ECONOMYNEXT – Sri Lanka is planning to amend a Strategic Development Act which gave discretionary tax holidays and personal income tax free to up to 30 top executives in each project is to be amended, Treasury Secretary Mahinda Siriwardana has said.
The SDP Act has come under fire from the International Monetary Fund in particular for long negotiated discretionary tax holidays given to projects, exposing the country to corruption vulnerabilities.
A bizarre incentive given for SDB Projects is to make salaries of top executives completely free of tax.
“A comprehensive review of the costs and benefits of past tax incentives granted will be initiated to have a more rigorous approach to the granting of new incentives to investors,” Siriwardana said in a speech this week.
“This approach will have specific and transparent criteria and processes, and include sunset clauses to limit the duration of incentives and include assessment of benefits and costs.
“Amendments to the Strategic Development Projects Act will be submitted to the Parliament by February 2025 to introduce transparent, rules-based eligibility criteria, to increase the effectiveness of granted tax incentives, and to limit the duration for which incentives can be granted.”
Sri Lanka has been unable to attract foreign investments as East Asian countries with monetary stability, who have credible anchors (usually external), have been able to do.
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“We need to have sound macroeconomic management,” Thilan Wijesinghe, a former Board of Investment Chairman told a forum organized by Advocata Institute, a Colombo-based think tank, earlier this year.
“Prudent economic management is an absolute sine-qua-non for investment promotion and attracting investment, and that goes hand in glove with policy consistency.”
“The period between 1995 to 2000, a six period, during which time I was a full-time employee of the government, was the longest Sri Lanka did not go under an IMF program.”
At the time, A S Jayewardena, a person who did not believe in inflationism, was at first Treasury Secretary and a member of the monetary board and from 1996 central bank governor.
Jayewardena inherited a 9.1 percent budget deficit and 95 percent debt to GDP ratio and 70 percent of GDP foreign debt.
Treasury bill yields touched 19 percent and call money rates rose above 50 percent in 1995 amid a renewed civil war but a currency crisis was averted till 2001.
Only other period for more than a year that Sri Lanka was without an IMF program was the three years between 1985 to 1987, after the central bank began running the agency from 1965.
By 1995 all central bank re-finance programs started by macro-economists to boost growth, which critics say undermined monetary stability for decades, were terminated.
After the end of the civil war, chasing high inflation targets and/or potential output under ‘flexible’ targeting, Sri Lanka has been hit by currency crises with budget deficits as low as 5 percent of GDP in 2012 and 2018.
IMF programs typically lead to ad hoc tax hikes in a so-called ‘stabilization crises’ after central bank’s inflationary rate cuts coming from a deeply flawed operational framework, triggers the original balance of payments crisis.
After the latest peacetime currency crisis fired by macro-economists who printed money to target potential output, even small IT firms are setting up alternate offices in Dubai, a country with monetary stability.
Sri Lanka does not have monetary stability due to spurious doctrines promoted by macro-economists requiring aggressive inflationary open market operations to suppress rates and trigger inflation as high as 5 percent, blowing the balance of payments apart in the process, critics say.
East Asian countries with monetary stability, that do not experience repeated ‘stabilization crises’ disrupting growth and tax revenues, have standard corporation income tax rates of around 20 percent.
In Sri Lanka a 20 percent tax rate is considered an incentive and a tax cost.
Singapore was a country that used tax holidays in the late 1960s, which Sri Lanka attempted to emulate after 1977, but without monetary stability, and was hit by chronic depreciation as advocated by Saltwater-Cambridge macro-economists.
Singapore Finance Minister Goh Keng Swee started so-called Pioneer Certificates with 4% corporate tax for export firms in the Jurong Industrial Park, called ‘Goh’s Folly’ for a time.
On November 20, 1967, Goh presented 44 pioneer certificates. Over the weekend Britain had devalued the Sterling after full employment ‘macroeconomic policies’ led to forex shortages. Singapore decided to maintain the previous parity, as did Malaysia at the time.
“This has been a possibility for a very long time, as the British economy staggered from one balance of payments crisis after another,” Goh said, explaining why Singapore did not devalue its own currency in step.
“Let us consider the consequences in Singapore if we devalue the (Singapore) dollar in step with Sterling. ..[If] Singapore dollar were to devalue, our exporters will be able to compete more keenly in the export market for manufactured goods.
“In recent months there has been much discontent as a result of the very substantial increase in the price of rice.
“If we devalue, it is likely that in the end, the increase in the price of important consumer goods will be equivalent to another very substantial reduction in wages.
“The present stability of the wage structure and reasonably good relations between unions and employers will stand in danger of disruption. It is likely that the instability in labour management relations may well outweigh the export opportunities created by devaluation of the currency.
To this day Singapore does not have a policy rate for macro-economists to trigger external crises, and corporate income tax is below 20 percent. Pioneer tax certificates are now given at 5 and 10 percent.
Taxation, analysts say, is not a substitute for denial of sound money.
Sri Lanka’s central bank has maintained monetary stability for almost two years by undershooting its high inflation target, though it is expected to generate five percent inflation eventually. (Colombo/August19/2024)