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Friday June 21st, 2024

Sri Lanka says IMF growth projection for 2021 too low

SUDDEN STOP: Sri Lanka and the Maldives have high levels of foreign debt partly due to Chinese infrastructure lending. Both countries have also been subject to IMF fiscal tinkering. In the case of Maldives it is a shift to highly volatile income tax from stable indirect tax.

ECONOMYNEXT – Sri Lanka says a 3.6 percent growth projection for 2021 by the International Monetary Fund is too low and the country will grow at 5.0 percent as expected as the island recovers from a Coronavirus pandemic with high vaccination.

The IMF downgraded the island nation’s economic growth to 3.6 percent in its latest economic outlook release on Tuesday (12) from an earlier 4.0 percent, while global growth was also lowered slightly.

Central Bank governor Ajith Nivard Cabraal said he would rely on local experts to predict Sri Lanka economic growth rather than the IMF.

“Global forecast is more general in nature,” Cabraal told reporters after keeping policy rates at 6.0 percent at an October rate decision.

“But when it comes to the local forecast, I think our research department has a greater understanding about the Sri Lanka economy than the people who have been manning the desk at the IMF as far as Sri Lanka is concerned.”

The global economy is expected to grow at 5.9 percent this year and 4.9 percent next year while the global lender predicts 6.4 percent growth for 2021 and 5.1 percent for next year for emerging markets and developing economies.

Analysts say IMF predictions have been usually conservative and include some global risks that could have impacts on individual countries.

“I would rather take the word of our experts who have greater access to the information rather than rely on those numbers that the IMF would do,” he said.

“But the IMF’s global numbers could be the numbers we rely on as far as the global economy is concerned.”

Sri Lanka, which is facing risks of possible sovereign default, is under pressure as it is unable to access the global capital market after ratings agencies have downgraded it to CCC, barely above default.

A sovereign default and ‘sudden stop’ of external financing could contract the economy, the World Bank has said. Sri Lanka and the Maldives were most at risk in South Asia.

The Maldives Monetary Authority however has the best record at an absolute level on monetary instability, while Bhutan and Nepal, which are pegged to the Reserve Bank of India, which has sub-optimal policy.

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IMF cautions Maldives on money printing to stop rufiyaa fall as Sri Lanka wobbles

Sri Lanka is in the midst of a currency crisis, after its monopoly note-issue bank, printing large volumes of money to de-stabilize the external sector heightening the possibility of external sovereign default as foreign exchange shortages persist.

Governor Cabraal has lifted price controls on bond auctions which were triggering money printing and forex shortages, bringing default closer, though he is facing an uphill struggle in getting debt and forex markets to work.

Sri Lanka’s central bank, set up in the lines of Argentina’s central bank has created external trouble and created volatile growth, high inflation, currency crises and social unrest for 70 years critics have said.

The agency has gone 16 times to the IMF after mis-managing its balance sheet mis-using multiple contradictory provisions in its constitution which allows its governing body to undermine its own mandate of economic and price stability, critics say.

It has also been buying bonds into its balance sheet after unceremoniously jettisoning a ‘bills only’ policy set by classical economists is probably violating section 112 of its constitution.

Purchasing maturing bonds allows the agency to monetize past deficits.

A Latin American central bank typically triggers a currency crisis by failing to roll-over its own securities at market rates, a device first invented by Argentina central bank creator Raoul Prebisch, which has devastated his country multiple times, despite having relative good budgets.

Spending for Prosperity

Sri Lanka is facing sovereign default due to forex shortages created by the central bank in the course of printing money to fill a budget gap created from extraordinary tax cut December 2019 followed by an expansion of the state by hiring 53,000 unemployed graduates.

The administration is also building ‘multi-task force’ from unskilled workers churned out by the other extreme of the state education system to ‘reduce poverty’.

Sri Lanka’s state spending rose sharply from 17 percent in 2014 to around 20 percent as part of a reckless ‘revenue based fiscal consolidation’ exercise that favoured the political classes against productive tax payers and spurned spending based consolidation, critics have said.

Related Rupee, Sri Lanka, in trouble after Keynesian stimulus

“In 2015, when we built the government, there was a collapse in aggregate demand,” Prime Minister Wickremesinghe told parliament in 2016 as the rupee collapsed around him from call money rate targeting.

“In this way we put more money in the hands of consumers to increase aggregate demand.”

Private citizens, including three wheeler drivers, news-paper and bread delivery persons who use highly taxed petrol, therefore had to take the entire burden of fiscal corrections and unemployed graduate hires.

