v2025 (2)

v2025

Economic

New taxation with policy clarity gives impetus for businesses 

Sri Lankan businesses have been assured a new beginning with policy clarity under the Covid-19 new normal situation following the introduction of a novel taxation system proposed in budget 2021.

The Treasury announced recently that a swing of taxes will be submitted to the Cabinet of Ministers and thereafter, the relevant tax amendment bills are to be presented in parliament before April this year.  

Treasury Secretary S.R. Attygalle told reporters that income and corporate tax changes, plus new goods and services tax proposed in Budget 2021 will be enacted in parliament soon.

Legislation is also being drafted to charge 1% tax on any previously undeclared foreign exchange brought into Sri Lanka.

He said legal provisions will be given to entrepreneurs to return such forex funds for investment in Sri Lanka and they will be liable to a tax of only 1%.

Opposition parties have been vehemently protesting this move alleging the Government of encouraging money laundering.

However, Attygalle said most of the proposals had already been presented to Cabinet and the Legal Draftsman was mid-way in formulating amendments to the Monetary Act to legalise the 1% tax for undeclared forex brought back into the country.

Sri Lanka’s tax collection efficiency will be improved through the introduction of an online-managed single Special Goods and Service Tax (GST) in place of the various goods and service taxes and levies commencing from April.

This GST is now set to be enforced under multiple laws and institutions on alcohol, cigarettes, telecommunication, betting and gaming and vehicles, which accounts for 50% of the income from taxes and levies.

It is expected through this reform to direct institutions under special legislation such as the Excise Ordinance to have a more focused regulatory engagement in facilitating the government to secure its revenues otherwise lost through sale of illicit alcohol and cigarettes, Finance Ministry sources said.

Relevant documents including the Finance Bill relating to the implementation and enactment of the tax are now being drafted to present and pass it in parliament soon, a senior Treasury official said, adding that this single tax will further simplify the country’s taxation system replacing several taxes under the new GST bill.

The new tax, one of the key proposals in the 2021 budget, will be determined before its implementation soon, he said, adding that the estimated revenue from this tax would be over LKR 670 billion.

The government is expected to raise around LKR 1.7 trillion from direct and indirect taxes this year, provisional data and economic model calculations revealed.

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Ban on forward contracts of foreign exchange leads to commodity price hike

In view of the need to avoid excess volatility in the foreign exchange market and the impact on banks  risk management, licensed commercial banks have been directed to refrain from  entering into forward contracts of foreign exchange for a period of three months with immediate effect.

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Sri Lanka's inflation increases marginally in February

Sri Lanka's inflation rate has been continuing in   a sudden slump during Covid-19 crisis period to around 3 to 3.5 percent due to price hike in food and non food items, official sources said.  

Head line inflation increased to 3.3 per cent in February 2021 from 3.0 per cent in January 2021. This was driven by monthly increase of prices of items in both Food and Non-food categories, Central Bank announced.

Meanwhile, Food inflation (Y-o-Y) increased to 7.9 per cent in February 2021 from 6.8 per cent in January 2021.

However, Non-food inflation (Y-o-Y) decreased marginally to 1.3 per cent in February 2021 from 1.4 per cent in January 2021.

The change in the CCPI measured on an annual average basis decreased to 4.1 per cent in February 2021 from 4.3 per cent in January 2021. Monthly change of CCPI recorded at 0.31 per cent in February 2021.

This was due to price increases observed in items of both Food and Non-food categories. Moreover, monthly changes of Food and Non-food categories recorded at 0.23 per cent and 0.08 per cent, respectively, in February.2021.

 Accordingly, within the Food category, prices of vegetables, green chilli, chicken and eggs increased in February 2021.

However, the price of potatoes recorded a decline during the month. Meanwhile, prices of items in the Non-Food category recorded an increase during the month mainly due to price increases observed in the Transport (tyres, tubes and spare parts) and Housing, Water, Electricity, Gas and Other Fuels (maintenance/ reconstruction) sub-categories.

The core inflation (Y-o-Y), which reflects the underlying inflation in the economy, decreased marginally to 2.6 per cent in February 2021 from 2.7 per cent in January 2021.

Moreover, annual average core inflation also decreased marginally to 3 per cent in February 2021 from 3.1 per cent in January 2021.

The Colombo Consumer Price Index (CCPI, 2013=100) is compiled by the Department of Census and Statistics.

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Government bonds tumble amidst foreign reserve depletion

Sri Lanka is facing foreign reserve depletion with the repayment of USD 400 billion currency swap with India and no sign of impending foreign funding, eminent economic experts claimed.

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Sri Lanka promulgates a set of rules on export proceeds

The Monetary Board of the Central bank has issued a set of rules as published in the Gazette Extraordinary No. 2215/39 dated 18.02.2021 in respect of receipt of export proceeds into Sri Lanka and conversion of such export proceeds into Sri Lanka Rupees.

