eastern European fascists, and joined the JVP bandwagon. The policies, along with protectionism and import substitution became the cornerstones of Sri Lanka’s economic strategies since then.

The policies were fully backed by Sri Lanka’s anti-austerity brigade and were also followed by the ousted so-called ‘Yahapalanaya’ regime who taxed the public to give historic salary and pension increments to state workers.

IMF-backed ‘revenue based’ state expansion

In 2015 the International Monetary Fund jumped on the JVP bandwagon, advocated raising taxes, instead of cutting spending, to give the elected ruling class and bureaucrats more of other people’s money to spend, by raising revenue to GDP to an arbitrary higher number.

The IMF-backed state expansion under ‘revenue based fiscal consolidation’ saw revenues grow from 11.6 percent of GDP to 13.5 percent.

Total state spending rose 18.7 percent of GDP in 2018 from 17.3 percent in 2014. IMF and state expansionists nostalgically spoke of a glorious past when the elected ruling class and bureaucrats had control of more than 20 percent of GDP of peoples money to spend as they saw fit.

In 2019 the state was further expanded to 19.4 percent of GDP, but revenue fell to 12.6 percent with the tax cuts in December.

During the ‘Yahapalanaya’ regime state expansionist touted virtues of ‘direct’ taxes, which kill capital and future jobs as investible capital is frittered away in current spending such as salaries.

State worker salaries and pensions grew from 567 billion rupees in 2015 to 820 billion rupees in 2019 as a large chunk of the ‘revenue based fiscal consolidation’ was re-distributed to state workers.

The current administration has said it will hire both unemployed graduates and those with weak education into a multi-task force to ‘reduce poverty’.

The IMF also intensified the dual anchor conflict in Sri Lanka’s monetary regime by bringing in a ‘flexible exchange rate’ (an external anchor with zero credibility) and flexible inflation targeting (a non-credible domestic anchor) which automatically led to currency crises as soon as private credit picked up.

The non-credible domestic anchor had an 8 percent inflation target, giving more than enough room to blow the currency peg apart, as soon a private credit recovered.

Sri Lanka has seen a steady rise in Keynesian stimulus mania from around 2011 involving so-called ‘stop-go’ policies.

The stimulus bent appeared to have gained ground after Deputy Governor W A Wijewardene retired from the central bank, some analysts have said.

Stop-go picked up pace after 2015, with then Prime Minister Ranil Wickremesinghe saying he ratcheted up state salaries and subsidies to reverse a collapse ‘in aggregate demand’ from a currency collapse in 2011/2012.

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Rupee, Sri Lanka, in trouble after Keynesian stimulus

Under stop-go policies involving targeting an ‘output gap’ a central bank with a soft-pegged exchange regime will inject money until the balance of payments is torn apart and will hit the brakes and bust the currency, triggering an output collapse and higher inflation.

Such countries become ‘recidivist’ IMF clients.

Both the UK and US suffered from such policies especially in the 1960 and it led to the collapse of the Bretton Woods system in 1971. UK went to the IMF 11 times until so-called ‘Cambridge economics’ was defeated in 1979 by Margaret Thatcher and her advisor Alan Walters, a classical economist.

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Sri Lanka’s growth slowed as currency crises hit rapidly in 2012, 2015/2016 and in 2018.

Stimulus hits new high

In late 2019 taxes were slashed in a ‘fiscal stimulus’ along with unprecedented monetary stimulus that had created the biggest balance of payments deficits in history.

State worker recruitment were stepped up in 2020, leading to 86 percent of tax revenues going to for salaries and pensions in 2020 and the country downgraded to barely above default at ‘CCC’ and money printing eroding reserves.

“We have to accept as this august assembly, no parliament has faced such a crisis since independence,” Gunewardene said.

Leader of the house Lakshman Kiriella charged that the current regime had created the crisis by suddenly cutting taxes December 2019.

“That is the root of the economic crisis,” he said.

The taxes were cut without parliamentary approval, in exceptional regime uncertainty. The tax laws were changed only 2021, almost 18 months later.

It is not clear whether a similar event had occurred in any other country with a functioning parliament in after the end of tax changes by ‘Royal Prerogative’.

Gunewardene said the last regime created ‘tax fright’ with a number of taxes being raised and the current administration had corrected it because growth fell.

“It is with the taxes charged on the poorest of the poor who are carrying on a daily struggle to live and the biggest millionaire that the government finds revenue,” he responded.

“When Pettah traders protested by Ravi Karunanayake used the Customs and sealed their shops of those people. That is why as soon as Gotabaya Rajapaksa got the government Value Added Taxes were cut from 15 to 8 percent, NBT was removed and income tax rates were cut.”

“It was only the Gotabaya Rajapaksa administration that had ever given a tax cut of 518 billion rupees.

“I would like to remind that all of you,” he said as government members thumped their tables in appreciation.

Sri Lanka’s rupee is now under severe pressure as unprecedented volumes of money is printed, blowing the balance of payments apart.

In most countries hyperinflation is set off by state worker and soldier salaries. While interest and debt can be rolled over as paper, salaries are cashflow items.

Speaking shortly before Minister Gunewardene, ex-Prime Minister Ranil Wickremesinghe suggested that Sri Lanka go to the IMF again.

