Sri Lanka slaps 15-pct tax on gold imports as rupee plunges

ECONOMYNEXT – Sri Lanka has slapped a 15 percent tax on gold after imports surged in 2018, a finance ministry official said, as the rupee also plunged following a rate cut and bout of liquidity injections into the banking system.

Sri Lanka’s gold imports which were 9,148 kilograms in 2016 had risen to 15,750 kilograms in 2017.

In the first quarter of 2018, imports had reached around 8000 kilograms.

Analysts believe Sri Lanka traders are making profits by smuggling gold to India. However the earnings and profits do not appear in official accounts, prompting the knee-jerk Mercantilist tax.

India has a 10 percent import duty. It was slapped in August 2013, in a Mercantilist knee-jerk reaction to narrow its external current account deficit, which are caused by government deficit spending and financial account inflows. There is also a 3 percent value added tax.

India frequently arrests Sri Lankans smuggling gold into the country.

With a 15 percent tax, gold will now be smuggled in to Sri Lanka.

The tax came as Sri Lanka’s rupee fell to historic lows against the US dollar this week. In the spot forex market the rupee fell below 156 and was around 156.50 to the US dollar on Wednesday.

The rupee fell as the central bank cut rates and printed tens of billions of rupees to keep rates below the 8.50 percent ceiling policy rate, which was also cut by 25 basis points from 8.75 percent.

Sri Lanka’s reserve money expanded from 949 billion rupees on the second week of March to 1,060 billion rupees on April 11 absorbing most of the money printed, according to official data.





However the money comes back to banks after the New Year holiday, allowing them to be loaned to importers, who may buy dollars with the printed money putting pressure on the rupee. Some of the reverse repo deals through which the money was printed expired on April 18.

The gold tax comes as Sri Lanka wants to be the ‘hub of the Indian Ocean’.

It also wants to be a financial centre despite having a central bank that is operating downward crawling inflationary soft-dollar peg (a permanently depreciating currency). (Colombo/Mar18/2018)

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