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Saturday May 18th, 2024

Sri Lanka revenue officers slam politicians, policy makers for tax cuts

ECONOMYNEXT – Sri Lanka’s policy makers who advised ex-Sri Lanka President Gotabaya Rajapaksa, the cabinet and legislators who approved tax cuts made in December 2019 were responsible for severe revenue losses tax officers said responding to a speech by a former minister in parliament.

“The people who raised their hands when these policies were made are now blaming us,” H A L Udayasiri, the Secretary of the Inland Revenue Service Union told newly appointed State Minister for Finance Ranjith Siymbalapitiya during a visit to the agency.

Ex-Agriculture Minister Mahindandna Aluthgamage in September slammed low collections and the sharply lower tax payers in a wide-ranging speech in parliament.

The responsibility to the current situation should be taken by the officials who were there back then, including the President’s secretary, Finance Secretary and the cabinet, he said.

“We refuse to take the blame for that,” Udayasiri said. “Do not let these people blame the department taking the advantage of being a parliament MP. Because the department is still operating at least on this level is due to these officers.”

Sri Lanka had brought a new income tax law with support of the International Monetary Fund which had raised tax collections from in 2019 to 1,025 billion rupees, Udayasiri said.

He said the revenue union had some problems with the tax law but they had suggested changes and it was passed in parliament.

“Just when the results were to continue in 2020, taxes were cut,” Udayasiri said. “Many changes were done. The threshold for VAT was increased to 300 million and the income tax was increased to 3 million.

“Due to these reforms in 2020 tax income decreased by 600 billion rupees compared to 2019. And in 2021, the revenue decreased by another 700 billion rupees.”

Meanwhile the President of the, Commissioners Union, Sarath Abeyratna said the PAYE files which were 11 million rupees in 2009 had fallen to 39,000.

“When a policy decision was made to a volunteer based PAYE tax from a mandatory PAYE tax, the files that collected 1.1 million payee tax was reduced to 39,000 how can there be an income from that,” Abeyratne asked.

PAEY tax was abolished in the reform but was brought back as a voluntary tax following appeals by salaried workers who wanted the convenience of monthly deduction instead of filing a year end return.

There was a no broad culture in Sri Lanka of voluntary payments, Abeyratne said.

Udayasiri said Inland revenue officers had to work ‘with their hands tied behind their backs’ with instructions from the top that they were not to make site inspections or demand other data.

Post-Keynesian economists who advised President Rajapaksa had cut taxes to target an output gap also known as ‘stimulus’ after growth fell in the wake of two earlier currency crises from also output gap targeting style exercise in 2015/16 and 2018.

The IMF, which helped with the income tax law however alsogave technical assistance to the central bank to calculate an output gap, and encouraged ‘flexible inflation targeting’ despite the agency operating a reserve collecting peg.

Liquidity injected for flexible inflation targeting (to enforce rate cuts as domestic credit recovers) or outright stimulus (yield curve targeting, buffer strategy, overnight or term reverse repo injections/Soros style swaps) leads to balance of payments deficits and the currency collapses.

As a result there was a currency crisis in 2018 despite budget deficits being brought down and fuel market priced. In 2018 the rupee fell from 151 to 182 despite improvements in tax collections due money printed to target an output gap. When currency crises take place growth falls.

After low growth in 2017 and 2019, post-Keynesian advocated more tax cuts and money printing saying there was a ‘persistent output gap’.

The UK Finance Minister Kwasi Kwarteng’s also tried a similar tactic in this month, leading to bond market turmoil. UK’s Conservative government in 1972-72 tried a similar tactic known as the Barber-Boom.

However Keynesianism is widely taught in universities around the world as ‘macro-economics’ and when put into practice inflation and eventual output shocks are the result.

Tax cuts cannot boost economic activity or create inflation or balance of payments troubel, unless there is a central bank to print money and keep rate down. Tax cuts automatically leads to higher domestic borrowings and higher interest rates in the absence of central bank accommodation.

In the UK bond yields soared even before tax cuts took effect and the Bank of England bought bonds to keep rates down.

Classical economists and analysts have called for a currency board or hard peg to be set up to block the ability of the central bank to support stimulus or engage or mis-target interest rates to violate the impossible trinity for any other purpose. (Colombo/Oct 1/2022)

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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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