Classical economists have called such anti-state-austerity moves ‘statistical’ methods of budget balancing exercises which are out of touch with Keynesian influenced political and Mercantilist realities involving heedless spending for growth.

“Another statistical alternative of balancing the Budget is to step up Revenue
collections…,” economist B R Shenoy said in 1966.

“This alternative is beset with pitfalls. Past experience in Ceylon, which is in line with experience in virtually all parts of the world, is that in a democratic set up political and other pressures are heavily on the side of more and more spending by the government.

“When Revenues increase, under the weight of these pressures, expenditures too increase to meet, or even exceed, Revenue collections.”

The current administration has outdone Wickremesinghe and cut taxes for ‘stimulus’ in December 2019.

Sri Lanka however is trying its best to avoid a default or impose hair-cuts on commercial lenders and preserve its clear record in foreign debt.

Though forecasts may vary, the IMF usually takes the numbers produced by domestic agencies without demur including for budget numbers, even when sharp deviations from past practices are clearly apparent. (Colombo/Oct14/2021)

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Indian FM meets Sri Lanka political leaders; focuses on committed deals

ECONOMYNEXT – Indian External Affairs Minister (EAM) S. Jaishankar met President Ranil Wickremesinghe and a range of political leaders during his visit to Sri Lanka, focusing on commitments made by Sri Lanka to India, including land and energy pipeline connectivity.

Sri Lanka has committed to renewable energy deals for the Indian Adani group, Trincomalee port development, an investment zone around the port, a bridge between the island nation’s Northern Mannar and South India’s Rameshwaram, a power grid, and an oil and gas pipeline between the two nations.

Though most of the committed projects have been discussed and some already signed, they face delays amid public protests, court cases on environmental concerns, anti-Indian sentiments triggered by high prices of renewable projects, local politicians as well as perceived Chinese influence, analysts say.

India has been pushing Sri Lanka to fast-track these deals under Prime Minister Narendra Modi.Jaishankar’s visit also comes ahead of Sri Lanka’s presidential polls later this year.

Jaishankar met President Wickremesinghe in a one-on-one meeting, Prime Minister Dinesh Gunawardena, and Foreign Minister Ali Sabry before delegation-level talks with Ports, Shipping and Aviation Minister Nimal Siripala de Silva, Agriculture and Plantation Industries Minister Mahinda Amaraweera, and Power and Energy Minister Kanchana Wijesekera.

“Appreciated the progress made on various bilateral projects and initiatives. Under President Ranil Wickremesinghe’s guidance, we discussed the way forward for India-Sri Lanka cooperation, especially in power, energy, connectivity, port infrastructure, aviation, digital, health, food security, education, and tourism sectors,” Jaishankar said on his official Twitter platform.

He also met former President Mahinda Rajapaksa, opposition leader Sajith Premadasa, and leaders of various political parties from the North, East, and the upcountry region.

“Interaction of EAM with the leadership of the Government of Sri Lanka provided an opportunity to review and accelerate progress in the multifaceted India-Sri Lanka partnership,” the Indian External Affairs Ministry said in a statement.

One of the key focus areas of discussion was the Vision Document adopted by President Wickremesinghe and Prime Minister Modi during the Sri Lankan leader’s visit to India in July 2023.

“Discussions added momentum to the ongoing projects as well as initiatives for promoting connectivity in all its dimensions, particularly in domains of energy, physical infrastructure as well as economic and people-to-people ties.”

Jaishankar also met leaders of Sri Lanka’s upcountry Tamils, who originally came from India as plantation workers. He discussed development and devolution of power with an eight-member delegation of Tamil leaders from the Northern and Eastern provinces, including Shanakiyan Rasamanikkam and M. A. Sumanthiran.

India helped Sri Lanka with financial and humanitarian aid when the island nation faced an unprecedented economic crisis amid delays by the International Monetary Fund loan to rescue Sri Lanka.

“Following Sri Lanka’s economic recovery and stabilization, forging deeper long-term economic cooperation was underlined as a priority for sustainable and equitable growth of Sri Lanka, and mutual prosperity in the Indian Ocean Region,” the Indian External Affairs Ministry said.

Though the Sri Lankan government has claimed that Jaishankar’s visit was a precursor to Indian Prime Minister’s visit, the Indian External Affairs Ministry did not mention anything about a possible Modi visit.

This visit is Jaishankar’s first bilateral visit after the formation of the new government.

