As underscored by Japanese Ambassador Mizukoshi, the pivotal importance in adhering to IMF remedies, whoever wins the presidential election, the revenue collection is expected to be one of the major challenges.
by Shamindra Ferdinando
Japanese Ambassador in Colombo Hideaki Mizukoshi meticulously dealt with Sri Lankan economy and post-Aragalaya developments in a strongly-worded speech delivered at the Sasakawa Memorial Hall, Bala Tampoe Lane, Colombo 03, last week.
Ambassador Mizukoshi didn’t mince his words as he delved into the still developing political-economic-social crisis that forced an unprecedented political change in 2022, just a couple of months after he received the diplomatic appointment here. After clandestine preparations, Aragalaya was launched on March 31, 2022. The violent protest was staged outside President Gotabaya Rajapaksa’s private residence at Pangiriwatta, Mirihana. The President was forced out of office on July 14, 2022, and UNP leader Ranil Wickremesinghe installed as the eighth President, a week later, to pave the way for an extraordinary international effort to rescue bankrupt Sri Lanka or was it a case of ‘economic hitmen’ having deliberately bankrupted the country to undo the unprecedented achievements of the Rajapaksas, especially in militarily destroying the terror outfit, the LTTE, against the wishes of the so-called international community – meaning the arrogant West?
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| President Ranil Wickremesinghe met with German Chancellor Olaf Scholz [Photo: German Embassy in Colombo] |
The so-called experts who blame everything on the Rajapaksas at the drop of a hat, however do not explain why the Yahapalana government, whose Prime Minister was Ranil Wickremesinghe, resorted to borrowing from the international bond market more than 10 billion dollars, at high interest, on top of getting over one billion US dollars by Leasing out the Hambantota port, without undertaking any notable projects of their own to show what they did with all that money,.
The Yahapalana lot also shamelessly staged two massive daylight robberies at the country’s Central Bank with an imported Singaporean Governor as its head at the time and he was allowed to slip out of the country scot-free. They even got a ‘joker’ MP to write a book denying there having been any robbery at the Central Bank. He certainly is no joker, being a lawyer he would have definitely benefited.
Among the invitees at the event, organized by the Lanka-Japan Friendship Society (LJFS), where Ambassador Mizukoshi expressed his candid views on the issues at hand and challenges ahead, was Deshamanya Prof. Waligamage Don Lakshman, the 15th Governor of the Central Bank. His wife Kalyani Sirisili was by his side.
The former Vice Chancellor of the University of Colombo, for a period of six years during President Chandrika Bandaranaike Kumaratunga’s first term (1994-1999), served as the Governor, CBSL, at the time, rapid economic deterioration took place in the post 2019 presidential election. Having succeeded Dr. Indrajith Coomaraswamy on Dec 24th, 2019, Prof. Lakshman resigned on Sept. 14, 2021, amidst the onset of the crisis, widely blamed on the mismanagement of the economy and criminal negligence on the part of those responsible for fiscal discipline over a period of time.
Prof. Lakshman had been one of those who were found guilty by the Supreme Court last November for the economic collapse. Among the others faulted by the Supreme Court were former President, Mahinda Rajapaksa, ex-Governor, CBSL Ajith Nivard Cabraal, ex-Minister Basil Rajapaksa and Dr. P.B. Jayasundera, Secretary to the then President.
Going back to the Yahapalana government that obtained over USD 10,000 mn in new International Sovereign Bonds (ISBs), between 2015 and 2019, so no wonder we still have an outstanding ISB stock of USD 12,500 million. In a statement issued on Dec 20, 2023, the former President asserted that USD 10,000 mn in new ISBs procured between 2015 and 2019 broke the back of our economy. Rajapaksa alleged that the IMF declined in March 2020 to provide Sri Lanka emergency assistance. The rest is history.
Within weeks after being appointed Governor, CBSL, in April 2022, Dr. Nandalal Weerasinghe told the watchdog parliamentary committee why the IMF declined to assist Sri Lanka.
Among the audience at Sasakawa Memorial Hall were Prof. G.L. Peiris, MP, Admiral of the Fleet Wasantha Karannagoda, who served as our Ambassador to Japan during Gotabaya Rajapaksa’s tenure as President, and career diplomat Rodney Perera, incumbent Ambassador in Tokyo. Perera, who opted for early retirement while serving as Ambassador in Washington in late 2020, received appointment as Ambassador in Tokyo in January 2023. He is one of the sons of the late UNP parliamentarian Paul Perera.
Paying a glowing tribute to Central Bank Governor Dr. Nandalal Weerasinghe and Treasury Secretary Mahinda Siriwardena for spearheading the economic recovery, Ambassador Mizukoshi issued a dire warning to political parties jostling for power. Ambassador Mizukoshi declared that regardless of the outcome of the Sept 21 presidential election, the country would have to adhere to IMF remedies or face the consequences. The Japanese envoy emphasized that Sri Lanka couldn’t under any circumstances deviate from the agreement reached with the IMF. Of course, he was speaking for like-minded countries.
