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Saturday May 18th, 2024

Sri Lanka President knew revenues will be lost, VAT cut to remain for 5-years: Jayasundera

ECONOMYNEXT – Sri Lanka’s President Gotabaya Rajapaksa knew revenue will be lost by tax cuts but he considered it an investment, and an 8 percent tax rate slashed from 15 percent, will remain unchanged for 5 -years, a top official said.

“The President promised this nation a new taxation strategy,” President’s Secretary P B Jayasundera said at a seminar titled Colombo Development Forum this month.

“He knew the revenue will be lost but he considers that lost revenue as an investment in the country.

“Therefore, outdated archaic taxes have been given up. Singe rate VAT has been introduced. New corporate structure has been introduced.”

Sri Lanka’s last administration came to power promising to simplify the tax system but got caught up in an International Monetary Fund drive to increase revenue to GDP to some arbitrary number and put more money in the hands of politicians and bureaucrats.

Illiberal Consolidation

The IMF’s ‘revenue based fiscal consolidation’ was unusually illiberal or statist in that it placed no emphasis on cutting spending, in a country where the public sector was already unaffordable to the working productive sectors.

The lack of emphasis on cutting spending anti-austerity style went against all principles of natural justice where the burden of fiscal consolidation has to be spread at least partly on the state workers and not only on the general public, in a full sellout to the anti-austerity brigade some critics say.

Under the illiberal ‘revenue based fiscal consolidation’ spending was ratcheted up from 17.3 percent of Gross Domestic Product in 2014 to 18.7 percent by 2018, reversing trend of steady contraction seen since the end of a civil-war in 2009 when spending was close to 24 percent.

Revenues were raised from 11.6 percent of GDP to 13.5 percent with a plethora of niggling withholding taxes and royalties added despite as the hten administration which promised to reduce total number of taxes and simplify the system watched on the sidelines.

Personal income tax which was a 15 percent proportionate tax was ratcheted up to progressive rate close to 30 percent in giving way to the left, with predictable results on the electorate.

Un-anchored Monetary Policy

What remained of rule based monetary policy was jettisoned with ‘flexibility’ being given priority under the IMF program.

Monetary instability worsened with a highly unstable peg labeled the ‘flexible’ exchange rate (no-credible external anchor) was combined with ‘flexible’ inflation targeting (no credible domestic anchor) leading to currency crises in 2015/16 and 2018, triggering output shocks.

Under flexible inflation targeting, inflation, the real effective exchange rate, the call money rate, the yield curve and an output gap was targeted with large volumes of excess liquidity injected. In 2018 buy/sell dollar rupee swaps were used to inject liquidity and pressure the peg.

Under flexible exchange rate and call money rate targeting, the administration was forced to firefight the external imbalances, imposing import controls Nixon shock style, and de-railing a plan by the then-administration to have freer trade.

RelatedSri Lanka controls imports in ‘Nixon-shock’ move to protect soft-pegged rupee

In December 2019, a new administration cut taxes without going to parliament. The taxes are expected to be legislated shortly.

2019 ended with spending to GDP rising to 19.4 percent of GDP and the deficit had worsened to 6.8 percent, with the IMF program already on hold.

In 2020 with tax cuts, a Coronavirus crises and more monetary instability, growth and tax revenues had taken another hit. The current administration is also focused on firefighting the balance of payments, with money printing worsened.

5 Year Tax Fix

The budget deficit is estimated to be in the double digits in 2020, though some spending has been cut by putting on hold state worker salary hikes proposed by the last administration.

However tens of thousands of under-educated workers and unemployable graduates are being hired.

Meanwhile Jayasundera said the value added tax cut from 15 to 8 percent will stay for another 5 years and income taxes will not be changed, but the deficit will be brought down to percent in the medium term with economic growth.

“We are assuring the tax regime that we have instituted will not change. For the next 5 years VAT is 8 percent,” Jayasundera said.

“Income tax is whatever the rate we have gazetted. No other taxes will be brought in. Custom base taxes will be rationalized. We need much more efficient, transparent, compliance, friendly, tax regime and that is given.”

“If you want raise the turnover, raise the volume, raise the GDP. That is what this is all about. The Treasury secretary is not allowed to make any changes in taxes.”

In the meantime revenue shortfalls are being covered with monetized debt (liquidity injections), leading to a steady run on forex reserves, despite sweeping import controls. (Colombo/Apr03/2021)

Sri Lanka suffers over $138mn foreign outflow from govt bonds in 2024 after rate cuts

ECONOMYNEXT – Foreign investors have dumped 41.6 billion-rupee ($138.6 million) worth of Sri Lanka government securities in the first 20 weeks of 2024, the central bank data showed, after reduction in the key policy interest rates.

