MR signals return to inward-looking economic policy
Posted on October 31st, 2018

Courtesy The Daily Mirror

Assuming duties as the Finance and Economic Affairs Minister yesterday, Prime Minister Mahinda Rajapaksa hinted towards his plans to return Sri Lanka to the inward-looking economy that he had built during his presidency from 2005 to 2014. While acknowledging the important role foreign direct investment could play in Sri Lanka’s economic advancement, Rajapaksa said domestic production and the agriculture sector activities would be actively encouraged for import substitution. This policy stance stands in contrast to the policies followed by the Ranil Wickremesinghe administration and its Finance Minister Mangala Samaraweera.

The Wickremesinghe administration was actively propagating a more outward-looking economic policy through expansion of foreign trade and maintaining an open-door policy for foreign investments and immigration.

During the almost four-year administration of Wickremesinghe, Sri Lanka actively pursued trade deals with regional nations and a number of laws were repealed or amended to facilitate the outward-looking economic policies.

Sri Lanka entered into a comprehensive free trade agreement (FTA) with the city state Singapore and was actively pursuing an extension to the existing FTA with India. Negotiations were also underway for a free trade deal with China.

These trade deals however were evidently making a lot of Sri Lankan industrialists uneasy.

Rajapaksa addressing the Finance Ministry staff yesterday said local production should be encouraged by supporting local industrialists and stressed the taxes imposed on them should be reasonable.

You should impose taxes on businesses. But that should be according to their capacities to pay taxes,” he said.

During Rajapaksa’s presidency, a number of local industries were protected by slapping high taxes on imports.

Meanwhile, Rajapaksa urged the need for a stable economic environment and exchange rate.

He said the revising of fuel prices every month doesn’t help creating a stable and predictable economic environment.

Rajapaksa said under his management, Sri Lanka’s budget deficit was brought down from over 10 percent to 5.2 percent in 2014 and the debt to gross domestic product (GDP) ratio to 71 percent, from 91 percent.

He further said the rulers should always be mindful of the cost of living of the people, despite the global developments such as high crude oil prices.

Meanwhile, touching on Sri Lanka’s hefty external debt repayment obligations, Rajapaksa said Sri Lanka has an unblemished track record in paying loans, has never defaulted and would not default in the future.

Sri Lanka’s external debt stock is equivalent to around 60 percent of GDP and almost 30 percent of this (US $ 15 billion) is due to mature between 2019 and 2022.

4 Responses to “MR signals return to inward-looking economic policy”

  1. Dilrook Says:

    Very good.

    Hope he will do so. However, FTA with India, Pakistan and Singapore protects their goods. No taxes can be imposed on goods covered by these FTAs. Although JO/SLPP screamed about scrapping the Singapore FTA, now they are not doing it!

    As per the Singapore FTA, it can be scrapped unilaterally (by one party) just by giving notice to the other. Why is it not scrapped? It will be another 13A with bipartisan support.

  2. Ananda-USA Says:

    The Govt should heavily tax luxury importss, and lower the tax on imports that cannot be produced locally but are needed as raw materials for local production. Promote local manufacturing and farming by reducing the taxes for their raw-material imports ‘.

    The Govt shoud recover the huge number of luxury vehicles imported by the previous Govt for its lackeys, and put them to use without importing more vehicles. Also, the New Govt should RETURN TO SERVICE those old luxury government vehiclles RUSTING in parking lots, or AUCTION them off to the public and return the auction incoome to the National Treasury.

    Yes, indeed a STABLE economic environment and a STABLE exchange rate (perhaps tied to the US dollar which is relatively stable in vaue) are ESSENTIAL for encouraging foreign and local investment in long-term projects.

    While the advice that tho FIRST thing to do when you fall into in a HOLE is to STOP DIGGING is GOLDEN, long-term investments using foreign loans for the Development of National INFRASTRUCTURE that will PAY FOR THEMSELVES in the long-term should not be HALTED on a case-by-case basis, PROVIDED the Govt has the necessary CASH-FLOW to service the loans until they begin to PAY FOR THEMSELVES!

  3. Ananda-USA Says:

    BRAVO! This is EXACTLY some of the Economic Policy steps I was advocating above for boosting local manufacturing and farming.

    New Finance Minister of Sri Lanka announces comprehensive relief package to promote economic growth

    Nov 01, Colombo: The Finance Ministry of Sri Lanka headed by the new Prime Minister Mahinda Rajapaksa today announced a comprehensive relief package to revive the economy and promote growth.

    The Prime Minister, who is also Minister of Finance and Economic Affairs announced the ‘Programme for Economic Revival’ taking measures to reduce fuel prices, special commodities levies and several other levies including VAT implemented by the previous government.

    Following is the full statement issued by the Finance Ministry on the ‘Programme for Economic Revival’:

    His Excellency the President, and the Honorable Prime Minister and Minister of Finance and Economic Affairs have raised concerns regarding the serious setback in the economy as reflected in the persistently low growth rates during the last 3 years along with the rising cost of living. The Honorable Prime Minister is of the view that ill-conceived economic and financial policies of the previous Government have led to this situation by marginalizing local entrepreneurs, industries and domestic production.

    As 2018/2019 Maha cultivation season has begun with extremely favorable weather throughout the country, the economy is set to get a new revival as all hydro power reservoirs and irrigated schemes have reached full storage capacity to generate electricity, provision of drinking water and water for cultivation. The Government thinks that this is the best opportunity to prepare the country to get the maximum benefit from agricultural production. At the same time the consumers are saddled with high cost of living. In this background the Prime Minister and Minister of Finance and Economic Affairs has given direction to implement following initiatives to revive the economy.

