Sri Lanka needs fiscal discipline to come out of economic crisis: President

ECONOMYNEXT – Sri Lanka has engaged in large scale mis-spending that has pushed up debt, and has to re-think subsidies, but cutting entitlements is extremely difficult within the exiting political culture, President Maithripala Sirisena said.

"We have an economy where education, health, fertilizer to agriculture and Samurdhi (transfer payments) are made," President Sirisena told a policy forum organized by Sri Lanka’s Ceylon Chamber of Commerce.

"We have to re-think them, but we cannot remove them."

Sirisena said he is often asked why Sri Lanka cannot to the same thing that some other country is doing.

"There is a different political system in such countries compared to this country," he said. "These decisions have political consequences."

He said the government now has a large debt because of massive mis-spending in the past, and people are beginning to suffer.

"We need better fiscal administration and fiscal discipline," he said.

Economic analysts have said that Sri Lanka’s politicians started to give subsidies after independence with the help of a money-printing central bank established in 1951.

The printed money then pushes up inflation and causes a currency collapse, leaving the people in a worse position than before with lower real salaries and higher prices of goods, as well as destroyed real savings accumulated during their lifetimes.

Taxation, including value-added tax, however, only destroys current spending power on specific taxed items. Inflation and currency depreciation push up prices of all goods, taxed and untaxed, in addition to pushing up taxes.

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Sri Lanka’s current administration pushed up spending in 2015 and followed up with loose monetary policy, generating a currency collapse and a balance of payments crisis.

By destroying the currency, the state is also able to avoid real sovereign default, instead destroying the real value of savings and pension funds.

President Sirisena said gem merchants have told him that they had money, and if the government gave them tax concessions, they will invest.

Sri Lanka’s current fiscal problems were partly caused by long tax holidays, according to most analysts.  (Colombo/Aug02/2016)
 

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