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Sri Lanka’s foreign debt crisis could get critical in 2021

By Umesh Muramudali

 

Sri Lanka’s foreign debt troubles are not new and have often been juxtaposed with concerns over defaulting debt and Chinese debt trap controversies.

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Government introduces measures aimed at restricting capital outflows

The government has already introduced measures aimed at restricting capital outflows, through suspension of outward investment payments until July 2021.

There are also import restrictions of certain goods, as well as prohibiting commercial banks facilitating imports of vehicles.

Outward remittances have been limited, while inward remittances will be exempted from certain regulations and taxes.

A scheme has also been introduced to insure investors against foreign exchange risk, by allowing domestic currency proceeds from qualified investments in treasury bonds to be converted at the same exchange rate as prevailed at the time of initial investment.

Commercial banks are prohibited from purchasing foreign currency denominated Sri Lanka International Sovereign Bonds until end-March 2021, senior CB official said.

A net outflow of foreign investment amounting to USD 10 million was recorded in the rupee denominated 553 million during 2020. The total outstanding exposure of foreign investment in the rupee denominated government securities market remained low at USD 37 million by the end of December, 2020.

There were net outflows of USD 16 million from the secondary market of the CSE in December 2020. On a cumulative basis, the CSE recorded a net outflow of USD 225 million, from both primary and secondary markets, during 2020.

Meanwhile, long term loans to the Government recorded a net outflow of USD 9 million in December 2020.

Gross inflows to the Government amounted to USD 2,002 million in 2020 compared to USD 6,570 million in 2019.

Gross official reserves at end December 2020 amounted to USD 5.7 billion. This level was equivalent to 4.2 months of imports.

Total foreign assets, which consist of gross official reserves and foreign assets of the banking sector, amounted to USD 8.5 billion at end December 2020, providing an import cover of 6.4 months.

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Sri Lanka settles its currency swap facility with India amid dwindling forex reserves

Without considering the dwindling the foreign reserves of the country, Sri Lanka has settled its currency swap facility with the Reserve Bank of India (RBI) as scheduled, the Central Bank of Sri Lanka (CBSL) announced today (05).

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Manufacturing and service sectors drive economic recovery

Sri Lanka’s industrial sector is set to drive the country’s economy this year (2021) with real GDP growth is expected to gain 4.8 percent due to more favorable base effects from the earlier forecast of 4.2 percent, Fitch ratings agency claimed.

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Government enters into 41 foreign financing agreements

Sri Lanka had entered into 41 foreign financing agreements with foreign development parties and lending agencies in the year under review and it had been scheduled to obtain a sum of USD 3,378.8 million in the forthcoming years through those agreements.
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Central Bank Governor presents a rosy picture of the economy

Sri Lanka’s economy is managed through new policies in an ‘alternative way’, Central Bank Governor Prof. W.D. Lakshman said, rejecting economic experts' claim of fiscal and monetary setback in the second quarter of 2020 which predicted a doom and gloom situation for 2021.

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Govt. exceeds borrowing limits increasing per capita debts

The government has exceeded its legal borrowing limits without considering the Fiscal Management (Responsibility) Act, a Colombo-based think tank said.

The Vote on Account, passed in October last year, allows the government only to borrow up to LKR 720 billion during this period. However, Verite Research said that the government has borrowed up to LKR 841 billion between January and April last year.

In terms of the Fiscal Management (Responsibility) Act, No.3 of 2003 as amended by the Fiscal Management (Responsibility) (Amendment) Act, No.15 of 2013, the maximum value of liability as at the end of a particular year shall not exceed 80% of the estimated Gross Domestic Product.

According to financial statements of the government presented to audit, the said restrictions had been complied with.

However, in auditing the financial statements of the year 2019, taking into consideration the liabilities of LKR 1,035 billion as foreign borrowings, treasury bonds and liabilities relating to various public enterprises which had been accounted outside the statement of financial position.

The Central Bank advances and bank overdrafts, the total liability of the Government had been LKR 13,493 billion audit inspection revealed.

It had represented 86.49% of the Gross Domestic Product of the year 2019. As such, the maximum restriction of liabilities cited in the Fiscal Management (Responsibility) Act had been exceeded.

In comparison to the total public debt with the mid year population, the per capita debt was LKR 264,824 as at 31 December 2012 and it had increased up to LKR 558,999 by 31 December 2019.

Moreover, as compared with the per capita debt of LKR 520,364 as at 31 December 2018, it had increased by LKR 38,635 representing 7.42%.

Meanwhile, the per capita debt was LKR 264,824 as at 31 December 2012 and it had increased up to LKR 558,999 by 31 December 2019 in comparison to the total public debt with the mid-year population.

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