    1. In order to ease the pressure on high cost of living while also protecting the local farmer, Special Commodity Levy will be reduced on Dhal by Rs.5 per Kg, Chickpeas by Rs. 5 per Kg, Black gram by Rs.25 per Kg. Customs Duty will also be waived on Wheat grain to Rs. 9 per Kg from the existing waiver of Rs.6 per Kg. Sugar will be brought under the Special Commodity Levy whereby the applicable taxes on Sugar will also be reduced by Rs.10 per Kg. Accordingly, the commodity prices will be reduced with immediate effect.

    2. Given the impact of fuel pricing on all strata of the society especially those engaged in transport, agriculture and fisheries sectors, price of Petrol (Octane 92) will be reduced by Rs. 10 per liter, Auto Diesel by Rs.7 per liter and Lubricants including the 2T lubricants used in three-wheelers and small agricultural engines by Rs.10 per liter with effect from mid night today. At the same time a cost-based pricing mechanism will be implemented on fuel in place of the monthly fuel price formula.

    3. A guaranteed price scheme will be introduced for Paddy, Onion and Potatoes produced locally by our farmers. Accordingly, SCL will be raised during harvesting period to protect farmers through remunerative guaranteed prices. As potatoes and B-Onions are being harvested, SCL on potatoes and B-Onions will be maintained at Rs.40 per Kg.

    4. In order to mitigate the impact of adverse weather conditions which resulted in farmers losing their livelihood and becoming heavily indebted, interest and the penal interest incurred by farmers and small Paddy Mill owners on loans up to a maximum of Rs.50 million, from all Commercial Banks during the past 3 years, will be written off in full and will be borne by the Government.

    5. The maximum threshold on Loan advances given by Samurdhi Banks to Samurdhi beneficiaries to support their livelihood activities will be increased by Rs.10,000/-.

    6. Fertilizer prices for paddy will be maintained at Rs.500/50kg bag and fertilizer prices for other crops will be reduced to Rs. 1,000/50kg bag from Rs. 1,500/50kg bag.

    7. The concessionary income tax rate of 14% on agriculture is presently applied only for the companies engaged in agricultural businesses. The income of individuals from Agricultural undertakings will also be reduced from the existing maximum rate of 24% to 14% so that individual farming agriculture is also encouraged.

    8. The concessionary Income Tax rate of 14% is presently applicable under the SME categories only for Companies. This rate will be extended to include individuals including those providing professional services. Therefore, the income tax rate for professional services will be reduced from 24 percent to 14 percent.

    9. Withholding tax will be exempted on Interest on any savings and fixed deposits maintained in any financial institution.

    10. To encourage local entrepreneurs, professionals and migrant workers to remit their earnings in foreign currency on services provided outside Sri Lanka, Income tax will be exempted on such remittances.

    11. The adverse impact created by high indirect taxes will be mitigated by simplification of VAT and NBT. The VAT threshold will be increased from Rs.12 million per annum to Rs.24 million per annum.

    12. The threshold for the VAT liability of the wholesale and retail sector also will be increased from Rs.50 million to Rs.100 million per twelve months providing benefits to small traders and businesses.

    13. The VAT rate applicable on the import of Sawn Timber will be reduced to 5% to support the local Construction Industry.

    14. VAT on the import of fabric will be exempt providing benefits to the small and medium garment manufacturers.

    15. Considering the high tax imposed on the Telecommunication services, the Telecommunication Levy of 25% will be reduced to 15%.

    The thrust of these initiatives are to encourage production and simplify the tax system. It will certainly help households with additional income in their hands. The proposed changes to the tax system will also encourage inward remittances and savings.

    The Government also expects to reduce its expenditure with the rationalization of Cabinet ministries as reflected in a lesser number of ministries and reexamination of capital expenditure programs. Accordingly, the government is confident that the primary surplus of 1.8 percent of GDP and the budget deficit of around 4.9 percent of GDP that have been targeted for 2018 could be achieved in support for further fiscal consolidation to provide economic stability. The measures to further consolidation of external trade and payment transactions are also being examined to provide much-needed stability to the exchange rate.

    His Excellency the President and Honorable Prime Minister and Minister of Finance and Economic Affairs have directed the implantation of the above policy measures. The necessary Gazettes for the aforementioned tax-related proposals will be issued today and Cabinet approval is sought to amend the necessary tax laws.

    Ministry of Finance and Economic Affairs

  4. Dilrook Says:

    All above measures are good excep 1.

    [Quote] 1. In order to ease the pressure on high cost of living while also protecting the local farmer, Special Commodity Levy will be reduced on Dhal by Rs.5 per Kg, Chickpeas by Rs. 5 per Kg, Black gram by Rs.25 per Kg. Customs Duty will also be waived on Wheat grain to Rs. 9 per Kg from the existing waiver of Rs.6 per Kg. Sugar will be brought under the Special Commodity Levy whereby the applicable taxes on Sugar will also be reduced by Rs.10 per Kg. Accordingly, the commodity prices will be reduced with immediate effect. [Unquote]

    This is a disaster.

    No point trying to save the local farmer is these rival imports are encouraged. A cut on levies on lentils is reasonable though. Please note that Indians and a Singapore company are in charge of these imports. That explains it.

    Also what about the Singapore-Sri Lanka FTA? It can be abolished simply by giving the other party notice. Why is it not done? Where are the seasonal jokers who screamed about scrapping it?

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