Economists urge incoming president to protect Central Bank’s independence

31 August 2024 01:33 am Views - {{hitsCtrl.values.hits}} 22 Bookmark

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Murtaza Jafferjee

Dr. Nishan De Mel

By Nuzla Rizkiya

Economists have called on Sri Lanka’s incoming president to safeguard the Central Bank’s independence and address the taxation issues, key areas critical to stabilising the nation’s economy.

Advocata Chairman Murtaza Jafferjee emphasised that the 2023 enforcement of the Central Bank Act marked a pivotal moment for Sri Lanka, which is grappling with inflation and a weakening rupee.

Speaking at the recent Sri Lanka Insurance Summit 2024, Jafferjee urged the new leader to protect the bank’s autonomy and dispel the misconceptions that taxation undermines national competitiveness, stressing the importance of these factors in ensuring governance and accountability.

“As Sri Lankans, we have always been living beyond our means but one thing that has substantially changed is that we now have a Central Bank that cannot finance the government in the primary market. It is a significant game-changer. If the Central Bank is allowed to go by its mandate and remain independent, this era of very high inflation and a continuously depreciating currency will become something of the past,” Jafferjee said.

“The reason we are not competitive has nothing to do with taxation. The challenge of any businessman is to make profits, so improving the business environment, making profits and then paying 30 percent of those profits as taxes to fund public services is far better than instability.

So, those are my two pieces of advice: Don’t mess with the Central Bank law that is there for the protection of sound money for all of us. The second is to understand that tax is not the problem. There are other ways that can fund businesses,” he added.

Reiterating his statements at the same event was Verite Research Chairman Dr. Nishan De Mel, who stressed that the government should increase its focus on broadening its tax base for better enforcement, noting that some countries with the same tax rates as Sri Lanka collect as much as twice the revenue.

“Our problem is not just increasing taxes because, in reality, it will run into a massive equity problem but it is in collecting the taxes that are due. For a long time, we have said the withholding taxes must go up to 10 percent or more because that’s such an easy way to collect taxes from people who are not paying,” Dr. De Mel said.

He emphasised that increasing taxes on the small pool of taxpayers in the country is not a sustainable macroeconomic approach that would be sustained for the long term, as issues such as corruption and poor administration are still being addressed in Sri Lanka.

He further went on to advise the incoming administration to make decisions on macroeconomic policies such as in international borrowings by basing them on frameworks that are supported by evidence and analysis.

“Macroeconomic decisions still need to be made but on the basis of analysis. If you’re going to be taking debt internationally or locally, you better know that you have an analytical base, knowing how much debt you take, from what sources, at what prices and how you will build reserve buffers to be able to repay that debt, without running into a liquidity crisis or insolvency crisis,” Dr. De Mel said.