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Monday February 6th, 2023

Sri Lanka sees backlash against market pricing of expensive, polluting diesel

ECONOMYNEXT – Sri Lanka’s move to cut the price of petrol below that of diesel moving away from long term policy of mis-pricing diesel which is more expensive to import than petrol, has drawn fire from passenger transport operators in the country.

Due to a long term policy of under-pricing more expensive diesel compared to petrol most public transport and goods transport vehicle use the more expensive and polluting fuel instead of the cheaper petrol in Sri Lanka and many low inflation countries.

On September 30 the Singapore price of refined petrol was 90.2 US dollars a barrel compared to 112.34 a barrel. Kerosene – which is similar to jet fuel was 113.44 dollars a barrel.

In lower inflation countries like the UK petrol is now priced at around 160 pence a litre and diesel 180 pence.

In Sri Lanka people also bought diesel powered vans and pick-up trucks for private transport instead of petrol vehicles when the diesel mis-pricing was even greater some years back.

There is backlash against the decision by owners of large diesel vehicles.

“From public transport to food transport and essential services, all vehicles that carry bulk loads use diesel. Diesel has more of an impact on the economy compared to petrol,” said Gemunu Wijeratne, Chairman of the Lanka Private Bus Owners Association said criticizing the market-pricing of diesel.

“A stupid, unfortunate decision was made by reducing the price of petrol when the economy is driven by diesel.”

Wijeratne said he believed Sri Lanka could have contained runaway inflation if the authorities had opted for a revision in diesel prices instead.

In Sri Lanka and other third world countries with high inflation politicians and bureaucrats also believe that believe that inflation is caused by petroleum rather than the central bank.

However years of under-pricing diesel has not made Sri Lanka a low inflation country, since it is a monetary phenomenon.

Sri Lanka’s inflation started to rocket in from late 2021 after two years of money printing, even when fuel prices were fixed. After 2015 inflation picked up amid liquidity injection even when global oil prices and domestic oil prices were cut.

Sri Lanka’s nation-wide inflation rose to 70.2 percent in August 2022 accelerating from 66.7 percent a month earlier, data from the state statistics office showed.

Sri Lanka’s state-run Ceylon Petroleum Corporation (CPC) sells 92 Octane petrol at 450 rupees a litre, while 95 Octane is sold at 540 rupees. Lanka auto diesel goes for 430 rupees a litre, while super diesel is sold for 510 rupees.

Meanwhile, office transport drivers who operate private coaches ferrying office workers in Colombo told EconomyNext that there is some stability due to unchanged prices which have resulted in more consistent passengers.

“Earlier when there were constant price revisions, there were only increments and people were leaving the bus. We prefer diesel being higher than petrol in that sense but a decrease was anticipated,” said one office transport driver.

Sri Lanka’s All Ceylon Inter-Provincial School Van Transporters Association said in a statement that, if diesel prices had been lowered to level with petrol, transporting costs would have been lowered.

One parent said: “Van drivers will talk, but never do it. When the cost of fuel increases they are the first to shout. They say they will decrease when diesel decreases but they never reduced their fees, so having diesel at the same market price benefits us.” (Colombo/Oc03/2022)

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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.

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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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