Government on Financial Policy See Saw

In the backdrop of announcing a much dreaded re-making of the country’s tax system through a new Inland Revenue Bill, the Lankan Government has paradoxically announced a surprise “pre-budget relief package” including a host of concessions such as low-interest loans to small and medium enterprises and offering upto 50,000 new jobs.

While the IRA bill is being introduced under pressure from the IMF and the World Bank, political sources say that the unprecedented cash bonanzas introduced last Thursday is because the long overdue local government elections is likely to be held in December this year. The postponement of the local and provincial council elections is already an embarrassment to the SLFP-UNP national unity government of President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe.

The common speculation (debunked by the current regime) is that it is not calling for elections out of fear that former President Mahinda Rajpaksa and his Joint Opposition will contest independently and make a record victory. Rajapaksa who started the year 2017 with a promise to topple the government, made a show of a full house by filling the Galle Face Green, Colombo’s largest ground for people to gather, at its May day rally this year. Since then the Rajapaksa group has been shadowing the current regime laying every possible obstacle in its way, ranging from getting Buddhist monks to issue statements against the ongoing constitution making process to orchestrating trade union protests against foreign funded projects, mainly those involving India and China.

The current regime which has passed its two and a half year milestone has come under criticism for being unable to bring about economic progress and is unpopular for its neo-liberal policy, in accord with the recommendations of IMF and World Bank. IMF released the second tranche of the $ 1.5 billion Extended Fund Facility (EFF) mid this year but is strictly monitoring structural reforms. Despite predicting a 4.7% growth for 2017, the International Monetary Fund (IMF) in its latest report has flagged several vulnerabilities including public debt management.

The restructuring pledged by the government (which is making it hugely unpopular) includes six of the largest state-owned ventures — the Ceylon Petroleum Corporation, Ceylon Electricity Board, Sri Lankan Airlines, National Water Supply and Drainage Board (NWSDB), Airport and Aviation Services, and Sri Lanka Ports Authority. Also in the pipeline is the sale of “non-strategic” assets such as the Colombo Hilton Hotel, Lanka Hospitals, the Hyatt Hotel and Sri Lankan Airlines which the IMF estimates could earn the government around $1.5 billion.

In its latest Country Report released recently, the IMF advocated the legislating and implementing of the controversial Inland Revenue Act (IRA), the strengthening of the Value Added Tax (VAT) system and making progress in expenditure management such as through privatization. The IMF and the World Bank welcomed the new Bill which has been widely critiqued by tax experts in Sri Lanka over the past few months. The IMF stated that the new income tax law seeks to widen the tax base and consolidate the various income tax laws to facilitate the application and use of these laws. It further said in its annual report for Sri Lanka that the legislation should enable the country to collect tax from a wider range of sources and could increase its tax revenues by 1.4 per cent of GDP.

Meanwhile, in a striking contrast, Finance Minister Mangala Samaraweera last week announced that a host of people friendly concessions would be made, including the slashing of the 10% telecommunications levy from September. A 2017 Budget proposal was to increase the levy to 25%. According to him the short-term measures announced by the ministry as a pre-budget relieve package will be followed by long-term measures in the 2018 Budget.

While the wooing of the masses with instant bonanzas at every election time is a common occurrence in the Lankan political milieu, it is a worn dice. Whether or not it will work, only the results of the local government elections would tell as an initial indicator.

One of the testing points for the unity regime this week would be its ability to pass the controversial Inland Revenue Bill in parliament. Earlier in the month the Supreme Court shot down the attempt to overhaul the Sri Lankan tax system, calling for amendments or the holding of an island-wide referendum on it.

The government has announced that it has already amended the bill in line with the recommendations of the Supreme Court and is geared to pass it in parliament as a top priority bill. While the reception this bill will get from the Joint Opposition is yet to be seen, the litmus test for this regime will be at a time when the local government polls are held, which will largely show what to expect when the next presidential and parliamentary election will be held in 2020.(South Asian Monitor)