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Monday February 6th, 2023

Sri Lanka opens floodgates for corruption in power sector: Harsha

ECONONOMYNEXT – Sri Lanka has opened the floodgates for corruption by ending competitive bidding for private renewable power plants opposition legislator Harsha de Silva, who tried to limit high feed in tariffs only to plants below 10 Mega Watts said.

“Due to non transparent procurement and corruption we pay so much more than necessary for electricity,” de Silva said in a message after the ruling party rejected his proposal to limit procurement corruption.

“One bright spot was the requirement for competition in renewable projects but had delays. Instead of fixing the problem they did away w competition. Horrible decision.

It will be interesting to see how the IMF, World Bank, ADB views this absolutely unacceptable new development in #SriLanka.

“This is 180 degrees opposed to what donors would want from us begging for dollars. This will open a floodgates for corruption.”

Some observers say Chinese funding built up a contractor class in the country which was able to influence the polity of the country, but Western donor agencies has promoted the renewable lobby at a time when their prices were un-competitive allowing them to develop ways of influencing public policy.

In many developed nations the renewable firm had to use public relations sometimes called ‘green washing’ to win special subsidies from the policies and influence public policy.

However renewable technologies have now matured and developing countries can use them at market rates and most cost-effective technologies are also emerging allowing grids of poor countries to handle unstable supply from highly volatile renewable sources.

Under then Minister Ajith Perera, renewable feed in tariffs collapsed under competitive tendering allowing investors without political clout to enter the renewable energy business.

Defying conventional wisdom, prices for smaller plants were lower than expected despite their smaller scale due to lowered barriers of entry in the form of the required investment.

Sri Lanka’s Podujana Party with ex-Prime Minister Mahinda Rajapaksa voted with 120 votes in favour and 36 votes against to do away with competitive tendering for renewable power plants.

There were 13 abstentions.

De Silva’s amendment to limit higher prices to only plants below 10 MegaWatts was also rejected.

Recent tenders have also not been approved by political authority pending the removal of competitive tendering, unions have charged.

Meanwhile Power Minister Kanchana Wijesekera said CEB unions have blocked renewable projects and that is why the Electricity Act was changed and power cheaper than thermal would be introduced.

But Sri Lanka’s power distribution is a state monopoly and renewable developers have to wait until the state-run Ceylon Electricity to sell to it.

Under Sri Lanka’s power sector unbundling model, the distribution companies are state owned and cannot directly buy power and the power producers are not responsible for collecting revenues, giving an incentive to bloat feed in tariffs for which they are not responsible to customers, critic say.

As as result they do not have to put in ‘risk capital’.

In India privatized power companies are ‘Holistic Integrated Power Utilities’ who can generate their own power and also distribute creating a direct business incentive to reduce generation costs instead of getting average costs. (Colombo/June10/2022)

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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.

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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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