An Echelon Media Company
Saturday June 15th, 2024

Sri Lanka sugar scam from midnight gazette, parliament committee calls for probe

PUBLIC FINANCE: The committee on public finance had previously called for an investigative report from the Treasury on the sugar tax.

ECONOMYNEXT – A committee on public finance at Sri Lanka’s parliament has called for a probe on alleged huge profits made from sudden changes in trade taxes changed at midnight while the public is sleeping.

Legislators have claimed that large profits have been made through a scheme involving tax changes in combination with import licenses that stopped competitors from clearing sugar after the tax was cut.

Chairman of the Committee on Public Finance Anura Priyadarshana Yapa, had instructed the Ministry of Finance officials submit an impartial and investigative report to the Parliament on the sugar tax revision, the assembly’s media office said.

There have been calls to abolish the so-called ‘tyranny’ of the midnight gazette, which leaves room for corruption.

The sudden tax changes, which are later informed to the parliament to rubber stamp in a ‘shoot-first ask questions later’ also violates the ‘taxation by consent’ principle on which parliaments are set up, analysts have said.

Related: Sri Lanka’s fiscal tyranny by midnight gazette, retrospective taxes must end

The room for corruption or losses expands when tax changes are large.

In Sri Lanka taxes are changed at midnight without prior notice involving severe ‘regime uncertainty’ or policy instability for businesses, which can result in either large losses or profits and discourages the holding of stocks for security by ordinary businesses.

A tax cut can result in large losses for wholesalers, traders, importers or supermarkets with stocks. A tax hike can bring profits, but usually supermarkets will sell at prices already marked in packets.

However a privileged set of businessmen, through licensing scheme are allowed to operated bonded warehouses, without running tax risks, where goods are landed without taxes and are not cleared.

The taxes are usually raised to give unjust profits to ‘domestic’ producers or import substitutors in a process known as ‘tax arbitrage.’

Janatha Vimukthi Peramuna legislator Anura Kumara Dissanayake told parliament last month that a sugar import tax was first jacked up from 33 rupee a kilogram to 50 rupees on May 23, 2020 saying it was used for illegal alcohol production.

In Sri Lanka ethanol imports have been banned taxes hiked, in a regime uncertainty, to give profits to domestic producers either owned by the state or close to the establishment, critics say.

Dissanayake said at the time the administration claimed that the tax was raised to boost domestic sugar production and discourage the production of moonshine and also save ‘foreign exchange’. He said turmeric imports have been banned.

However moonshine is popular due to high taxes on ethanol and finished products which makes legal alcohol prohibitively expensive.

The high taxes have also encouraged some licensed distilleries to sell untaxed alcohol through a network of off-license retail shops (known as bars), and a promote a lucrative trade in smuggled alcohol, critics say.

Dissanayake said on October 13, the government suddenly cut taxes in sugar to 25 cents a kilogram.

“While taxes of many goods were raised, and imports of many goods were restricted, the sugar tax was removed from 50 to 25 cents,” he said. “In other words it was almost completely removed.”

He said then a statement was sent by the government that the retail price of sugar would be 85 rupees.

Related: Sri Lanka slashes onion, lentil, tinned fish, and sugar import tax to 25 cents a kilo

Dissanayake said the Consumer Affairs Authority had done a survey to find out how much sugar was with the importers cleared by paying the tax at 50 rupees.

“At the time there was 90,000 metric tonnes of sugar imported by paying tax,” he said.

“Now the government is saying to sell at 85 rupees. So there was a big confusion there. At Sathosa there was sugar at 85 rupees for one kilogram. Trade Minister Bandula Gunewardene had said that one kilo was enough for a house for one month.”

Then October 27, there was a meeting with importers, Treasury Secretary and the Chairman of Sathosa, he said. This crisis was explained.

Then a decision was made to re-impose the tax again to 40 rupees. The trade minister had told the following day out that the tax should remain at least for a month, according to the procedure. Dissanayake said.

“So it could not be changed until November 13,” Dissanayake said. “The Trade Ministry then decided to start a license scheme under the Import and Export Control Act to clear sugar from ports.”

Under the licensing scheme sugar was not allowed to be cleared from the port at 25 cents until November 22.

The government said the 40 rupee tax would be hit again from November 13.

“But the tax was not raised. After November 22, sugar was cleared at 25 cents from November 22.”

He said on October 13 Sathosa had bought 700 metric tonnes of sugar at 127.49 rupee a kilogram.

“Then it was sold at 85 rupees.”

On October 14, another 700 metric tonnes was bought at 121.50 rupees. Then it was sold at 85 rupees.

On October 20, 750 metric tonnes were bought at 92 rupees. He said it was bought from a business connected to the Shangri-La hotel building

On October 27, 600 metric tonnes was bought at 110 rupees by Sathosa.

“Now taxes were reduce and it was ordered to sell sugar at 85 rupees. To sell at 85 rupees, sugar had to bought at least 80 rupees.

“The government is saying the controlled price is 85 rupees, but Sathosa is buying at 121.50 rupees.

