Sri Lanka to lose oil taxes as rupee falls

ECONOMYNEXT – Sri Lanka’s government may ‘bear the burden’ of rising oil prices, Finance Minister Mangala Samaraweera said indicating that the government may lose tax revenues as the rupees soft-peg with the US dollar was battered amid contradictory policy.

"We are a government that is sensitive (to the people)," Samaraweera told parliament.  "We may take part of the burden. These days oil prices are going up steadily even as I speak.

"If the prices are going up too fast, we will take a part of it, formula or no formula. Do not be scared."

Sri Lanka is scheduled to announce the oil prices on October 10.

Oil prices have been generally rising in world markets since May 2018, when Sri Lanka started formula based pricing under an agreement with the International Monetary Fund.

Sri Lanka has excise taxes on both petrol and diesel, which are not change on the value of oil but are charged on volume, and so-called para-tariffs which are based on value.

A falling currency pushes up import prices reducing the total amount of goods that can be consumed by a person within the country earning a rupee salary. Tax revenues therefore can fall, based on which items consumers choose not to buy, and the rate of tax on such items.

Sri Lanka has also curbed car imports, as liquidity mis-management led to two runs on the rupee, which are one of the highest taxed items in the country giving the lie to a commonly peddled false narrative that a falling currency can boost taxes.

India has also cut taxes as oil prices rose and the Indian rupee tanked. Sri Lanka seems to be following India, including in the exchange rate, holding the falling Indian currency as a poster child.

India’s rupee has fallen steeply, Samaraweera said.





Sri Lanka’s central bank has managed to bust the currency despite having formula based oil prices to keep the credit system in balance.

The Reserve Bank of India, has been one of the worst performing central banks in the world, after it was nationalized, though policy improved dramatically after 1991, when it generated a severe balance of payments crisis.

Sri Lanka is following a Real Effective Exchange Rate peg, and is importing the worst monetary policy in the region, including from India, critics have pointed out.

"India also taxed imports temporarily," Samaraweera said.

India’s economic policy has been a terrible example for Sri Lanka to follow.

Sri Lanka has followed India in expropriation, demonetization, directed credit, Soviet style Gos plans, money printing which triggered import and exchange controls. (Colombo/Oct10/2018)

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