The foreign holding in Sri Lanka’s treasury bills and treasury bonds fell to 75.9 billion rupees on the week ended on Friday (17), May 2024, from 117.4 billion rupees on the week ended on December 29.

The central bank rate has reduced the key policy rates by 50 basis points so far in 2024, extending the rates cut by 700 basis points since June last year.

The rupee appreciated 9.1 percent in the first four months, but the gain failed to attract foreign investors amid a dragged debt restructuring negotiation with external private creditors.

Currency dealers said lackluster demand for dollars due to dampened imports with heavy controls, boom in both tourism revenue and remittances have helped to increase the dollar liquidity in the market, leading to the appreciation of the local currency.

The dealers said foreign investors can earn capital gain if they had bought government securities before the appreciation and now the offshore investors might be selling their bonds.

“They are also discouraged by policy rate cut because that will reduce their returns from the rupee bond investments,” a currency dealer said.

The yield in 12-month T-bills has fallen 336 basis points in the first four months of this year, the central bank data showed.

The central bank also reduced the Statutory Reserve Ratio (SRR) of commercial banks by 200 basis points in August last year to boost liquidity in the market with an aim to reduce market interest rates.

Under tough International Monetary Fund (IMF) conditions for its $3 billion loan program, the central bank raised key monetary policy rates in 2022 and last year to bring down inflation which hit over 70 percent in 2022. The inflation has fallen to the lower single digit now.

The rupee has appreciated to around 300 against the US dollar this week from around 330 level early in November. The local currency was at 365 rupees against the US dollar in early 2022. Depreciation causes capital loss for foreign investors. (Colombo/May 18/2024)

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Sri Lanka’s ‘Sancharaka Udawa’ tourist fair seeks to involve universities

ECONOMYNEXT – Sri Lanka’s ‘Sancharaka Udawa’ tourism fair kicked off this week to promote interaction between industry stakeholders and relevant Government bodies, including the Tourist Police, and also universities.

“Several universities, including Colombo, Uva Wellasa, Kelaniya, Sabaragamuwa and Rajarata were given free stalls to facilitate student interaction with industry professionals,” Chairman of the Sancharaka Udawa Organising Committee, Charith De De Alwis said in a statement.

The event takes place today (18) at the BMICH and houses stalls for hoteliers, tour and transport services, with a goal of attracting 10,000 visitors.

Organized by the Sri Lanka Association of Inbound Tour Operators (SLAITO) and the Sri Lanka Tourism Promotion Bureau (SLTPB), the 11th edition of Sancharaka Udawa offers a platform for both B2B and B2C sectors.

“Sancharaka Udawa houses over 170 exhibitors and a footfall of more than 10,000 visitors,” De Alwis said.

This year’s edition will include participants from outbound tourism sectors to facilitate capacity building. The event provides networking opportunities for industry newcomers and veterans.

“The networking platform offers opportunity for small and medium-sized service providers integrating them into the broader tourism landscape. The anticipated outcome is a substantial increase in bookings particularly for regional small-scale tourism service providers.” (Colombo/May18/2024)

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Sri Lanka’s CEB sells LTL shares to West Coast IPP for Rs26bn

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board has sold shares of an affiliate to West Coast Power Company Limited, an independent power producer giving profits of 25.9 billion rupees in the March 2024 quarter, interim accounts showed.

The sale has been carried out as a transfer.

“Twenty-eight percent (28-pct) of share ownership of CEB within LTL Holding’s equity capital has been transferred to West Coast Power Company Ltd for a total consideration of Rs 26 billion as part of a partial settlement of outstanding dues…” the March interim accounts said.

“This transaction resulted in a net gain of Rs25.9 billion rupees which has been recognized and reflected in the ‘Gain from Share Disposal’ in the individual financial statement in CEB.”

LTL Holdings is a former transformer making unit of the CEB set up with ABB where the foreign holding was sold to its management.

The firm has since set up several IPPs.

West Coast Power operates a 300MW combined cycle IPP in Kerawalapitiya promoted by LTL group liked firms in which both the Treasury and Employees Provident Fund also have shares.

Its operational and maintenance contract is with Lakdhanavi, another private IPP. The firm has been paying dividends.

The capital gain from the transfer of shares helped the CEB post profits to 84 billion rupees for the March 2024 quarter.

CEB reported gross profits of 62.7 billion rupees from energy sales and 30.6 billion rupees in other income and gains in the March 2024 quarter. Other income was only 3.1 billion rupees in last year. (Colombo/May18/2024)

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