The stock market wracked by sustained uncertainty, made worse by Tuesday’s tax increases, fell for seven consecutive market days to yesterday, last seen two years ago, when the COVID-19 pandemic wreaked havoc, shrinking the economy by a record 3.6 per cent in 2020. Consequently, shareholder wealth wipe-out increased to Rs 146 billion in the seven market days to yesterday.
Tuesday’s tax increases not only impacted the stock market, but also the suffering masses, already buffeted by record high inflation and cost of living, shortages of essentials, nepotism, cronyism, a black market and queuing up to buy the bare necessities. Tuesday’s tax increases were underlined by VAT, an indirect tax, being immediately increased by 50 per cent, ie from 8 to 12 per cent.
But when Finance Minister, Premier Ranil Wickremesinghe, raised taxes on Tuesday, this same Wickremesinghe when he was the Premier in the immediately preceding Government, said he aimed to reduce the ratio of indirect tax revenue like VAT, currently at 80 per cent of total tax revenue, to 20 per cent, while simultaneously increasing direct tax revenue, at present 20 per cent, to 80 per cent.
However, by increasing VAT, an indirect tax, by 50 per cent in one go on Tuesday, shows not only Wickremesinghe’s insincerity, but also his duplicity. Small wonder that the once mighty UNP which bestrode the island’s political landscape like a colossus since Independence 74 years ago in 1948, has been reduced to one seat, that of Wickremesinghe’s, though, not by being elected, but by being appointed, from the National List in the August 2020 Parliamentary Poll.
Wickremesinghe’s Tuesday’s tax increases were not only ill timed, but also sealed his sense of insensitivity to the country’s suffering masses. This is because on the same day he raised taxes, Census and Statistics Department announced that inflation in Colombo, the heartbeat of the country’s economy, registered a record 39.1 per cent increase last month, backed by both food and non-food inflation also hitting record figures of 57.4 and 30.6 per cent, respectively.
If Wickremesinghe’s uncle J.R. Jayewardene, floated the rupee nearly 45 years ago in November 1977 when he was the Premier and in which Government Wickremesinghe served as a fresher MP to clinch an IMF loan, Tuesday’s raising of taxes by the current Premier was also done for similar reasons.
This is exemplified by the fact that Wickremesinghe told the media recently, “Sri Lanka is looking to fast-track talks with the IMF and agree on a loan by mid-June (middle of this month). The IMF has two main objectives when dealing with member countries like Sri Lanka. Increase the country’s foreign reserves and fiscal consolidation.
In 1977, Sri Lanka had an external resources gap (ERG) equivalent to 11.33 per cent of its total foreign exchange (FX) earnings. Consequently, IMF drawings that year were equivalent to financing 108.85 per cent of that ERG and grants, a further 50.04 per cent, data on Central Bank of
Sri Lanka’s (CBSL’s) 1977 Annual Report showed.
Though the exchange rate was liberalised in November 1977, inflation as a whole, according to the Colombo Consumers’ Price Index increased by a mere 1.2 per cent that year, compared to 39.1 per cent last month, a 33-fold increase compared to then.
Wickremesinghe’s Office on Tuesday said, the above tax hikes are a result of low revenue. But as Asia Securities in a report yesterday said, Wickremesinghe should not only target increasing revenue, but should also aim at reducing Government expenditure as well.
“In the short-term, the adverse effects on living standards of the people may have to be cushioned by external assistance especially if a large ERG emerges,” CBSL in its 1977 report said. The Government of 1977, handled that aspect relatively well, if the Tamil problem that came to a head in July 1983, largely due to circumstances beyond its control is discounted.
It’s left to be seen whether foreign aid, other than IMF aid which Wickremesinghe is seeking, as said in the above CT article will also materialise, as quickly as the IMF aid he expects.