An Echelon Media Company
Friday December 9th, 2022

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“Therefore, outdated archaic taxes have been given up.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 bond yields end higher, kerb dollar Rs370/371

ECONOMYNEXT – Sri Lanka bonds yields ended up and the T-bills eased on active trade on Friday, dealers said.

The US dollar was 370/371 rupees in the kerb.

“The bond rates went up, however more interest was seen in the short term bills by the investors” dealers said.

A bond maturing on 01.05.2024 closed at 31.90/32.20 percent on Friday, up from 31.25/70 percent at Thursday’s close.

A bond maturing on 15.05.2026 closed at 30.30/31.30 percent steady from 30.30/31.00 percent.

The three-month T-bills closed at 30.75/31.30 percent, down from 32.00/32.25 percent.

The Central Bank’s guidance peg for interbank transactions was at 363.18 rupees against the US dollar unchanged.

Commercial banks offered dollars for telegraphic transfers between 371.78 and 372.00 for small transactions, data showed.

Buying rates are between 361.78 – 362.00 rupees. (Colombo/Dec 09/2022)

Continue Reading

Foreign minister, US ambassador discuss future assistance to crisis-hit Sri Lanka

ECONOMYNEXT — In a meeting in Colombo, Sri Lanka Foreign Minister Ali Sabry and US Ambassador to Sri Lanka Julie Chung discussed ways in which the United States can continue to support Sri Lanka going forward, the Ambassador said.

Chung tweeted Friday December 09 afternoon that the two officials had reflected on the “twists and turns” of 2022, at the meeting.

Minister Sabry was recently in Washington D.C. where he US Secretary of State Antony Blinken.

A foreign ministry statement said the two officials held productive discussions at the Department of State on December 02 on further elevating bilateral relations in diverse spheres, including the 75th anniversary of diplomatic relations which will be marked in 2023.

Incidentally, Sri Lanka also celebrates the 75th anniversary of its independence from the British in 2023, and President Ranil Wickremesinghe has given himself and all parties that represent parliament a deadline to find a permanent solution to Sri Lanka’s decades-long ethnic issue.

The US has been vocal about Sri Lanka addressing concerns about its human rights record since the end of the civil war in 2009 and was a sponsor of the latest resolution on Sri Lanka passed by the United Nations Human Rights Council. Unlike previous resolutions, this year’s iteration makes specific reference to the country’s prevailing currency crisis and calls for investigations on corruption allegations.

In the lead up to the UNHRC sessions in Geneva, Minister Sabry Sri Lanka’s government under then new president Wickremesinghe does not want any confrontation with any international partner but will oppose any anti-constitutional move forced upon the country.

On the eve of the sessions on October 06, Sabry said countries such as the United States and the United Kingdom, who led the UNHRC core group on Sri Lanka, are greatly influenced by domestic-level lobbying by pressure groups from the Sri Lankan Tamil diaspora.

These pronouncements notwithstanding, the Wickremesnghe government has been making inroads to the West as well as India and Japan, eager to obtain their assistance in seeing Sri Lanka through the ongoing crisis.

The island nation has entered into a preliminary agreement with the International Monetary Fund (IMF) for an extended fund facility of 2.9 billion dollars to be disbursed over a period of four years, subject to a successful debt restructure programme and structural reforms.

Much depends on whether or not China agrees to restructure Sri Lanka’s 7.4 billion dollar outstanding debt to the emerging superpower. Beijing’s apparent hesitance to go for a swift restructure prompted Tamil National Alliance MP Shanakiyan Rasamanickam to warn of possible “go home, China” protests in Colombo, similar to the wave of protests that forced the exit of former pro-China President Gotabaya Rajapaksa.

The TNA will be a key player in upcoming talks with the Wickremesinghe government on a solution to Sri Lanka’s ethnic issue. (Colombo/Dec09/2022)

Continue Reading

India smogs out Sri Lanka’s China tower observers


ECONOMYNEXT – Sri Lanka’s Chinese-built Lotus Tower has halved visitors to its observation deck an official said as dirty air flowing from India triggered air quality warnings and schools in the capital closed.

“Masks are mandatory at the observation deck and roughly around 50 to 60 can go up to the observation deck at a time, time limits have not been altered and still persists at 20 minutes for observation,” the official told EconomyNext.

Prior to the smog, 120 observers were permitted at once to the deck.

However, even after limitations the Lotus Tower has continued to draw visitors, and revenues are coming in, the official said.

The tower built with a Chinese loan by the cash rich Telecom Regulatory Commission has been described by critics as a white elephant that eats the money earned from telecom operators mainly as spectrum fees.

Sri Lanka’s National Building Research Organization (NBRO) said India air heavily polluted with particulate matter was flowing across the island into a depression in the South West Bengal Bay. (Colombo/Dec09/2022)



Continue Reading