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Stakeholders in Sri Lanka’s IMF programme recognise need for reform: top IMF official

IMF Asia and Pacific Department Director Krishna Srinivasan

ECONOMYNEXT – There is broad recognition among various stakeholder groups that Sri Lanka has been through a crisis and ambitious reforms are necessary despite some differences of opinion, a top International Monetary Fund (IMF) official said after discussions with said stakeholders.

IMF Asia and Pacific Department Director Krishna Srinivasan told a media briefing on Monday May 15 in Colombo that he had met with a “variety of stakeholders” including trade union representatives during a four-day IMF mission ahead of a review due in September.

“There are differences of views in terms of reform priorities, the pace of reforms, and so on. But there is a broader recognition that the country was in crisis and that ambitious reforms are needed ,and that they should be pursued in a comprehensive way,” said Srinivasan.

“You’ll have various stakeholders and they’ll have different views. That’s to be expected,” he added.

Srinivasan was responding to a question posed by EconomyNext on resistance to some of the IMF-prescribed reforms, particularly with regard to a hike in personal income tax which was met with strong protest.

Asked about public-buy in for the painful reforms that Sri Lanka is required to undergo as part of the crisis-hit country’s 17th IMF programme, IMF’s Senior Mission Chief for Sri Lanka, Asia and Pacific Department Peter Breuer said that the public may perceive an overlap between the crisis and the reforms needed to overcome the crisis.

“In people’s perception, these two things are linked and they may not like it. But Sri Lanka is a good example of what happens when the IMF isn’t here,” he said.

Breuer said the pain of the crisis was already palpable long before the IMF’s 2.9 billion dollar extended fund facility (EFF) was approved in March.

“You know it better than we do. The pain was clear and present. What the IMF does is it provides some financing that cushions the transition from a very harsh reality to a new equilibrium. It gives a little bit of breathing space to let these necessary reforms take place and help the country emerge from the crisis [in the medium term],” he said.

IMF Resident Representative in Sri Lanka Sarwat Jahan said she has personally has a first-hand understanding of what the people have been going through with inflation, high interest rates and loss of jobs having a tremendous impact.

“But we’re also here to work with you so that, through the stabilisation process, Sri Lanka will come back to where it was perhaps two years ago,” she said.

In the absence of a survey on public support for the IMF programme, it is hard to accurately assess whether there is wide acceptance of the government’s reform agenda that is largely in line with conditions posed by the international lender. The reforms include revenue based fiscal consolidation, restructuring of state-owned enterprises and other measures that are politically sensitive.

Sri Lanka’s opposition parties, too, have also been blowing hot and cold on the reforms. The main opposition party, the Samagi Jana Balawegaya (SJB), which was among the first to urge the then government to approach the IMF for a bailout in early 2022, has now taken a more cautious tone. Spokesmen for the party have alluded to a unique economic vision the party possesses with regard to macroeconomic development that doesn’t necessarily include the IMF

Related:

Sri Lanka’s SJB no longer enamoured of IMF, promises new govt in three moons

In a meeting with SJB and a number of other opposition MPs following on Tuesday May 16, SJB and opposition leader Sajith Premadasa told the visiting IMF officials that Sri Lankans are undergoing unbearable hardships due to poverty and the tax hike while small and medium enterprises are also struggling. Seeking IMF assistance in overcoming these issues, Premadasa asked the officials to pressure the government to be more transparent with how it spends the funds it receives.

The leftist National People’s Power (NPP) led by the Marxist-Leninist Janatha Vimukthi Peramuna (JVP), on the other hand, has been increasingly hostile towards IMF-backed reforms. The party, which has been gaining ground at least according to one opinion poll, was not overtly opposed to IMF assistance at the onset of Sri Lanka’s crisis early 2022, but has turned up the volume on its anti-IMF rhetoric since the appointment of President Ranil Wickremesinghe whose administration successfully negotiated the IMF deal.

One reason for the scepticism levelled at the latest IMF programme is that it is Sri Lanka’s 17th, the previous 16 not having delivered the anticipated results. Addressing this concern, Srinivasan said at Monday’s press briefing that this time it’s different in one critical way.

“Debt is assessed to be unsustainable. In the past, the crises were more of a balance of payments nature. What do you do to ensure that debt is sustainable? That requires some very strong reform efforts – even if you talk about revenue based fiscal consolidation and so on, which is pretty ambitious. There is little choice. If you don’t do these reforms, your debt is going to get worse and you don’t want that,” he said.

