Business Times

Flaws in economic policy

Cracks are showing in economic policies with the private sector complaining this week about issues relating to exports and of a heavily-taxed tourism sector. Reports in the Business Times and other newspapers reflect the extent of the problem particulary exports which has been hit by a fresh issue – suspension of the US GSP concessions.

The US GSP, much like the EU GSP trade benefits, requires the stamp of approval of the new US Congress and when and whether that would happen in coming months is anybody’s guess. Though textile and garments are not eligible to the tax breaks, several Sri Lankan products benefit from the concessions.

While on Tuesday top exporters in Sri Lanka expressed their concern to the media on five issues - high energy costs, loss of EU GSP+, suspension of the US GSP, appreciation of the rupee and lack of or high cost of raw materials -, the tourism sector was firmly told by the government on Thursday that taxes for this sector won’t be reduced as requested.

The biggest problem facing the tourism industry is that while they say they are comfortable in being treated alike with any other industry, being lumped into a ‘special’ category and charged much higher in taxes is objectionable. Furthermore a Nation Building Tax (NBT) announced in the budget for some categories in the hotel sector is now being extended to more categories. “The biggest problem is one of uncertainty,” one hotelier said.

This all boils down to one factor: Money for the government. The Treasury is short of cash and looking at any, possible avenue to raise cash to help fund a huge development programme in the next few years. In fact many of the ongoing projects like the Colombo Commercial Co property development and the Kalpitiya tourism zone are seen moving out of the bidding process after the usual tender exercise.

The Colombo Commercial property has been finalised to be given to a Colombo conglomerate at Rs 8 billion with an upfront payment to be made while the Shangri-La hotel deal was also with an upfront payment. In both cases, the government is keen to clinch the deals because on-the-spot cash is available. Another new development in these two properties are that they are being sold outright and not on lease which has been the practice for many decades until the third quarter of last year. The thinking is that lease rental is a pittance while there is a lot of money to make in selling the properties and help reduce the budget deficit. Whether this is the right policy and whether parliament approval need to be sought because of the outright purchase process, remains to be seen.

The government is taxing the tourism industry as it prospers seeing it as a cash cow, which is not a viable policy. Global tourism expert Lakshman Ratnapala (see interview on Page 5) says governments all over are fond of taxing tourism. “It’s like killing the goose that lays the golden egg. This is the wrong policy. Taxation inhibits growth,” he says.

With the need to raise cash from any source including tourist visas, it’s unlikely that exporters would get any relief from the present woes they face though the Export Development Board has promised to take up their problems with the Treasury.With oil prices rising to $100 per barrel and the government most likely offering some short-term sops to consumers ahead of crucial local government elections while battling a cost of living crisis and floods that have ravaged paddy fields and other crops, exporters are unlikely to get the relief they want.

Some issues are external like the EU GSP and US GSP while a strengthening rupee has its plus points: it reduces the cost of imports specially fuel and food (wheat flour and sugar). Central Bank Governor Ajith Nivard Cabraal recently said the bank has no plans for the rupee vis-s-vis the US dollar and its movement would be based on market trends which – owing to huge inflows of foreign currency from remittances from the Middle East – is most likely to see the rupee gaining further this year. This means exporters get less for their exports in rupee terms while on the other hand, raw material and power costs, rise.

Taxing the people is an inherent right by an elected government. Without taxes, a country cannot be governed, no development can take place and current administrative structures cannot be maintained. However the government needs to be cautious in haphazard taxation based on desperation or the ‘no choice’ factor. Too much reliance and dependence on foreign remittances from Sri Lankans slaving away in the oil-rich Middle East to keep the home fires burning, is not good because this source can dry up as fast as it grew as the world moves to an era of renewable energy and high oil prices. Exports and tourism are crucial to Sri Lanka’s progress particularly in the post-war era and deserves far more shared concern from the authorities.

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