ECONOMYNEXT – Sri Lanka’s government will have to extract more taxes from the people to sustain itself and repay debt and the country faced a ‘make or break’ challenge over revenues, Central Bank Governor Arjuna Mahendran said.
"Sri Lanka still taxes its people like a Sub-Saharan country," Mahendran told members of Sri Lanka’s Association of Professional Bankers Thursday. "We still manage to get only about 10 percent of GDP (gross domestic product) which is quite pathetic."
"For some reason the government cannot bring itself to raise sufficient taxes to pay its debt, let alone the rest of the expenditure, paying public servants etc."
Analysts have pointed out that amid low revenues the current administration had ratcheted up average state salaries by 40 percent, in a remarkable fit of fiscal profligacy, which has been monetarily accommodated, generating balance of payments pressure.
The rupee has already fallen 7 percent this year, imposing ‘belt tightening’ on all citizens in the most regressive manner possible, a trick Sri Lanka perfected in the 1980s by operating a ‘crawling peg’ with the US dollar.
Sri Lanka has too many tax spenders with a bloated public sector which people in the private sector find in difficult to maintain with taxes, critics have pointed out.
Some analysts pointed out that in addition to giving exemptions to politically favoured sectors, Sri Lanka state enterprises which still control key areas of the country do not pay taxes unlike in comparable East Asian nations, and are themselves kept alive by taxes from the people.
In the 1980s and 1990 when revenues were around 20 percent of GDP the power sector was taxed a 20 percent turnover tax.
Now the power sector itself has become taxation system of cross subsidies operating outside the budget, where moderately large users are ‘taxed’ at the second highest rate in Asia and the money is used up as cross subsides.
There have also been concerns that Sri Lanka’s GDP number is inflated. A revision by this administration has added work-in-progress, imputed income, all of which do not bring in tax income as well as some new sectors.
Meanwhile Mahendran said Sri Lanka has used foreign savings to fund infrastructure during the last regime.
"We may have fallen into a trap in the last five to seven years of perhaps becoming exceedingly depended on foreign savings that we borrow to trying and fund our development," he said.
"You can see that a lot of concrete had been poured, principally funded by pretty expensive borrowings from foreign countries and foreign markets,
"Which is all very well provided that infrastructure becomes productive and give us a return which will enable us to pay that back.
Sri Lanka this week sold a 1.5 billion US dollar bond in foreign markets with a spread widening by around 100 basis points over that paid earlier this year but much lower than the price paid by countries like Pakistan only a few weeks earlier.
Mahendran said the numbers indicated that state investments were not generating enough revenues.
The principle problem appeared to be the inability to collect taxes, he said. There were too many exemptions and there were several dozen taxes which made the system complex and difficult to pay and administer.
He said an online payments system would make it easier to pay taxes.
Mahendran said Sri Lanka’s tax system is regressive, involving high import duties charged on food taxes.
Sri Lanka’s private domestic savings are high, but total domestic savings are lower than some peer Asian nations because the government runs a current account deficit in the budget (dis-saving) dragging down the overall domestic savings rate.
In addition public sector non-financial enterprises are also classed as ‘private’ firms, but are making losses, dragging down even the private domestic savings rate.
In Malaysia the overall public sector including state enterprises ran a surplus of 84 billion Ringgit in 2014, or 7.4 percent of GDP, which is the key reason for the country’s high domestic savings rate. (Colombo/Oct30/2015).