The authorities have so far shown commitment to the reforms they have undertaken, he said, as evidenced by the government meeting all prior actions that were required before IMF board approval on the loan.

“It’s important to recognise that they showed commitment to the reform efforts. Now, going beyond that, what is different is that it goes towards building greater ownership and buy-in from the population at large,” he said.

Efforts taken by the government to address corruption vulnerabilities, one of the pillars of the programme and the governance diagnostic requested by the government should “assuage people that these issues are being taken seriously,” said Srinivasan.

“We recognise that this programme is very ambitious and a difficult one, he added.

The official said the IMF also recognises that the programme will have a disproportionate impact on the poor and vulnerable. The floor on social spending that the organisation has prescribed is among the various elements that will go towards more public buy-in, he said.

“There is reason to believe that there is more commitment and this programme will succeed,” he added. (Colombo/May17/2023)

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  1. sacre blieu says:

    How can the country recover even in the slightest when the president and government are obstructing the path to justice? Not even, in spite of the evidence, one fraudster has been prosecuted, nor a rupee has been recovered.

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  1. sacre blieu says:

    How can the country recover even in the slightest when the president and government are obstructing the path to justice? Not even, in spite of the evidence, one fraudster has been prosecuted, nor a rupee has been recovered.

Sri Lanka central bank appoints two Deputy Governors

ECONOMYNEXT – Sri Lanka’s central bank said Assistant Governors A A M Thassim and J P R Karunaratne were promoted to the post of Deputy Governor.

The full statement is reproduced below:

APPOINTMENT OF NEW DEPUTY GOVERNORS OF THE CENTRAL BANK OF SRI LANKA

In terms of the provisions in the Central Bank of Sri Lanka Act, No. 16 of 2023, Hon. Minister of Finance, as recommended by the Governing Board, has appointed Mr. A A M Thassim, Assistant Governor and Secretary to the Governing Board, and Mr. J P R Karunaratne, Assistant Governor, as Deputy Governors of the Central Bank of Sri Lanka with effect from 20.06.2024 and 24.06.2024, respectively.

Mr. A A M Thassim

Mr. A.A.M. Thassim has over 31 years of service at Central Bank of Sri Lanka (CBSL) in different capacities in the areas of Supervision and Regulation of Banking Institutions, International Operations, Communication, Payments and Settlements, Employees Provident Fund, Finance, Risk Management, Deposit Insurance, Security Services and Information Technology.

He has served as the Director of Bank Supervision (DBS), Director of International Operation (DIO) and Director of Communications (DCM) and has contributed towards strengthening the legal framework, governance, implementation the Basel 3 international guidelines for capital and liquidity and adoption of International Financial Reporting Standards (IFRS) 9 to the banking sector, thereby strengthening the resilience of the Financial Sector.

Further, as the DIO, Mr. Thassim was responsible for the investments and management of foreign reserves of the country and exchange rate management. Mr. Thassim has also gained experience and knowledge in the field of payment systems and was involved in the implementation of the Cheque Imaging and Truncation System. In addition, he has also served on several high-level internal committees including in the areas of monetary policy, financial system stability and international reserves.

Prior to the appointment as the Deputy Governor, Mr. Thassim held the position of Assistant Governor and was in charge of several key departments including the Bank Supervision Department. He also served as the Secretary to the Governing Board, Monetary Policy Board, Audit Committee, Board Risk Oversight Committee, Ethics Committee and Financial Sector Crisis Management Committee.

At present, Mr. Thassim is a board member of the Sri Lanka Export Credit Insurance Corporation and the Vice Chairman of the Institute of Bankers of Sri Lanka (IBSL). Further, he has also served as a board member of the Credit Information Bureau of Sri Lanka and LankaClear (Pvt) Ltd.,

Mr. Thassim is an Associate member of the Chartered Institute of Management Accountants (ACMA) United Kingdom and possesses a Masters in Business Administration (MBA) from the Postgraduate Institute of Management (PIM), University of Sri Jayewardenepura (USJ). He has also completed a programme on Gold Reserves Management from Hass School of Business, University of California, Berkeley, USA.

He is also an Alumni of Harvard University, USA having successfully completed the executive programme on Leaders in Development conducted by the John F. Kennedy School of Government.