Japan, one of the Quad countries, is a major US ally and represents their interests. Ambassador Mizukoshi also discussed the unprecedented nature in taking up the debt issue with China, the number one creditor, especially against the backdrop of both China and number 3 creditor India not being part of the Paris club. Japan is the number 2 creditor.
Ambassador Mizukoshi pinpointed the failure on the part of the powers that be to address basic issues, even after the irresponsible governance bankrupted the country. The top envoy explained how utterly lethargic bureaucracy caused delays and in some cases held up external help to the needy. But, what really raised eyebrows were his unvarnished comments on the controversial issuance of online visas. Ambassador Mizukoshi explained how the new system discouraged foreigners from visiting Sri Lanka at a time the country needed a revenue boost.
The 30-minute speech put those in authority to shame. Instead of being upset by such frank expression of views, the government should address the contentious issues at hand without further delay. During a brief question and answer session, Ambassador Mizukoshi emphasized the responsibility on the part of Sri Lankans to tackle corruption at all levels. The Japanese envoy made reference to the ongoing Japanese-funded UNDP project aimed at strengthening the CIABOC (Commission to Investigate Allegations of Bribery or Corruption).
GR causes sharp drop in revenue collection
As underscored by Ambassador Mizukoshi, the pivotal importance in adhering to IMF remedies, whoever wins the presidential election, the revenue collection is expected to be one of the major challenges.
The IMF has proposed a series of tax reforms meant to achieve fiscal sustainability and tax to GDP ratio of at least 14% by 2026. The current issues cannot be discussed without making reference to unparalleled 2019 tax cuts that destabilized the national economy. Apparently stubborn Gotabaya, who was no economist, being essentially an ex-military man, was misled by his economic advisors at the worst possible time.
Claiming that the tax cuts would boost the domestic economy, the Gotabaya Rajapaksa government reduced Value Added Tax (VAT) from 15% to 8%, abolished 2% Nation Building Tax (NBT). The government combined NBT with the Ports and Airport Development Levy with a relevant ratio of 10%, and tax on telecommunications tariffs was slashed by 25%. The following taxes were done away with: economic service charge, debit tax in banking and financial institutions, capital gains tax on the share market, VAT on sovereign property, Pay as You Earn (PAYE) tax, withholding tax on interest income and credit service tax.
The pandemic and the tax relief caused a massive burden on the Treasury. As a result of these foolish decisions tax revenue, as a percentage of GDP, was reduced from 8.1% in 2020 to 7.7% in 2021. The number of taxpayers dropped by a million between 2020 and 2022. The economy couldn’t stomach the deadly blows delivered by the government in a country where the contribution of direct taxes to the GDP was only 2%.
An IMF Technical Assistance report: Sri Lanka Governance Diagnostic Assessment released in September 2023 attributed the continuing crisis to what the IMF described as a confluence of shocks and policy missteps led to a deep economic and governance crisis. The report prepared by a team led by Joel Turkewitz pointed out how two years of low tourism revenues, due to COVID, loss of market access, deep reductions in tax revenues, and the debt service burden depleted reserves, ruined the economy.
In spite of reaching agreement with bilateral and private creditors, regarding debt repayment, the country is yet to work out proper structures required to streamline tax collections. The responsibility on the part of the incumbent government, and the party that secures the presidency at the September 21 election, is to implement tax reforms to strengthen the fiscal position and address structural weakness of the domestic economy on a priority basis.
One of the key issues that should be addressed by the government, following the next presidential election, is the Foreign Exchange Act No 12 of 2017 enacted at the behest of Yahapalana Premier Ranil Wickremesinghe. Some lawmakers, including Justice Minister Dr. Wijeyadasa Rajapakshe, PC, both in and outside Parliament, on numerous occasions, declared that the abolition of Exchange Control Act No 24 of 1953 contributed to the economic crisis. Unfortunately, Dr. Rajapakshe, being the only lawmaker to represent the government parliamentary group, did nothing, except for repeatedly alleging the new law allowed unscrupulous exporters not to bring back export proceeds. However, Dr. Rajapakshe, appeared to have conveniently forgotten that he had been among those Yahapalana lawmakers who voted for the new Foreign Exchange Act No 12 of 2017 that replaced the time tested Exchange Control Act No 24 of 1953.
Having voted for that damaging piece of legislation, the then UNPers now with the SJB, too, remain silent. SJB and Opposition Leader Sajith Premadasa himself had voted for Foreign Exchange Act No 12 of 2017, along with Dr. Harsha de Silva, Eran Wickremaratne and Kabir Hashim, key members of the SJB parliamentary group crying so much about the need for proper financial management.
Some useful proposals
Active citizen L.J. Udukumburage, recently discussed ways and means of improving tax collection and the responsibility on the part of political parties, represented in Parliament, to take tangible measures in this regard.