Dissanayake claimed that a ship carrying sugar had not arrived in the country for 30 years. But on November 02, a sugar ship can come with 26,000 metric tonnes.

Dissanayake said up to December 10, 37,000 metric tonnes had been brought at 25 cents a kilo.

He said on December 12, a sugar ship with 22,500 metric tonnes was scheduled to arrive consigned to a company called Wilmar.

Dissanayke said around 73,000 metric tonnes of sugar was due on a 25 cent tax.

Dissanayake said with the 50 rupee tax, sugar was at 135 rupee a kilogram. He said around 90,000 metric tonnes were imported at 25 cents.

“Either the government should get the tax, or the benefit should go to the people,” Dissanayake said.

“There is no sugar at 85 rupees, and no taxes for the government.”

He said about 90,000 metric tonnes had been imported or was in transit. Annually Sri Lanka imported about 650,000 metric tonnes of sugar, he said. But since the tax cut in October around 200,000 metric tonnes were either imported, or on order, he claimed.

Dissanayake said if 90,000 tonnes had been imported the revenue loss would be around 4.5 billion rupees. If 200,000 was imported the revenue loss would be 10 billion rupees.

“There is no sugar at 85 rupees,” he said. “There is revenue to the government. So certain businessmen are pocketing the money through indirect paths.”

‘Import substitution’ operators also do the same thing, analysts say. Price are kept artifically high through import duties and they pocket the tax. Economists call the process ‘tax arbitrage.’

Such countries also become export uncompetitive as not just the protected items, but goods higher up the value chain which use the protected item as inputs also become noncompetitive. (Colombo/Jan08/2020)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Sri Lanka beats key IMF program targets for March 2024 amid rupee stability

ECONOMYNEXT – Sri Lanka has exceeded key quantitative targets set in an International Monetary Fund program for March 2024, based on preliminary data the Washington based agency said in a report.

The March data are not performance criteria on which reviews are conducted but are indicative targets which shows the progress of the program and are a stepping stone for a September review based on June data.

An indicative target for the primary balance (roughly overall deficit minus interest costs), was assessed at 316 billion rupees more than four times the 70 billion rupee target set in the program.

Primary balance can be a big surplus if the interest bill is high and capital expenditure is cut and is a type of crisis management tool after a central bank triggers a currency crisis by cutting rates with inflationary liquidity tools.

However, Sri Lanka’s Treasury has also kept a lid on most current spending. A state salary hike is however due after the currency collapse made life difficult for everyone.

Meanwhile more taxes have been collected from the people to finance the island’s bloated state.

A 750 billion rupees central government tax revenue floor has been exceeded to reach 837 billion rupees.

Central bank credit to government (outstanding stock) has been reduced to 2,691 billion rupees in March compared to a target of 2,800 billion rupees. In December the CB credit was calculated 2,742 billion rupees.

Net international reserves of the central bank were brought up to a negative 1,268 million US dollars exceeding the target of a negative 2,035 by almost 700 million dollars.

In order to collect foreign reserves, which is a type of appropriation of domestic savings of the people by the central bank (taking in deposits) and exporting it to the US and other countries to finance their deficits or by other agency debt in reserve currencies.

In order to collect such ‘deposits’ the central bank has to prevent them from being invested domestically.

It is achieved with deflationary policy through sell-downs of down its Treasuries holding to domestic banks or others, at a market rate, collecting interest from the government or repayments of re-finance credits, subject to any nominal changes in reserve money at a given exchange rate.

In 2024 the central bank allowed the exchange rate to appreciate, which can also reduce prices of traded goods boost real and nominal savings and make it easier to collect foreign reserves.

When domestic credit is weak it is easier to collect reserves. Reduced domestic credit and collection of reserves, including by private banks which then cannot be invested domestically, can push the external current account into surplus.

The central bank also met a 5 percent 12-month inflation target, with an achievement of 4.3 percent.

Sri Lanka’s economy grew 5.3 percent despite reserve collections, amid the stability provided by the central bank.

There were no central bank purchases of Treasuries from the primary market.

However the central bank injected overnight and term money to banks (not on a net basis) showing how easy it is for a rate-obsessed monetary authority to get around the requirement and create external instability again as soon as private credit recovered.

The central bank also allowed excess liquidity from dollar purchase to remain unsterilized for an extended period under its ad hoc pegging arrangement, getting a short term falls in rates, but triggering pressure on the rupee as a result in May and June.

It is not possible to collect reserves with a free floating exchange rate. (Colombo/June15/2024)

Continue Reading

Sri Lanka GDP grows 5.3-pct in first quarter of 2024 amid monetary stability

ECONOMYNEXT – Sri Lanka’s gross domestic product grew 5.3 percent in the first quarter of 2024 data from the state statistics office showed as the central bank continued to refrain from generating monetary instability.

Instead of printing money to cut rates under ‘flexible inflation targeting’ and printing money to boost growth by taking into account ‘potential output’ as permitted by its new monetary law, the central bank ran deflationary policy and also allowed the rupee to appreciate.

“The Sri Lanka economy experienced a more favorable economic condition[s] in the first quarter 2024, when compared to the first quarter in the year 2023,” the Department of Census and Statistics said.

