• The national economy has been handled by finance ministers over the years who did not have a proper knowledge in economics or tax management 
• Continuous tax cuts are the root cause to the sharp drop of state revenue since 1977

By Sandun A Jayasekera

One of the main contributory factors for the current economic mess in Sri Lanka was the wrong and backward tax policy of successive governments since the introduction of the open economy after 1977, former minister and COPE chairman, DEW Gunasekara said yesterday.  

The situation has been further aggravated as the national economy has been handled by finance ministers over the years who did not have a proper knowledge in economics or tax management, he added.   

Mr. Gunasekara, considered a tax expert expressed doubts about a comprehensive debt restructuring programme from creditors as the situation of Sri Lanka is extremely precarious and unpredictable with an annual debt service commitment of US$ 6 billion in addition to domestic debts of Rs. 11 trillion.   

“We can’t find many of the creditors who originally invested in our Sovereign Bonds as most of the bonds have changed hands, making restructuring process more difficult,” he pointed out.   

“The continuous tax cuts are the root cause to the sharp drop of state revenue since 1977. The main source of revenue of the government is tax collection. When Mrs. Sirimavo Bandaranaike handed the regime to J.R.Jayewardene in 1977, the direct tax collection remained at an upper bracket for the supper rich at 70%. This was brought down to 55% by Finance Minister Ronnie De Mel to 45%, Finance Minister D.B.Wijetunga of President R.Premadasa government, to 45%, by President Chandrika Kumaratunga to 35% and under Mahinda Rakapaksa presidency it was 28%. During the Yahapalana government the tax revenue further reduced to 21% and by former finance Minister of the SLPP government, Basil Rajapaksa, the tax revenue dropped to 14% and under former President Gotabaya Rajapaksa it was brought down to a further 8%. Paradoxically enough, the indirect tax, charged even from a plain tea or bun purchased by the lowest segments of the society increased dramatically worsening the situation further,” Mr. Gunasekara noted.  

Politicians, like D.B.Wijetunga, Chandrika Kumaratunga, Mahinda Rajapaksa or Bsil Rajapaksa who held the finance portfolio and took decisions on the monetary and tax policy in the country did not have a good knowledge in economics or planning.  

As a result of the sharp drop of state revenue in this way, the government did not have enough money to run the country and had to borrow heavily from domestic banking sector and commercial loans globally with higher interest rates. The unavoidable outcome was the sharp depreciation of the rupee against the dollar. With the release of dollars by the Central Bank TO money market to plug the depreciation of the rupee, the foreign reserves dropped to one billion dollars by January 2022 and to 500 million by March, with no foreign exchange to import essential food commodities, medicine, fertilizer, oil and gas and raw material for the export industry. All these factors contributed to a major shortage of consumer goods coupled with the skyrocketing of prices of all of them and services. This is how foreign debts spiraled to US$ 51 billion by 2022 from a mere 743 million in 1978.“I have repeatedly forewarned President Mahinda Rajapaksa and Gotabaya Rajapakse in as early as year 2000 about the impending economic meltdown but sadly no one listened or took remedial measures,” he stressed. 

-The predicament of Sri Lanka is extremely precarious and unpredictable with an annual debt service commitment of US$ 6 billion in addition to domestic debts of Rs.11 trillion Pics: DEW Gunasekara.