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Sunday August 14th, 2022

Sri Lanka would need hard reforms under an IMF program after elections: analysts

ECONOMYNEXT – Sri Lanka needs hard reforms under an International Monetary Fund program from a stable government after elections to restore investor confidence and provide a stable policy environment for companies to operate, analysts said.

Sri Lanka Podujana Party of President Gotabaya Rajapaksa is widely expected to win upcoming parliamentary polls in August with insiders pushing for a two thirds majority.

Two thirds majorities from 1978 however had brought constitutional changes that fostered illiberal arbitrary rule and undermining of the judiciary and general rule of law, critics say.

Policy Formulation

In the last five years infighting between Prime Minister Ranil Wickremesinghe and President Maithripala Sirisena led to conflicts and there was general policy fright and paralysis with the administration unable to even do a build-operate-transfer deal for Colombo port or a natural gas or coal plant, they say let alone privatization.

“We need to have one strong party ruling the country, whatever the party,” Sanjeewa Fernando, Executive Director Research at CT CLSA Securities, a Colombo-based brokerage told an online forum organized by Sri Lanka’s Echelon Magazine.

“The key here is that we need to have proper policy stability and then there has to be a government to take decisions. It is after that they only if they prefer they can go for hard reforms.

“This is what has been told by the IMF and other institutions that Sri Lanka needs to adopt hard reforms. But we have not done that. I think it’s high time, we have to use this environment to do these things.

“I think this is a good time to do tough reforms which will help Sri Lanka’s economy go to a better state.”

A new IMF facility is expected after a new government is formed.

Instability

Sri Lanka started 2020 reversing value added tax reforms involving raising rates and broadening the base that was achieved under a previous IMF program under a so-called ‘fiscal stimulus’. The taxes were slashed without passing them in parliament.

The lack of a stable legal or tax framework as well as expropriation and price controls which chip away and private property rights is called ‘regime uncertainty’ by classical economists.

Sri Lanka is now under import controls adding another sudden economic control with the aid of a law that was used in the 1970s to close the economy and achieve 20 percent unemployment.

An exceptional level of uncertainty is also brought by a so-called midnight gazette where taxes are slammed while the citizenry is sleeping using another process that evolved in the 1970s.

The IMF program itself, which was started after a currency collapse from liquidity injections in 2015, failed to bring monetary stability and the currency collapsed in between the program in 2018, plunging the country into stagflation.

A ‘debt moratorium’ was also imposed on the banking sector. From late January policy rates were cut, despite the budget deficit expected to rise after the tax cuts, just as the credit system was starting to recover.

Under so-called ‘flexible exchange rate’ and ‘flexible inflation targeting’ Sri Lanka’s rupee had collapsed from 151 to 185 to the US dollar since April 2018, after collapsing from 131 to 153 from 2015 to 2018 worsening losses in state enterprises and nullifying price reforms in petroleum.

SOE

Lower tax revenues from the stimulus, Covid-19 and import controls may drive the deficit to as much as 9 to 11 percent of gross domestic product analysts said.

The government spending has been cut in the first quarter, Lakshani Fernando – Vice President at Asia Securities said. Increasing taxes was also a problem at this time with the economy set to contract in 2020.

“SOE has to be one of the key priorities,” Lakshani Fernando – Vice President at Asia.” I think this is one of the things they will focus on.

Indirect privatization could also be on the agenda.

“In the next year there is a high likelihood that we will look at privatizations,” Head of Research at First Capital, an investment house said.

“Already the government has started this Temasek model type company called Selendiva. They already have a structure, 51 percent going to the government. There is likelihood that they will raise money through that area.

“That will obviously have foreign investment coming in. That may not be the traditional foreign investment.”

Tax Hikes

The government however is now taxing petroleum heavily to get some revenues.

When value added taxes were slashed by the current cabinet, policy makers were expecting to get more money out of growth rather than the rate.

An increase in taxes was needed but the question was its impact on an economy already hit by Coronavirus, Asia Securities’ Fernando said.

“We are looking at slow economic activity,” Fernando said. “If on top of that the government tightens fiscal policy by increasing those taxes, it is going to be a bigger impact, but I honestly think that has to be done at this point.

Overall there are some hard decisions to be made.”

“What I feel is there could be an additional form of taxes coming in,” Udeeshan Jonas – Chief Strategist at Capital Alliance said.

“It might not be VAT as such; it may be another indirect tax. Given that the government wants to control import duties, it may be another tax on non-essentials.”

He said the value added tax cut had not increased spending of the consumer as prices were not reduced, but it helped firms.

IMF Program

Nikita Tissera – Head of Research at Bartleet Religare Securities, said the IMF program could be a catalyst for hard reforms, but there have also been other cases.

Tissera said improving the profits of SOEs, higher direct taxes could be options.

He said Nigeria – an oil exporter with chronic monetary instability – had gone against IMF recommendations over the last three years, and foreign capital was controlled.

“Despite the IMF warning them very severely on the east of capital movement, they did not do it and Nigeria still got the facility they wanted,” Tissera said.

“So I don’t know at this time bang in the middle of the pandemic how pressing the IMF would be to press reforms on us, linked to their help.

An IMF program will help improve investor confidence. With Sri Lanka’s sovereign bonds trading at a discount, the country has been pushed out of the bond market and will have to pay a billion dollar maturing bond out of reserves.

Analysts said the likelihood of a default was low, may be around 5 to 10 percent.

An IMF program would to address the problem of debt sustainability, persons familiar with the issue say.

