The fall –out from the country’s forex crisis hit the streets with irate drivers queuing up for fuel at petrol stations as the country’s diesel pumps ran dry. In several locations including Colombo, Negombo, Nugegoda and Kohuwela people held candlelit vigils in the dark and protested by the roadside carrying torches as frustrations built up at the long hours of power cuts the lack of fuel has brought on. In some locations, angry protestors who had set up road blocks were seen having heated exchanges with the police who had been deployed in petrol stations to keep the peace.
Meanwhile Samagi Jana Balawgeya MP and economist Dr Harsha De Silva who talked toNewsline raised the alarm about the potential for emergency services like ambulances also being affected by the fuel shortage.
For many months now, the writing has been on the wall although the government chose to look the other way and ignore it. Udaya Gammanpila, who was the Energy Ministeruntil his sacking on Thursday for failing to toe the government line, had been warning about an impending fuel shortage even as the country’s dollar reserves nosedived to suffice for only half a month of exports. Gammanpila did not do much else to salvage the situation, nor did the government which ended up hamstrung by the inability to purchase sufficient stocks of fuel for electricity generation and to meet consumer needs.
Gammanpila and former Prime Minister Ranil Wickremesinghe predict that there is worse to come with the likelihood of the current seven hour power cut being extended to ten hours by March. Following President Gotabaya Rajapakse’s meeting with senior government officials on 2 March the government announcedits decision to provide an uninterrupted power supply from 5th March. A payment of US$ 31 million to a Singaporean company for a diesel shipment of 37, 000 metric tons is likely to enable this.
But contrary to the government’s pledge and causing further consternation to the consumer, the Ceylon Electricity Board and the Public Utilities Commission of Sri Lanka have announced power cut schedules until the 6th of March. Meanwhile in what has become standard practice akin to picking a card from the same pack, Gammanpila who was relieved of his portfolio in Thursday’s sudden cabinet reshuffle was replaced by Gamini Lokuge, who until then held the parallel portfolio of Minister of Power.
Although the government has scapegoated the pandemic and the resulting drop in tourist arrivals as being the main reasons for the country’s economic debacle, the knowledge that the country’s current financial woes are the government’s own making is gathering momentum among the people.
The president was instrumental in introducing sweeping tax changes in December 2019, in particular the increase in thresholds for Value Added Tax (VAT) and the abolition of Pay AsYou Earn (PAYE) tax.
In January 2020, the mandatory PAYE Tax on any employment receipts to any resident or non-resident person was removed and on 01st April 2020 it was replaced by the Advance Personal Income Tax (APIT) which is an optional scheme. The tax-free threshold for personal income tax was also increased from LKR 500,000 per annum to LKR 3,000,000 per annum, reducing a large number of tax payers from Sri Lanka’s tax base. Further on 01st January 2020, the threshold for VAT registration was increased from LKR 12 million per annum to LKR 300 million per annum and an exemption for VAT was provided for information technology and enabling services.
With the abolition of PAYE employees are expected to file their own income tax returns if their annual income is above the tax-free threshold. However, the increase in individual income tax files between 2019 and 2020 was just 11,607, which is insignificant when compared to the decline in PAYE/APIT registered taxpayers of 485,055.
The tax changes led to an erosion in the tax base with a 33. 5 percent decline in the number of registered tax payers. The money that was lost to the government purse was 600 billion rupees of tax revenue.
These tax incentives and the lack of revenue raising measures in budgets have been among the reasons for Sri Lanka’s down grading by credit rating agencies. Between 2015 and 2020, Sri Lanka has been down graded five times of which three times have been between 2020 and 2021.
Another reason for the down grade has been the decline in worker remittances from US$ 675 million in 20201 to US$ 259 million in January 2022. It’s a loss of US$ 2. 5 bn to the economy.
Although the pandemic had a bearing on this, the dominant reason now is that the government has been stoic about pegging the rupee to the US dollar. It has led to a flourishing black market and the government has instructed the police to arrest those who are involved in the illegal trade of dollars. Economists grimace about the ready availability of dollars in the black market than through official channels.
Meanwhile last week the government received a missive from the International Monetary Fund (IMF). It’s assessment ran contrary to that of the government. The IMF saw scope for the government to raise income tax and VAT rates and minimize exemptions. It also said that further efforts are needed to diversify the economy, phase out import restrictions, and improve the business and investment climate in general. While telling the government to renew efforts on growth enhancing structural reforms, it pointed out the need to strengthen governance, fight corruption and to manage the ColomboPort City Project prudently.
The IMF agreed that a tighter monetary policy stance is needed to contain rising inflationary pressures, while phasing out the central bank’s direct financing of budget deficits. They also recommended a gradual return to a market-determined and flexible exchange rate to facilitate external adjustment and rebuild international reserves. Directors called on the authorities to gradually unwind capital flow management measures as conditions permit
The IMF’s rap comes after its executive board concluded the 2021 Article IV consultation on Sri Lanka.
The directors noted that the country faces mounting challenges, including public debt that has risen to unsustainable levels, low international reserves, and persistently large financing needs in the coming years. Against this backdrop, they stressed the urgency of implementing a credible and coherent strategy to restore macroeconomic stability and debt sustainability, while protecting vulnerable groups and reducing poverty through strengthened, well-targeted social safety nets.
Meanwhile the Ceylon Chamber of Commerce (CCC) too reiterated its position that the government should go to the IMF.
The CCC on its own and together with other chambers, has, on numerous occasions, consistently advocated an engagement with the IMF since the outbreak of the COVID-19 pandemic in March 2020.
‘A systematic and methodical approach to restructure debt with the support of the IMF will help the government to successfully manage its external debt obligations, while ensuring the availability of much needed foreign exchange to support vital economic activity’, the Chamber said in a statement. “This could ensure the allocation of scarce foreign exchange reserves towards the purchase of essential supplies such as fuel for electricity generation, transport of goods and persons and other industrial purposes without holding it back for debt servicing’.
According to the CCC these issues are all ramifications of the shortage of foreign exchange experienced by the country and believes urgently addressing the currency issue is the fastest way in which the power and energy issues can be tackled in the short term.
The Chamber was also seriously concerned about the adverse effects the interruption to the power supply and the fuel shortages were having on its members and all sectors of the economy. The recovery seen recently in tourism and export sectors can be seriously hampered and economic growth slowed down unless urgent action is taken to eliminate the disruptions to the supply of electricity and fuel which is threatening to cripple all sectors of the economy.
