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Monday February 6th, 2023

Sri Lanka protestors in human chain against President, PM as currency crisis bites

CHAIN OF PROTEST: Sri Lanka protestors linking hands across the Galle Face seafront as sun goes down.

ECONOMYNEXT- Sri Lanka’s protestors banded together in a human chain from Temple Trees, Prime Minister Ranil Wickremesinghe’s official residence to the iconic ‘Gota go Gama’ in front of President Gotabaya Rajapaksa’s office asking the two to step down as a currency crisis worsened.

Sri Lanka’s protests which reduced after Wickremesinghe was appointed are starting to gather pace as shortages continue with the central bank unable to restore monetary stability.

Protestors called for a ‘system change’ on Saturday as fuel queues lengthened and difficulties in paying for imported diesel, petrol and gas intensified amid continued money printing to pay salaries of state workers triggered forex shortages.

Sri Lanka went through three currency crises in rapid succession from 2015 under as money was printed under ‘flexible’ policies to boost growth (stimulus) and in 2019 taxes were also cut in a fiscal stimulus with state economists claiming that there was a ‘persistent output gap’ as growth fell from previous currency crises.

President Rajapaksa also banned chemical fertilizer imports to save 550 million US dollars in foreign exchange worsening the effects of the central bank crisis.

Failed President? Failed PM?

Saturday’s protest was largely focused on Prime Minister Wickremesinghe, under whom forex shortages have continued though interest rates have been raised by the central bank to smash economic activities which can reduce private credit and drive private savings to finance the budget deficit.

The central bank has again imposed a ‘guidance rate’ trying to enforce an exchange rate peg despite running out of reserves amid continued money printing.

The rupee fell 200 to the 360 to the US dollar in a botched attempt by the central bank to float the currency with a surrender requirement in place (forced sales of dollars to the central bank) and foods and basic essentials are now out of reach of the less affluent.

Malnutrition is also beginning to go up. A factory producing Triposha – a nutritional supplement aimed at combating malnutrition among children of low income families started in the 1970s when money printing and import controls were rife – is closed often without regular supplies of maize and soya beans.

Crisis cuts off vital food programme

Wickremesinghe was appointed Prime Minister after the President’s Rajapaksa’s brother was forced to step down from the post following widespread protests.

The appointment is said to have diluted protests somewhat, but after a month since the appointment and a fall from bad to worse, protestors are saying that he must step down, and the country must go for an election.

“Ranil was brought in ‘for the rescue’, but we know the cynical intentions behind all of that. It’s just politics as usual, and not the system change we are asking for,” said Chaminda Dias.

Dias was part of organizing the human chain, and an active protestor since the #GoHomeGota movement started.

International Approach

Many people waited for the Prime Minister’s more “diplomatic” and “international” approach to leadership in the hopes that he would help bring in much needed forex and international support to Sri Lanka.

However, the placards read different.

“Ranil is the International Face of the Rajapakshas” says one. “Ranil oyath fail” (Ranil you have failed too) says another.

“Ranil You Are Also Fail”

 

“We cannot give up until Gotabaya goes with Ranil, because as long as these useless leaders [are here] we will not get any assistance…even [from] our own people (migrant workers) living overseas,” said social Activist Vishaka Thilakarathna.

Wickremesinghe, a six time Premier now, has not captured public confidence, and got into Parliament through the National List.

Protesters called his appointment “undemocratic” and demanded an election.

Leisha Lawrence, an active protestor who had brought her sons along said “If we have billions to spend on defense and other things, why can’t we spare five billion for an election?”

Youth at the Protests

“I brought my sons along today because this is their future we are standing up for and they need to know what’s going on,” said Lawrence.

“They need to be a part of the solution, they need to be a part of pressuring the government in the next steps that need to be done.”

Her sons, Aaron, Ethan, Kieran and their friend Abiru say that they are “angry with Gota” for his part in the crisis that is depriving them of education.

“Our school is closed a lot. We’re losing a whole year of our life because our O Levels are also getting postponed.”

Sri Lanka’s Covid lockdowns and power cuts severely impacted school children, who missed out on studies and interactions with friends.

Several schools and the country’s largest state university were recently shut down due as fuel shortages intensified.

Crisis-hit Sri Lanka’s fuel shortage forces closure of schools, largest state university 

The boys wanted to encourage more young people to participate in protests.

“Just come, just show up.”

Sri Lankan youth are continuing activism through social media, but the young protesters want more people to take to the street and physically show dissent.

“We’re living through a moment in history, come and do your part. You wanna be able to tell the future gen you did your part.”

Protesting is a Privilege

But showing up physically is not an option for many, who are stuck in Sri Lanka’s ever growing fuel lines, or simply struggling to survive.

Two people died in fuel queues on June 16, bringing the death toll in queues to 10. The protesters who moved to Galle Face beachfront towards the evening observed one minutes silence in their memory.

“Gota how many more lives do you need to send home?” read one placard.

On June 15, a woman threw her child off a bridge in Wattala, and was prevented from taking her own life.

In March, a father of four died by suicide after struggling to pay off a loan of 10,000 rupees.

“People are dying on the streets. Mothers are throwing their children into the river because they don’t want to face the indignity of begging for food,” says Dias.

“That is all [Gota’s] responsibility.”

Many protesters said they were taking part in the human chain in solidarity for those who could not make it.

Nigel Karunaratne was part of a crew of cyclists at the protest. He said that the movement might have “lost a little steam” but it was important to speak out.

“Whatever changes that have come are because of the protests at Galle Face. Without them we would still be with Mahinda, Basil and the other cronies.”

The organizers of the human chain however, were happy with the turnout considering the extreme difficulties of living in Sri Lanka at the moment. (Colombo/June19/2022)

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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.

Read more:

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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