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Wednesday June 7th, 2023

Sri Lanka’s current policies were years in the making – Godahewa

A view of Colombo showing the Presidential Secretariat, Treasury and the Twin Towers/Amitha Thennekoon economynext

ECONOMYNEXT – The new government’s policies were formulated years before implementation says Nalaka Godahewa, Key Advisor to the Government and former Chairman of the Securities Commission.

“When our leader of Viyathmaga, President Gotabaya Rajapaksa was appointed, the policies we developed over the years became national policy,” Godahewa said at an investment forum organized by Sri Lanka Malaysia Business Council (SLMBC).

“For 4 years a group of professionals discussed what the economic policy of the future government should be, but at that time it was not with the intention of us running the country,” he said.

“Being in the opposition gave us a chance to sit back and analyze what went wrong and why we weren’t developing at the rate we should be.”

As a result, the government brought in sweeping tax cuts in a move to spur economic activity, he went on to say.

“What we promised as tax cuts we have given and yet some of the benefits have not being realized, so we are working on that too,” said Godahewa.

Sri Lanka unified and reduced the Value Added Tax (VAT) of 15 percent and Nation Building Tax (NBT) of 2 percent to 8 percent, construction tax was reduced from 28 percent to 14 percent and telecommunication levy was reduced to 25 percent

All taxes imposed on remittance made by ex-pat workers to be removed, VAT on condominium properties removed and tax on places of worship too were removed.

“Our economic direction is pretty simple, it focuses on four cornerstones; complete eradication of poverty, equal opportunities to all, clean and efficient government and protecting our local companies,” said Godahewa.

He said that the new government needs to protect Sri Lankan companies because we cannot compete with foreign entities as “all the other countries have come to a certain (higher) level of development.”

Godahewa said the previous government was focused on political suppression rather than political development.

In a 2020-2025 policy framework, the new administration has said it aims for a deficit or less than 4 percent of GDP and economic growth of 6.5 percent. This year the deficit is expected to reach 7.0 percent of GDP.

In President Rajapaksa’s election manifesto he outlined 10 Key Policies; Priority for national security, Friendly and non-aligned foreign policy, an administration free from corruption,  a New Constitution that fulfils the people’s wishes, Productive Citizenry and a vibrant Human resource, People-Centric Economic Development, Technology-Based Society, Development of Physical Resources, Sustainable Environmental Management and a disciplined law-abiding and values-based society.(Colombo/Jan29/2020)

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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed amid weak credit and better inflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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