“The high inflation had prevailed in the first quarter of year 2023, gradually reduced to a lower level by the first quarter of 2024 and this low inflation incentivized the economy by providing inputs at [a] much lower price.

The agriculture sector grew 1.1 percent in the first quarter of 2024, after also growing 1.6 percent last year.

Industry grew 11.8 percent in the first quarter, against a 24.3 percent last year.

The economy grew amid falling prices, the statistics office said in sharp contrast to the Anglophone macroeconomic claim that inflation is needed to boost growth, on which Sri Lanka has 5-7 inflation target has apparently been set.

Related Sri Lanka central bank pushing for high inflation target to boost growth

“Among ‘Industrial activities’, coinciding with the decline in input prices, the ‘Construction industry’ grew by 14.2 percent, parallel to this, the ‘Mining and quarrying’ industry too expanded by 18.3 percent during this quarter,” the Statistics Department said.

Sr Lanka’s services sector grew 2.6 percent, against a decline of 4.6 percent recorded last year.

The International Monetary Fund has also urged the central bank to give priority to stability.

Sri Lanka dropped the stability mandate in the earlier monetary law which was violated after the end of a civil war to push the country into serial currency crises especially after the International Monetary Fund gave technical assistance to calculate potential output.

Related Sri Lanka has a corrupted inflation targeting, output gap targeting not in line with monetary law: Wijewardena

Sri Lanka survived a 30-year civil war by giving priority to a stability mandate despite shortcomings in its operational framework but defaulted in peacetime amid activist monetary policy which denied monetary stability to the people. (Colombo/June12/2024)

Continue Reading

Sri Lanka’s NPP notes five-point crisis for economic growth sans details

Former JVP MP Sunil Handunneththi

ECONOMYNEXT — The leftist National People’s Power (NPP) has identified five crises that need resolving for Sri Lanka’s economy to progress, much of which emphasise a production economy targeting export growth though sparse on the detail on resource allocation.

NPP spokesman and former parliamentarian Sunil Handunneththi speaking at an event in Mulaitivu on Thursday June 13 said Sri Lanka is grappling with firstly, a collapse of the production economy, second, a budget deficit, third, a balance of payment crisis which has, fourthly, created a debt crisis, and finally, a resultant gap between haves and have-nots.

“We must first understand the crisis. We reocgnise five main crises that have the same impact irrespective of differences between the north and south.

“The first is the collapse of the production economy. We can see this historically. Agriculture that used to be some 30 percent of gross domestic product (GDP) has now fallen to 8 percent. Essential food is imported. We cannot produce the rice needed for the small population here. Things that can be made here are also imported.

“Second is the income crisis. For the people, their expenses are twice their income. The budget deficit is two or three-fold every day. Banks cannot give loans to businesses and industries because the government takes funds to address the budget deficit. The government takes most of the people’s savings for this,” he said.

The balance of payment crisis Sri Lanka is facing the third crisis, according to Handunneththi, which has triggered a debt crisis, in turn leading to a crisis of income disparity among the people.

“Third is the balance of payments crisis. Imports are two or three fold export income. The government has to take 11 to 12 billion US dollars in loans from foreign countries. When GDP is 80 billion US dollars, debt has gone over 100.”

“All this creates a massive gap between haves and have-nots. Without finding solutions to these crisis, there is no point distributing goods,” he said.

Handunnethi’s remarks appear to be departure from the NPP’s anti-corruption rhetoric which had centred its economic development policy agenda primarily on fighting corruption.

‘Fighting corruption’ and ‘recovering stolen assets’ have been popular slogans since the Aragalaya protests in Sri Lanka and the NPP has made it its central theme in its bid for power. The leftist outfit had also adopted a position that’s cautiously critical of the International Monetary Fund (IMF) and the reforms the international lender has prescribed for Sri Lanka in exchange for a 2.9 billion-dollar bailout.

However, NPP leadership had recently acknowledged the need to continue the IMF programme since the agreement has already been signed.

The Marxist-Leninist Janatha Vimukthi Peramuna, which controls the NPP, though it was never in government barring a brief stint in an Sri Lanka Freedom Party (SLFP)-led coalition in the early 2000s, has been instrumental in driving popular support against privatisation.

Three key policy pillars articulated by the JVP from 2001-2004 and embraced by mainstream politician Mahinda Rajapaksa’s administration in 2005 onward have been highlighted by experts.

From 2005, Sri Lanka halted privatisation, started recruiting tens of thousands of unemployed graduates into the public service every year with lifetime pensions, expanding an already bloated public sector and denying any benefit of a peace dividend to the country.

Sri Lanka also abandoned a price formula for fuel that had helped keep the rupee stable and inflation low from 2001 to 2003 even as global commodity prices went up from the ‘mother of all liquidity bubbles’ fired by the Federal Reserve from 2001.

From 2001 to 2003, state workers fell from 1.164 million to 1.043 million. By 2020, the public sector cadre has grown to 1.58 million with another batch of 53,000 unemployed graduates being paid tax money. (Colombo/Jun14/2024)

Continue Reading