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Wednesday December 8th, 2021

Sri Lanka wage, subsidy hikes kick in amid import collapse; capex cut

ECONOMYNEXT – Sri Lanka’s current spending of up to 40,000 rupees are kicking in from July 01, the finance ministry said, amid a import fall coming from monetary instability 2018, though cut in capital expenditure may help balance cashflows.

Most the measures were already in expenditure outlined for 2019 in the budget.

The Easter blasts may also cut revenues from tourism and related areas, while compensation payments are also being made.

The government is expected to spend 20,000 billion rupees for the rest of the year on a 2,500 rupee interim allowance to 1.1 million state workers. A cost of living allowance of 7,800 rupees will remain in place.

From July 01, a ‘ration quota’ for military officers will be increased to 23,321 rupee and for other ranks to 19.350. A commando allowance had been increased from 1,000 to 5000 rupees. This will cost 1,175 million rupees. A rent allowance had been doubled.

Pensions of former state workers have also been raised which would cost 12,000 billion rupees.

An allowance for disabled had been increased to 5,000 from 3,000 rupees. Another 32,000 had been added to the disabled recipients taking the total up to 70,000.

The government is giving 5,000 rupees each to 21,000 kidney patients. Another 5,000 had been added at a cost of 1,840 million rupees.

The measures would cost a total of 36.355 billion rupees.

However the government also said that there may be up to a 18,000 rupee loss of expected value added tax from a collapse in tourism following the Easter Sunday blasts.

However Sri Lanka’s imports started to fall from a collapse of the currency due to the monetary instability triggered by the central bank which printed money and tried to push interest rates down just a credit was recovering in the first quarter of 2018.

Sri Lanka has had balance of payments troubles from shortly after the central bank was built, as it tried to target both the exchange rate and interest rates (dual anchors) at the same time.

Meanwhile the finance ministry has ordered a 15 percent cut if capital expenditure which would help balance out some of the fall in revenues.
The salary and pension hikes were already in the budgeted current spending for 2019.

Treasury had also asked government departments to keep a close eye on currency spending and target a 5 percent cut in items like power bill. State agencies have been asked to strictly adhere to circulars on overtimes and curtail foreign travel which are not backed by foreign funding.

Sri Lanka’s then finance minister Ravi Karunanayake embarked on a spending spree in 2015, after the International Monetary Fund pushed a program based on ‘revenue based fiscal consolidation’  ending several years of expenditure restraint, which had come in during the latter part of the Rajapaksa administration.

Analysts at the time pointed out that cutting deficits with just tax increases and being implicitly critical of expenditure restrains was against basic principles of classical economics.

The IMF program institutonalized dual achor contraditions by giving a wide inflation target and and a foregn reserve rates which requires pegging while outside the program a real effective exchange rate target was also targeting which is also an external anchor. Analysts had warned that the wide infaltion target and REER targeting may lead to stagflation. (Sri Lanka risks instability, stagflation by being in PIIS soft-peg group: Bellwether) .   (Colombo/June30/2019) 


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