ECONOMYNEXT – Sri Lanka will need an extra 275 billion rupees to give 20,000 rupee salary hike to state workers, requiring value added tax to be raised by 4 percent, State Minister for Finance Shehan Semasinghe said.
To generate money for a 20,000 rupee salary hike, value added tax on the people will have to be raised from the current 18 percent to 20 percent, he said.
Meanwhile import duties will also have to be raised by around 42 percent.
Sri Lanka has already given a 10,000 rupee salary hike to state workers from taxes collected from the people.
Sri Lanka’s debt sustainability path set in an International Monetary Fund program will also be undermined, he said.
Sri Lanka’s current default was also linked to forex shortages that emerged when rates were cut with printed money claiming inflation was low (flexible inflation targeting), as deficits expanded in part due to 20,000 rupee salary hike in 2015, analysts have said.
The currency crises from ‘flexible’ inflation imposed on a reserve collecting central bank also led to the inability to settle maturing foreign debt using rupee cashflows of the government.
This in turn led run down of reserves and heavy borrowings to repay maturing debt, leading to rapid expansion of the net (and gross) external debt stock, which outpaced the actual foreign financing of the budget.
Under flexible inflation targeting, when budget deficits expand with state salary hikes, rates are cut with printed money claiming inflation is low, triggering currency depreciation, and confidence shocks to investors.
Up to 2022, out of 555 billion rupees of new taxes collected from the people since 2014 when spending based consolidation (cost -cutting) was abandoned under ‘progressive Saltwaterism’, 495 billion went as salaries and pensions to state workers.
As a result most other current spending was met with borrowings. By 2022 salaries and pensions accounted for 72 percent of the taxes collected from the people. (Colombo/July09/2024)