At the moment fresh budget support loans from other multilateral loans are also in abeyance until and IMF program addresses the issue with a credible fiscal plan.

With a highly unstable soft-peg Sri Lanka is a serial IMF customer. Since the soft-peg was created the central bank has had 16 programs with the IMF. Necessarily not a single had reformed the soft-peg. (Colombo/July25/2020)

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Sri Lanka coconut auction prices continue to climb

ECONOMYNEXT- Sri Lanka’s average coconut prices grew 3.7 percent to 64,618.23 rupees for 1,000 nuts at the last auction held on Friday August 12, official data showed.

The highest price was 62,900 rupees for 1,000 nuts, while the lowest was 57,000 rupees at the auction conducted by Sri Lanka’s Coconut Development Authority.

Buyers offered 1,019,395 nuts at the auction and sold 576,906.

Exports of coconut-based products have risen by 12 percent in January to June to 434.48 million dollars from a year earlier, data show. (Colombo/Aug13/2022)

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Chinese tracking vessel cleared to dock at Sri Lanka’s Hambantota Port

Hambantota Port

ECONOMYNEXT – Sri Lanka’s Ministry of Foreign Affairs has given the green light to Chinese tracking vessel Yuang Wang 5 to dock at the Chinese-built Hambantota Port from August 16 to 22.

Sri Lankan authorities had first given clearance to the Chinese vessel on July 12, to make a port call at the Hambantota Port from August 11 to 17​ for replenishment purposes.

However, following a diplomatic standoff after concern about the tracking vessel’s anticipated arrival were reportedly raised by the US and India, Sri Lanka’s foreign ministry requested China to defer the port call until “further consultations”.

A report by Sri Lanka’s privately owned Times Online news website said Saturday August 13 morning that the foreign ministry has authorised the docking of the ship.

Related:

Sri Lanka permits entry to controversial Chinese tracking vessel Yuang Wang 5

The ministry’s official statement released Saturday evening confirmed that the ship has been given clearance to dock at the Hambantota Port for the new dates August 16 to 22.

“The Ministry wishes to reiterate Sri Lanka’s policy of cooperation and friendship with all countries. Security and cooperation in the neighbourhood is of utmost priority. It is Sri Lanka’s intention to safeguard the legitimate interests of all countries, in keeping with its international obligations. The Ministry is deeply appreciative of the support, solidarity and understanding of all countries, especially in the current juncture when the country is in the process of addressing severe economic challenges and engaging in multiple domestic processes to ensure the welfare of the Sri Lankan people,” the ministry said, without naming the stakeholder countries. (Colombo/Aug13/2022)

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Sri Lanka looking to provide relief to bona fide protestors: justice minister

Pix by T.N.Nawas

ECONOMYNEXT – Sri Lanka has entrusted the process of identifying individuals who engaged in violence during the widespread anti-government protest to a “different group”, as there is a “practical issue” with separating those individuals, the island nation’s Justice Minister said.

“There is a problem. This is not a legal issue; it is a practical issue because the Aragalaya consists of several groups. In fact even the police has difficulty identifying who were genuinely involved in the peaceful struggle and the others who came from outside and caused some violence,” said Minister Wijedasa Rajapaksha, speaking to EconomyNext on Wednesday August 10.

“We needed assistance in identifying those who [protested] bona fide. We want to give them relief; [not] take any legal action against them.”

Sri Lanka saw a massive uprising against the government’s inability to protect people from a debilitating economic crisis caused by wrong economic policies. The public took to the streets to demand the resignation of then President Gotabaya Rajapaksha and a stop to Sri Lanka’s systemic corruption.

Most protestors focused on sustained protests in several areas of the island, particularly the GotaGoGama agitation site in front of the President’s Secretariat.

However there were incidents of violence that saw houses of ruling party MPs looted and burned down and public property damaged. President Ranil Wickremesinghe’s private residence was also burned down in July, while he was Prime Minister and protestors were occupying the Official Residence of President Rajapaksha, who had by then fled the country.

Wickremesinghe declared a State of Emergency shortly after, granting the forces power to arrest anyone suspected of engaging in violent behaviour.

However, many of the arrested protestors allege that they were not part of the “violent minority”.

“This was such a peaceful protest. When the Bastille was stormed there was not a brick left in the place,” said one protestor.

The protestors subsequently handed over the occupied government buildings to the authorities, and have now wrapped up the occupation segment of the protests following to a court order.

Activists both local and international are asking the government to repeal the State of Emergency, but Wickremesinghe has not indicated that he plans to do so anytime soon.

The Supreme Court meanwhile has granted leave to proceed to a Fundamental Rights Petition filed by former Human Rights Commissioner of Sri Lanka Ambika Satkunanathan.

Satkunanathan tweeted Friday August 12: “The Supreme Court granted leave to proceed in Articles 12(1) and 14(1) in the fundamental rights petition I filed challenging the declaration of the state of emergency and the emergency regulations.”

Though Satkunanathan had filed the petition for other allegedly violated Articles, the Supreme Court will only be proceeding with Articles 12(1) and 14(1) which deal with equality under the law and freedoms of speech, expression and assembly.

Several prominent protestors have been jailed under the Emergency laws, and on Wednesday August 10 the Immigration Department cancelled the visa of a Scotswoman who had documented the protests.

Minister Rajapaksha said that he had met with protestors, and discussed the situation regarding arrests.

“We are in the process [of identifying protestors]. We entrusted that to a different group on the advice of the president and we will do that in the following days,” he said.

“The police will have to take action only against those who engage in vandalism,” he said. (Colombo/Aug13/2022)

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