The Adani wind power project in the Northern district of Mannar has seen some public protests over environmental concerns after some experts said the project has failed to conduct a proper Environmental Impact Assessment (EIA). Critics also protest against its transparency.

President Wickremesinghe, opposition leader Premadasa, and Marxist Janatha Vimukthi Peramuna (JVP) leader Anura Kumara Dissanayaka are expected to contest in the election to choose the island nation’s 8th leader.

Sri Lankan leaders have been under pressure from India in the past two decades amid increasing Chinese influence in the island nation, seen as a security threat to India, analysts say.

The docking of a Chinese nuclear submarine in 2014 led to a dramatic government change in the 2015 presidential poll with the ousting of former leader Mahinda Rajapaksa, who later accused India of orchestrating his defeat.

Rajapaksa’s brother Gotabaya in 2021 unilaterally canceled a key port terminal project given to India’s Adani group after promising Jaishankar to sign the deal.

Gotabaya Rajapaksa was later forced to flee the country in 2022 after mass protests due to his economic policies. (Colombo/June 21/2024)

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Sri Lanka car permit tax losses Rs14bn in two years of partial disclosure

ECONOMYNEXT – Sri Lanka has lost 14.3 billion rupees in taxes from car permits given to public servants, including doctors, military officers, central bankers, finance ministry and tax officials, in 2019 and 2020 information disclosed by the finance ministry shows.

Inclusive of some 2021 tax losses when imports were banned for the rest of the year, 14.4 billion rupees of foregone revenue from a waived luxury tax is shown.

The list only shows waivers of a so-called ‘luxury tax’ imposed on larger vehicles above a certain value and size.

The list does not show other vehicles imported under car permits such as double cabs or cars below a certain size.

The list also does not seem to include tax free cars imported by politicians.

In 2019, Sri Lanka has lost 8.3 billion rupees from the luxury tax on car permits and in 2019 the loss 5.92 billion rupees.

In 2021 when car imports were stopped as the central bank started printing money to cut rates and target ‘potential output’ only 85.6 million rupees were lost.

Among the biggest tax waivers of over 10 million rupees went to some doctors and military officers. Doctors were among the biggest users of tax slashed car permits in the list.

Sri Lanka at one time did not allow cars imported by state workers to be transferred for many years.

But reportedly after Customs raided a finance company involving a fleet of vehicles, the rule was relaxed by the then President.

Among the largest tax waivers listed were given to Rolls Royce and Maclaren assigned to Melwire Rolling (Pvt) Ltd.

The 45.6 million rupee Rolls Royce was given a 42.1 million rupee tax waiver.

The 41.46 million McLaren was given a 37.9 million tax waiver.

There were also a large number of Audi A5 and Q2 vehicles listed at prices over 80 million rupee. It is not clear whether the disclosure is an error. The market value of the A5 and Q2 are much lower.

Up to end 2023, 138 cars imported under a migrant worker remittance scheme was listed to lose 436 million rupees in luxury taxes.
The total for the three years was listed at 14.86 billion rupees, involving 2,034 cars in 2019 and 1,470 cars in 2020.

It is not known how much the total tax losses or total vehicle imported through ‘car permits’ is. (Colombo/June20/2024)

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Construction of Sampur solar power plant to begin mid-July

ECONOMYNEXT – Joint energy projects between India and Sri Lanka, including the Sampur solar power plant due to begin next month, took centre stage during bilateral discussions between president Ranil Wickremesinghe and visiting Indian External Affairs Minister S Jaishankar on Thursday.

Wickremesinghe and Jaishankar discussed initiatives aimed at enhancing energy connectivity and developing the renewable energy sector, a statement by his media division said.

“Significant attention was given to plans for an LNG supply, a proposed petroleum pipeline linking the two countries, and advancing oil and gas exploration projects. Additionally, it was announced that construction of the Sampur Solar Power Plant is set to commence in July 2024.”

The visit comes amid delays in key Indian projects including land, oil and gas pipe, and grid connectivity deals, Adani’s wind power plant deals which are facing a legal battle, and port and investment zone projects in the Eastern port district of Trincomalee.

Indian supported projects for developing Trincomalee and expanding the Kankasanthurai port, the ongoing development of Jaffna Airport and Colombo Airport, and the expediting the unique digital identity card project were discussed.

The efficiency of projects supported by the Indian government aimed at bolstering Sri Lanka’s liquid milk industry and fertilizer production, were also examined.

Sri Lankan leaders have been under pressure from India in the past two decades amid increasing Chinese influence in the island nation as the move is seen as a security threat to India, analysts say. (Colombo/Jun20/2024)

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