Related

Sri Lanka ex-PM Ranil says only alternative is to go to IMF

Sri Lanka’s soft-pegged central bank has already gone to IMF 16 times. (Colombo/June26/2021)

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Sri Lanka single borrower limits cut to 25-pct of bank capital, SOEs also included

ECONOMYNEXT – Sri Lanka’s central bank has issued directions limiting loans to a singe borrower or a group of connected customers to 25 percent of Tier I capital, with state enterprises which turned out to be the biggest borrowers, also included.

In a 2007 direction, banks were allowed to give loans up to 30 percent of capital for a single customer and 33 percent for a group but the rules were widely violated in the case of state enterprises, which were used as off-budget vehicles to give energy and other subsidies.

Banks will have to limit exposures to 25 percent starting from January 2026.

According to transitional provisions published in the direction seems to indicate that some banks may have single borrower exposures of 85 percent or more.

They will be required to bring exposures down to 60 percent by 2027 and 25 percent by 2028.

Download the direction from here Sri-Lanka-single-borrow-limit-direction-2024

Energy utilities were made to borrow from state banks to run off-budget subsidies under plan avoid a price formula during the Rajapaksa regimes.

Sri Lanka’s state banks ended up with large debts to Ceylon Petroleum Corporation partly due to flexible inflation targeting (printing money to cut rates as soon as inflation fall triggering forex shortages) even when fuel was market priced in 2018, analysts have shown.

When rates were cut with inflationary open market operations, triggering forex shortages, CPC was barred from buying dollars and forced to get suppliers’ credit denominated in dollars.

The suppliers’ credits were later converted to dollar loans from state bank loans, usually after the currency collapsed from the inflationary rate cuts or inflationary open market operations to sterilize interventions or both, analysts have shown.

The CPC loans have since been taken over by the government.

Banks have also funded roads and other state projects.

“Licensed banks shall gradually reduce the exposures to Public Corporations to meet the maximum limit,” by December 2030 according to the direction.

“Public corporation shall mean any corporation, board or other body which was or is established by or under any written law other than the Companies Act, with funds or capital wholly or partly provided by the Government.”

Many of the newer state enterprises however have been suddenly set up under the Companies Act, unlike earlier where a specific act was passed by the parliament to set up corporation or a statutory authority.

Borrowings of CPC and CEB eventually hit the financial stability of state banks while actual bad loans were under-reported. Now the bad loans are being covered with a state capital injection.

Under an International Monetary Fund and World Bank backed program, the so-called ‘sovereign bank nexus’ is being severed to protect the banking system.

Government securities, central bank sterilization securities, loans guaranteed by multilateral lenders or high rated foreign banks are excluded. (Colombo/Apr23/2024)

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Sri Lanka exceeds tax revenue target by 6% in first quarter

ECONOMYNEXT – Sri Lanka’s revenue collecting bodies have outperformed and exceeded tax revenue target by 6 percent for the first quarter ended on March 31, State Revenue Minister Ranjith Siyambalapitiya said.

“After many years of difficult challenges, it has been possible to exceed the expected state revenue in the first quarter of 2024,” he said in a statement.

The government expects a revenue collection of 4,106 billion rupees in 2024.

“The reason for the economic crisis in the past period was the reduction in the level of government revenue. Considering the achievement of higher than the target in the first quarter of this year and the revenue pattern, the 2024 will become a year in which the revenue targets can be achieved,” he said.

The three tax revenue collecting bodies – Sri Lankan Customs, Excise Department, and Inland Revenue Department have collected 834 billion Sri Lanka rupees in the first quarter.

“It is a 6% higher than the expected revenue target of 787 billion rupees,” Siyambalapitiya said.

He said the Inland Revenue Department exceeded its target by 13 percent to 430 billion rupees compared to the target of 381 billion rupees in the first quarter of 2024.

He also said Customs Department has managed to reach the target of 353 billion rupees and the Excise Department has also achieved 96% of the revenue requests and earned 51 billion rupees in the first quarter.

The island nation has raised Value Added Tax (VAT), imposed new taxes, and increased personal income taxes to boost the revenue under an International Monetary Fund-backed reforms in return of a $3 billion External Fund Facility.

People have started to grumble over the government’s higher taxes without reducing some of the state expenditures. The government has been in the process to privatize some key state-owned enterprises. However, that process faced delays amid gradually rising protests against the move. (Colombo/April 22/2024)

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Sri Lanka rupee closes stronger at 300.50/301.00 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed stronger at 300.50/301.00 to the US dollar with the spot market becoming active in the second half of Monday, dealers said.

The rupee closed at 302.00/50 to the US dollar on Friday amid moral suasion.

On Monday a foreign bank sold dollars to the central bank around 302 levels, following by more sales, dealers said after trading started without proper spot market quotes.

On Friday a 302 level was indicated by some dollar sales, dealers said.

Sri Lanka’s rupee came under pressure over the last week, despite broadly deflationary policy, after the central bank collected large volumes of dollars in March.

Bond yields were flat as buyers awaited the next development in sovereign bond re-structuring, market participants said. There were both positive and negative sentiments among bond investors, dealers said.

A bond maturing on 15.12.2026 closed flat at 11.30/40 percent

A bond maturing on 15.09.2027 closed flat at 11.95/05 percent.

A bond maturing on 15.12.2028 closed flat at 12.15/25 percent.

A bond maturing on 15.09.2029 closed marginally higher at 12.25/35 percent from 12.30/40 percent.

A bond maturing on 01.10.2032 also closed flat at 12.40.50 percent. (Colombo/Apr19/2024)

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