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Friday October 22nd, 2021

Sri Lanka will discourage FDI with abrupt tax changes, policy upheavals: Eran

ECONOMYNEXT – Sri Lanka will find it hard to attract foreign direct investors with sudden policy changes and bans announced by gazette, with overall policy driven by special interests, opposition legislator and former state minister for finance, Era Wickremaratne said.

Sudden tax hikes and import bans by gazette will not only discourage foreign investors but also local investors, he warned.

Political Risk

“When policies change suddenly at midnight it will be very difficult to attract local or foreign direct investment,” Wickremaratne said.

“What investors look for is consistency. Even if they do not agree with the view they may come if there is consistency. If you suddenly change policy, political risk is increased.

Sri Lanka in suddenly banned the import of palm oil throwing bakery and confectionary industry into turmoil. Later it was said that palm stearin, which is used by the food industry would be allowed.

Sri Lanka had earlier banned ethanol and restricted the import of a large number of products.

“In parliament now almost every day we see import controls and licenses on many items,” Wickremaratne said.

“Sometimes the government also decides the payment terms. There is uncertainty everywhere.”

He said under an expropriation law in 2011 investors who had agreements with the Board of Investment was also expropriated.

Due post-independent expropriation which drove out foreign investors, in 1978 there was a constitutional guarantee given

In 2011 investors who had leased land from BOI were also expropriated.

“There has to be rule of law,” Wickremaratne said. “There has to be sanctity of contracts.

“The government should not go outside contract using legislative powers to usurp contracts.”

Economists call sudden changes in taxes and government policies including expropriation regime uncertainty (Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War).

Sri Lanka’s midnight gazette allows for taxes to be changed arbitrarily without prior disclosure and debate in parliament, violating the principle of ‘taxation by consent’ critics have said.

Special Interests

Though there it was claimed that that domestic producers would be helped, it was special interests (cronies) that was driving to policy, he charged.

Abrupt policy changes while helping ‘cronies’ will harm the overall business environment in the same way that expropriation drive out investment.

“Promoting domestic business is not only supporting gaja mithuro (cronies),” Wickremaratne said. “It is about creating a safe and stable environment for businesses.

“When local investors are harmed, foreigners will think twice. In 2011 property rights were violated and businesses were expropriated.

“You have to respect people’s property rights. You have respected their liberty and their right to life. If you want to stop Sri Lanka from ending up at the Human Rights Council you have respect the freedom of the citizens.

There is increasing pointers to show that policy was being driven to benefit various special interests.

“A few days before independence a gazette which increased the economic freedom of the citizens by allowing imports to break a monopoly in ceramics was suddenly reversed within 24 hours,” Wickremaratne said.

“That shows the power that those cronies are having on economic policy making here. Economic controls are placed on the people to give profits to gaja mithuros.

“Now a bathroom set had gone up 300 percent.” (Colombo/Apr13/2021)

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