Mr. J P R Karunaratne

Mr. J P R Karunaratne has over 33 years of service at the Central Bank of Sri Lanka in different capacities in the areas of supervision and regulation of Banks and Non-Bank financial institutions, Currency management, public debt, Secretariat, Finance, policy review and monitoring. He has served as the Director of Supervision of Non-Bank Financial Institutions (DSNBFI) and the Superintendent of Currency (SC) and has contributed towards strengthening the legal and regulatory framework in the Non-Bank Financial Institutions sector and has played a prominent role in the consolidation of the Non-Bank Financial Institutions sector. Prior to the appointment as a Deputy Governor, Mr. J P R Karunaratne held the position of Assistant Governor and was in-charge of the Department of Supervision of Non-Bank Financial Institutions, Finance Department and the Facilities Management Department.

As an Assistant Governor Mr. Karunaratne has previously overseen several other departments namely, Macroprudential Surveillance, Resolution and Enforcement, Foreign Exchange, Currency, Regional Development, Legal and Compliance, Risk Management, Center for Banking Studies, Security Services and Staff Services Management.

He has also served as the Secretary to the Monetary Board, Secretary to the Board Risk Oversight Committee, Monetary Board Advisory Audit Committee and the Ethics Committee. Further, He was on release to the Ministry of Defence, where he served as a Financial Advisor. He was also appointed as the Chief Operating Officer for the Secretariat of Committee of Chartered Accountants appointed by the Supreme Court in 2009.

He has served as the Chairman of the Sri Lanka Accounting and Auditing Standards Monitoring Board and has been a Council Member of the Certified Management Accountants (CMA) of Sri Lanka. Mr. Karunaratne was awarded the CMA Sri Lanka Business Excellence Award at the CMA Sri Lanka National Management Accounting Conference 2023 in recognition of his service to the profession. He has also received “Long Service Award” of the IBSL in 2019 in recognition of his long career and contribution as a resource person at IBSL.

He was the Project Team Leader of the South East Asian Central Banks (SEACEN) Malaysia, research project on “Implementation of Basel III Challenges and Opportunities in SEACEN Countries” and SEACEN published the research in 2013. He serves as a member of several internal and external committees at present.

Mr. Karunaratne holds a Master of Commerce Degree in Finance from the University of New South Wales, Australia and a Postgraduate Diploma in Applied Statistics and a Bachelor of Science (Physical Science) Degree with a First class from the University of Colombo. He is a Fellow Member of the Chartered Institute of Management Accountants (CIMA), UK and a Chartered Global Management Accountant (CGMA). Further, he is an Associate Member of the CMA Sri Lanka.

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Sri Lanka opposition questions claims that IMF housing tax is only for kulaks

ECONOMYNEXT – Sri Lanka’s opposition has questioned claims made by government spokesmen that a tax on housing proposed in an International Monetary Fund deal is only limited to rich people but if as promised by President one house is exempt, it is welcome, legislator Harsha de Silva said.

Sri Lanka President Ranil Wickremesinghe made a promise in parliament that the first house of a citizen will be excluded from the property tax.

Related Sri Lanka to exempt one house from imputed rent wealth tax: President

But opposition legislator Harsha de Silva pointed out that the IMF program documents clearly says taxes will be levied on owner occupied houses on ‘imputed taxes’, not second houses.

Under current inland revenue laws, actual rent income from a second house is already captured as part of taxable income.

The IMF document mentions a threshold value from which taxes will be exempt but not that a whole owner-occupied primary residence will be exempt.

“The tax is imposed on the income of individuals (rather than real property itself) and thus raises central government revenue in accordance with the constitution,” IMF staff said in their report.

“A similar tax was previously included in the Inland Revenue Act. No. 10 of 2006.

“Under this regime, primary residences were exempt and the assessed values for rating purposes were used to determine the base.

“Given the broad exemption and the use of outdated and downward biased annual values, the tax generated hardly any revenue.”

Meanwhile Sri Lanka has promised to impose the housing tax from April 01, 2025.

“…[W]e will introduce an imputed rental income tax on owner-occupied and vacant residential properties before the beginning of the tax year on April 1st, 2025,” the memorandum of economic policies agreed with the IMF said.

“An exemption threshold and a graduated tax rate schedule would make this tax highly progressive.

“The full revenue yield from this tax is estimated at 0.4 percent and would materialize in 2026 (with a partial yield of 0.15 percent in 2025).

“This yield would still fall short by 1 percent of GDP relative to the expected yield of 1.2 percent of GDP from the property tax envisaged for 2025 onwards.”

Presidential Undertaking

“Whatever the President said the IMF agreement says owner occupied house,” De Silva told in parliament.

