ECONOMYNEXT – Sri Lankans began voting Saturday on elections to select their next President, with key candidates offering subsidies, tax cuts in a country that where foreign debt is climbing in a country where monetary instability has long de-stablized the credit system, dragging the currency down.
Both Premadasa and Rajapaska are offering salary hikes and subsidies which will raise expenditure on one side and tax cuts which will erode the revenue base at the same time.
Premadasa had offered additional handouts for the poor in an income support program and 2.5 percent cut in value added tax and a widening of income tax slabs.
Rajapaksa has also offered free fertilizer to farmers and support for fisheries and a steeper value added tax cut of 7 percent.
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Sri Lanka’s growth has slowed and debt has climbed during an International Monetary Fund program based on a so-called ‘revenue based fiscal consolidation’ involving higher and a number of ‘nuisance’ style withholding taxes, but failed to discipline the central bank.
Sri Lanka’s national debt is now close to 100 percent, when state guaranteed debt and state enterprises are counted.
The rupee collapsed from 131 to 150 from 2015 to 2016 to the US dollar and from 153 to 182 during 2018 as billion of rupees was printed to target short term rates, de-stabilzing the highly unstable currency peg labeled a ‘flexible exchange rate’.
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A liquidity crunch which prevented a total meltdown of the currency had nevertheless hit economic output and inflation is also higher, hurting the prospects of the incumbent.
Weak economic growth and moderately high inflation (by Sri Lanka’s standards) from monetary instability coupled with policy conflicts within the coalition has led to calls for a ‘strong man’ echoeing rallying cries of other nations in similar cycles.
The currency collapse has pushed public debt to 90 percent of gross domestic product, with 83 percent, central government debt, 5.2 percent publicly guaranteed debt and 1.6 percent of IMF debt, up from 82 percent before the latest crisis.
Sri Lanka’s central bank enjoys the worst record among South Asian monetary authorities since independence from British rule with the worst depreciation so far.
Analysts say the best are Bhutan, Nepal which are unfortunately hitched to the India rupee – holding the two countries back – and Maldives which is linked to the US dollar and has is now the economy with the higher per capita income.
Rajapaksa’s backers have said they stand for a strong currency, but so no firm reforms have been proposed for the central bank.
Key candidates have built their promises without offering reforms to reign in central bank discretion.
Lack of a program of monetary stability, has undermined election manifestoes of most past leaders and the currency collapses have led to rising costs of livings and demands for subsidies.
With fiscal policy set to deteriorate next year, whoever wins and an activist central bank with flexible discretionary policy will remain in place.
A planned new monetary law looks to institutionalize a ‘flexible exchange rate’ and give flexibility also in inflation targeting. (Colombo/Nov16/2019)