30 May 2022 12:01 am Views - 1563
The Gotabaya Rajapaksa government’s astrology-driven mismanagement of the Sri Lankan economy has led to the worst economic crisis our country has ever seen. We face mounting
Unfortunately, President Rajapaksa is out of luck and out of options. The only way he can resolve this crisis, since he inspires no confidence, is by covertly taxing the poor.
The Rich Eat Well
President Rajapaksa’s first mistake was his ill-advised tax cuts in November 2019. In a shocking death blow to the Treasury, he removed the Pay As You Earn Tax (PAYE), the Nation Building tax (NBT), the Withholding Tax (WHT), the Debt Services Tax (DST), and the Capital Gains Tax (CGT). He also reduced the Value Added Taxes (VAT) and income tax rate.
The main beneficiaries of the tax cuts were large companies and wealthy families. For example, the removal of CGT benefits those who hold and trade shares in companies traded on the Colombo Stock Exchange – which skews towards the wealthier segments of our society. The reduction in income tax profoundly benefitted those who earn over Rs. 6 million a year – traditionally professionals and business owners.
However, this drastic reduction in government revenue meant that the government needed to find other sources of funding itself. This could either be done by raising debt in the international markets, in the domestic markets, or by printing money. Raising debt meant our children and their children will have to pay this back in the future. Money printing, if out of step with growth in the economy, could lead to inflation, which hits the poorer segments of our society harder.
Gotabaya Rajapaksa’s vistas of prosperity and splendour meant prosperity for his affluent friends, and poverty for the poor and our children. Splendour meant luxury for crony businesses and simplicity for the hard-working owner of the kade down your street.
"Money printing, if out of step with growth in the economy, could lead to inflation, which hits the poorer segments of our society harder"
Unfortunately, Sri Lanka was locked out of international markets as soon as the COVID-19 pandemic began. To finance health expenditure, the government resorted to money printing. This was understandable – we had to be agile to protect our country from an unknown and unseen virus. As the pandemic eased, the government still needed funding. The economy was starting to recover, but the government could not finance essential expenditure.
The November 2019 tax cuts starved Sri Lanka of the government financing that it needed to provide services such as health and education, while still servicing our debt. Having been locked out of international markets from March 2020, the Central Bank started printing money to finance government spending. Former Governor W.D. Lakshman and then State Minister Cabraal were bewitched by the idea of “Modern Monetary Theory” (MMT), a topic hotly debated in the United States but untested in volatile and emerging markets such as Sri Lanka. Assuming we could import American policy, similar to how we import an American President and Finance Minister, the Central Bank (CBSL) financed the government’s increased deficit spending and defended it vociferously on local and
international television.
"We are facing shortages in gas, petrol, milk powder and other goods, whose prices are artificially managed. This causes inflation in other sectors of the economy. This, combined with inflation induced by money printing, is squeezing the most vulnerable families in
the country"
The Poor Pay
Knowing that the country had little income, the CBSL continued its policy of money printing into 2021. The issue is that excessive money printing, greater than the demand for money in an economy, causes inflation. This means that cost of food, gas, and other goods and services increase because we have more money in the economy chasing the same amount of products.
Unfortunately for Sri Lanka, in 2021 and 2022, we have been hit by two more shocks. The war in Ukraine has increased global food prices and increasing oil prices has had reverberations through the global economy. We are facing shortages in gas, petrol, milk powder and other goods, whose prices are artificially managed. This causes inflation in other sectors of the economy. This, combined with inflation induced by money printing, is squeezing the most vulnerable families in the country.
Inflation is a type of tax. When the price of vegetables increases by Rs. 100 but your income stays the same, you are essentially being taxed an additional Rs. 100 for eating the same number of vegetables. This tax is indirect. It affects everyone equally. If you have a lower income, you are hurt more than someone who earns more.
The President and his advisors are choosing to tax the poor through money printing and inflation, instead of correcting the tax policy. This is an active policy choice – where they are prioritizing and valuing certain groups over others.
"The President and his advisors are choosing to tax the poor through money printing and inflation, instead of correcting the tax policy"
Where do we go from here?
Captivated by the spell-blinding theory of MMT, President Rajapaksa has backed us into a corner. Business owners and high-income professionals, who cheered on the tax cuts, were rewarded by the Rajapaksa government in 2019 only to also suffer from the failing economy today.
We have no revenue, no access to debt markets, and families squeezed by sky-rocketing inflation. While Governor Weerasinghe has inspired some credibility back in the Central Bank, he is operating with no space. Money printing maybe our only option left, but it means that the government is choosing to impose a covert tax on the poor and the working class.
Prime Minister Ranil Wickremesinghe’s upcoming budget will have to choose who it prioritizes: the rich or the poor? Who
will he choose?