In a brief interview with The Island, at his office, Udukumburage, CEO of Iceland Residencies, located opposite the Indian High Commission, found fault with successive governments for their egregious failure to adopt a comprehensive tax strategy.
Had there been an efficient system devoid of political interventions/interferences, as in the case of 2019 tax cuts, the country would have been in a much better position in the economic crisis. The Supreme Court ruling on the ruination of the economy in November 2023 must be made available to all members of Parliament as well as the executive for them to understand the gravity of the situation.
Udukumburage asserted that by ensuring all payments above Rs 50,000 were channelled through the banking system, tax collection could be maximized. If properly implemented, there was absolutely no requirement to maintain a cumbersome personal tax files system, Udukumburage said, adding that this would pave the way for bringing back black money into the legal system following taxation.
Responding to queries, Udukumburage explained the proposed strategy (1) all payments over Rs 50,000 must be through bank transfers-savings/current account or debit/credit card (2) ATM and other cash withdrawals, including credit card tax free up to Rs 200,000 a month (3) strict monitoring of opening of new accounts. Udukumburage proposed an amnesty for those who bank cash above Rs 200,000 in hand. “Of course, the government needed to enact laws to ensure people adhere to the curbs in place,” Udukumburage said, urging the powers that be to take appropriate measures without further delay to tighten up the banking system.
Referring to discussions both in and outside Parliament, after the declaration of bankruptcy in April 2022, Udukumburage pointed out that various systems acquired at tremendous cost to the taxpayer had been ineffective or not properly used for obvious reasons. The total amount of uncollected taxes and fines often mentioned in press releases issued by Parliament is evidence that successive governments lacked the political will to go the whole hog.
Revenue collection apparatus remained ineffective and corrupt as alleged by Chairman of the Ways and Means Committee Patali Champika Ranawaka, MP and leader of Eksath Janaraja Peremuna. The recent declaration by the former Minister that several liquor producers, including W.M. Mendis Company, owed the government Rs 6 bn, though the Excise Department estimated that amount to Rs 600 mn, underscored the severity of the issue.
The accusations directed at the Customs and Inland Revenue Department, the two other primary revenue collection setups over the years remained uninvestigated. In spite of disclosures made at parliamentary watchdog committees as regards the Excise, Inland Revenue and Customs, successive governments haven’t taken remedial measures.
Udukumburage emphasized that if the government took appropriate measures to streamline tax collection, those struggling to make ends meet wouldn’t be burdened with additional taxes. Instead of introducing new taxes or further increasing VAT (Value Added Tax), the government, the one elected following the next national election, could overhaul the revenue collection setup, Udukumburage declared.
Udukumburage proposed that the government should take into consideration strong opposition to tax salaries above Rs 100,000. Pointing out that many protested against the current PAYE tax scheme, Udukumburage asserted that the government could increase the monthly personal tax free allowance to Rs 200,000 by streamlining tax collection.
Ranil issues warning
Close on the heels of the Japanese Ambassador stressing the responsibility on the part of the presidential election winner to adhere to IMF remedies, President Wickremesinghe reiterated, in Galle, that his government was operating in line with the agreement reached with the Washington-based lending body. The UNP leader dismissed claims that his government was operating outside the IMF framework while warning that such false declarations jeopardize the country.
Despite strong opposition from some members of Parliament, President Wickremesinghe, in spite of being reduced to just one UNP MP in Parliament, pursued his political strategy.
A few hours before the Japanese Ambassador’s talk, Parliament passed the Public Financial Management Bill and the Economic Transformation Bill, both crucial pieces of legislation adopted in support of the IMF-led recovery effort. The Parliament adopted both Bills without a vote following amendments made during the committee stage.
The approval for the two Bills can be considered a personal victory for President Wickremesinghe. The SJB-led Opposition owes an explanation whether they are satisfied with the amendments introduced during the committee stage.
Dissident SLPP MP Charitha Herath recently declared that Wickremesinghe couldn’t, under any circumstances, compel other political parties to adopt and continue with his economic policies in case he lost the forthcoming national election.
Herath, now aligned with the SJB, is on record as having alleged that the ‘Economic Transformation Bill’ and ‘Public Financial Management Bill’ were intended to transform Wickremesinghe’s political manifesto for the forthcoming presidential poll into a far reaching law.
MP Herath warned if Wickremesinghe succeeded in his endeavour, it could have a detrimental effect on the political party system. Actually, the new law would make the election process a farce. In fact, such a law or system could exist only in a country ruled by hardline communists, MP Herath told The Island.
Whatever the circumstances, the Parliament adopted two Bills, particularly the Economic Transformation Bill, and the move would be appealing to the IMF bent on ensuring Sri Lanka’s adherence to its remedies, often criticized by the Opposition. The creditors’ position articulated by the Japanese Ambassador recently and the passage of the Economic Transformation Bill would be in good stead for Wickremesinghe campaigning for a five-year term.
Shamindra Ferdinando is a Deputy Editor of a Colombo-based daily newspaper, The Island.
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