“It is not the second house that is mentioned in the agreement.

“But there is one thing. I am happy as Samagi Jana Balawegaya, that we have been able to save the middle class in society from a massive tax that was to be imposed.”

In Sri Lanka there is a belief that the most productive citizens are fair game for excessive or expropriationary taxation, just like kulaks were targeted in the Soviet Union for actual expropriation, critics say.

Wealth taxes have had disastrous effects on some US cities like Baltimore, leading to falling populations and dilapidated houses.

Sri Lanka is currently facing a brain drain due to high income tax after on top of depreciation from severe monetary debasement from a flexible exchange rate, which is neither a hard peg nor a clean float.

Sri Lanka has imposed a wide range of taxes on the people to maintain a bloated state, after inflationists engaged in extreme macro-economic policy (tax and rate cuts) glorified in Saltwater-Cambridge doctrine to boost growth, throwing classical economic principles and monetary stability to the winds and driving the country into external default.

The IMF itself gave technical assistance the central bank to calculate potential output inviting the agency to cut rates to close the perceived econometric ‘output gap’.

In the run up to the default, rate cuts triggered multiple external crises, leading to output shocks as stabilization programs were implemented.

Macro-economic Policy

Macro-economic policy as known now was devised by Cambridge academic J M Keynes in the wake of the Great Depression triggered by the Federal Reserve after it invented open market operations and policy rates in the 1920s and also popularized by Harvard academic Alvin Hansen among others.

Macro-economic policy started to de-stabilize countries in peacetime in the interwar years and after World War II it led to the collapse of the Bretton Woods system.

The Great Depression was also a peacetime collapse of what was later known as the roaring 20s’ monetary bubble.

“They have blithely ignored the warnings of economists,” classical economist Ludwig von Mises wrote of European nations which got into trouble from rate cuts and Keynesian stimulus, which brought currency depreciation and protectionism in its wake from the 1930s.

“They have erected trade barriers, they have fostered credit expansion and an easy money policy, they have taken recourse to price control, to minimum wage rates, and to subsidies.

“They have transformed taxation into confiscation and expropriation; they have proclaimed heedless spending as the best method to increase wealth and welfare.

“But when the inevitable consequences of such policies, long before predicted by the economists, became more and more obvious, public opinion did not place the blame on these cherished policies…”

Who….?

In Sri Lanka however there is some understanding of the role played by macro-economists in the most recent crisis.

There are rumblings of unhappiness about ‘central bank independence’ given to an agency to create 5 to 7 percent inflation and currency debasement under a flexible exchange rate and its constitutional status relating to parliamentary control of public finances.

Sri Lanka’s central bank’s current flexible inflation targeting (inflation targeting without a floating rate) regime as well as its 1980s money supply targeting without floating rate has busted the national currency for decades and made it impossible to run budgets, made it difficult for people build houses which are now to be taxed, and also for millions to live and work in the country of their birth.

Fiscal metrics deteriorate each time rate cuts drive the country into currency crises and new taxes are brought in stabilization programs, ousting reformist governments and leading to policy reversals.

Sri Lanka’s citizens have suffered for decades from the privilege given to a few macroeconomists to print money to cut rates with inflationary open market operations and trigger forex shortages.

Related How Sri Lanka’s elections are decided by macro-economists and the IMF: Bellwether

Critics have pointed out that since 1954 in particular, central bank rates cuts which drive the country into external crises and the stabilization programs that follow, have been the main determinant of elections in the country and election of fringe political parties. (Colombo/June13/2024)

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India supports Sri Lanka Coast Guard to boost maritime security

ECONOMYNEXT – India has given 1.2 million US dollars’ worth spare parts to Sri Lanka’s Coast Guard to be used in a vessel also gifted to the Indian Ocean Island on an earlier occasion, the Indian High Commission in Colombo said.

“Handing over of the large consignment of spares symbolizes India’s commitment to support capability building towards addressing the shared challenges of Maritime Security in the region,” the Indian High Commission said

The spare parts were brought to Sri Lanka on the Indian Coast Guard Ship Sachet, an offshore patrol vessel that was on a two-day visit to the island.

The spares were formally handed over to the Sri Lanka Coast Guard Ship Suraksha which was gifted to Sri Lanka in October 2017 by India.

India has gifted spare parts for the ship in June 2021 and April 2022 and also provided assistance in refilling of Halon cylinders in January 2024. (Colombo/June23/2024)

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