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Tuesday December 5th, 2023

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“Therefore, outdated archaic taxes have been given up.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 stocks close up as some investor interest returns

ECONOMYNEXT – The Colombo Stock Exchange closed up on Monday, CSE data showed.

The All Share Price Index was up 0.22 percent, or 23.33 points, at 10,743.59.

The S&P SL20 index was up 0.68 percent, or 20.60 points, at 3,067.73.

Turnover was at 708 million. The banks sector contributed 189 million, while the food, beverage and tobacco sector contributed 176 million of this.

Sri Lanka’s stock market has seen some investor interest return after last week’s news that the country had managed an agreement on a debt restructuring deal with an official creditor committee, and foreign funds for some development projects resumed.

Top positive contributors to the ASPI in the day were Sampath Bank Plc (up at 71.50), LOLC Holdings Plc (up at 379.00), and Commercial Bank of Ceylon Plc, (up at 90.90).

There was a net foreign outflow of 52 million.

Citrus Leisure Plc, which announced that its banquet hall and revolving restaurant at the Lotus Tower would launch on or around Dec 9, saw its share price rise to 6.20 rupees. (Colombo/Dec4/2023).

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Sri Lanka rupee closes broadly steady at 328.10/30 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 328.10/30 to the US dollar on Monday, from 328.00/10 on Friday, dealers said.

Bond yields were stable.

A bond maturing on 01.06.2025 closed at 13.70/14.00 percent from 13.70/95 percent.

A bond maturing on 01.08.2026 closed at 13.90/14.10 percent from 13.90/14.05 percent.

A bond maturing on 15.01.2027 closed at 14.00/14.10 percent from 14.05/10 percent.

A bond maturing on 01.07.2028 closed at 14.20/35 percent from 14.15/25 percent.

A bond maturing on 15.05.2030 closed at 14.25/45 percent, from 14.20/45 percent.

A bond maturing on 01.07.2032 closed at 14.05/40 percent, from 14.00/45 percent. (Colombo/Dec4/2023)

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Gov minister highlights abortion rights, sex-ed for children, and Sri Lanka men killing their women

ECONOMYNEXT – Sri Lanka’s legislators have politicized the topics of rape and violence without addressing the elephant in the room, Jeevan Thondaman, Minister of Water Supply and Estate Infrastructure Development said in parliament on Monday (4).

“All the members here are talking about rape. What happens after that? We must talk about abortion rights. That is not something anyone wants to touch on, and that is why we are in this place right now,” Thondaman said.

“Despite alarming statistics on rape and violence, women are often blamed and punished for it. The criminalisation of abortion is a major example of this.”

Sri Lanka has some of the most restrictive abortion laws in the world. According to a 2016 estimate by the Health Ministry, he said, approximately 658 abortions take place a day, and close to 250,000 a year.

“That’s 250,000 women whose lives you are endangering.”

He added that what was needed at this point in time was comprehensive sexual education (CSE) for children and young people.

“Only through CSE in schools will children and young people develop, accurate, age appropriate knowledge attitude and skills; positive values such as respect for human rights, gender equality, diversity and attitude and skills that contribute to a safe, healthy and positive relationship.”

Thondaman pointed out that CSE plays a pivotal role in preparing young people for a world where HIV, AIDS, sexually transmitted infections, unintended pregnancies, and sexual and gender based violence still pose a risk to their well-being.

“CSE basically empowers children take control and make informed decisions freely and responsibly.”

Thondaman also highlighted the findings of a 2021 study (Fatalities_20211109_UNFPA) by the UNFPA and the University of Kelaniya that showed that a majority of women killed in Sri Lanka were murdered by those close to them.

“62 percent of homicides of Sri Lankan women are committed by either an intimate partner, ex-partner or family member. 84 percent are killed in their own homes by someone they know.”

Police and the judiciary have failed Sri Lanka’s women, the minister pointed out.

“Only 5 percent of these cases, between 2013-2017, were ever concluded. Men claim they were provoked, or are of unsound mind or have mental illness: These have been successful defenses. And the Police often express sympathy to this narrative as opposed to the victim’s.”

“We have a history of protecting oppressors.”

It takes 7-10 years for a child rape case to conclude, he pointed out.

Establishment of child courts are needed, he said, as well as several legislative amendments. “The government is working on a new law to reform the domestic violence act, reform of marriage and divorce laws to ensure there is an easier path to divorce: no one should be forced to remain in a marriage that is either abusive or not healthy.” (Colombo/Dec4/2023)

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