By Harsha Gunasena –

Harsha Gunasena

The election manifestos of the presidential candidates were published. This time there is enthusiasm from the people about the election manifestos and there are several articles  being written about those. The National Movement for Social Justice recently published a questionnaire to political parties on policies to be included in election manifestos. By this questionnaire the political parties are directed to elaborate the proposals they make in depth.

Since the country was bankrupt and the recovery process is not yet completed, this time there is more emphasis on the economic issues. Emphasis on the deviation from the corrupt political culture of the National Peoples Power (NPP) and the emphasis on the digitalization of the activities of the state of Samagi Jana Balawegaya (SJB) are eventually aimed at the economy of the country. Therefore, if we do not handle the economic affairs of the country effectively all the citizens will have to face the consequences. Hence, we all should pay attention to this.

There is a public opinion against trade in this country. People are against the traders since they produced the essential goods for themselves. The traders do not give reasonable prices for the produce of the people, and they sometimes attempt to get undue profits. This position  when translated into macroeconomics means people like to produce their goods in this country without importing those goods and in order to get foreign exchange, they like to export the goods and services they produce. This is not in line with the economic principles, since the swing goes to both sides. A country cannot have only exports without imports. Sri Lanka over decades gave priority to import substitution over export promotion.

According to Central Bank reports in the year 2022, 15% of Sri Lankan imports are consumer goods and 6.5% are other consumer goods. The balance was intermediary and capital goods. Fuel is categorized as an intermediary good and it accounts for 26% of the total imports. These data are not  drastically different for the other years. Hence a great percentage of imports is not wasted on consumption.

Sri Lanka experienced an economic growth of more than 5% in 2010-2012. The main component of it was government constructions from borrowed money, not trade.

It was mentioned in the election manifesto of NPP that it will enter into bilateral trade agreements which is a very positive approach. This approach challenges public opinion which is against international trade. However, there is a term in the NPP election manifesto which goes along with that public opinion. That  is the production-based economy. NPP has mentioned elsewhere in detail that the exports would be promoted but the term denotes that they would discourage imports and increase the production of the country.

Ranil Wickremesinghe (RW) in his manifesto use the term Theravada Trade Economy. There is no mention in the Pali Canon of Theravada about free trade economy. The Buddha advised many including the traders how to advance their lives spiritually as well as mundanely. Concepts of Theravada are not in free trade.

However, in the Rajarata civilization prior to the invasion of Magha, international trade was a key component of the economy. Sri Lanka was a trading centre which combined the east and the west in the Maritime Silk Road.

Parakramabahu the Great who ruled Sri Lanka in the 12^th century, strengthened the paddy cultivation. He said not to waste even a single drop of rainwater without effectively utilizing it. He also strengthened international trade as well. He invaded Burma on a trade dispute that affected the Sri Lankan vessels.

The dominant religion of the country was Theravada Buddhism. Mahayana Buddhism developed in certain periods which was able to solicit the support of the kings such as Mahasen. However, it was subdued. After the demise of Rajarata civilization, Thailand which was another Theravada country,  managed to be the centre of trade.

RW emphasizes that during the Rajarata civilization international trade comprising imports, exports and reexports contributed to a great extent to the economy of Sri Lanka. Hence, he would do the same thing. Modern Thailand and Vietnam did the same.  This is a direct challenge to the Sri Lankan thinking against the trade.

According to the terms agreed with the International Monetary Fund (IMF) in the year 2025 as a percentage of Gross Domestic Production (GDP), government revenue should be 14.9%, government expenditure should be 12.6% and primary account balance which is government revenue minus government expenditure excluding interest payments and repayments of loans, should be 2.3%. It was estimated that the growth of economy in 2023 would be minus 3% , in 2024 1.5%, in 2025 2.6% and thereafter 3.1%. According to the Central bank reports economic growth in the third quarter of 2023 was 1.6% and in the fourth quarter of 2023 it was 4.5%. The growth in the first quarter of 2024 was 5.3%. Hence the real growth outperformed the estimates. As a result, GDP increased and it was reported that the government revenue and the primary account balance were higher than estimated.

Election manifestos of SJB, NPP and RW mentioned that personal income taxes would be reduced. We should examine these promises carefully since in the last Presidential Election Gotabaya Rajapaksa promised to reduce taxes in his election manifesto and he did it with the blessings of the private sector and their organizations. It was the beginning of the collapse of the economy.

RW mentioned in his election manifesto that the government negotiated with the IMF about reduction of income taxes. On a different occasion he expressed that the Treasury proposed to keep the annual tax-exempt limit of Rs, 1.2 mn ( monthly Rs. 100,000) and the tax rates of different slabs of 6%, 12%, 18%, 24%, 30% and 36% as they are. However, the present tax slabs of Rs. 500,000 each would be increased to Rs. 720,000 each. The counter proposal of the IMF is that that to increase the first tax slab from Rs. 500,000 to Rs.1,000,000 and keep all the criteria i.e. tax-exempt limit, tax rates and the other tax slabs intact.

NPP mentioned that they would increase tax exempt limit from Rs. 1.2 mn to Rs.2.4 mn which means persons with the monthly income of Rs.200,000 will not have to pay income taxes. It is assumed that the existing tax slabs and the rates would be applicable thereafter.

SJB mentioned that personal income tax after the Tax-free slab of Rs 100,000 per month will start at just 1% and increase up to 24% income up to around half a million per month. Thereafter, current rates will apply for high income earners. Therefore, there will be 24 tax slabs of Rs. 200,000 each and the tax rates of those would be ranging from 1% to 24%.

Accordingly, the chart in this article has given the personal taxes of the monthly income levels from Rs.100,000 to Rs. 600,000 for different proposals assuming that there are no other adjustments. The maximum tax reduction for different levels comes from the SJB proposal. NPP proposal also have a significant reduction of taxes. The problem is that although there are significant reduction of the taxes for the comparatively low income earners in this two proposals, there are significant reductions of taxes for the high income earners as well who are capable of paying the taxes.  Thinking in the side of the state as well as the reasonability, I think that the IMF proposal is the best.

If the state is unable to achieve the agreed said objectives by these tax reductions either the proposal of the winning candidate would have to be withdrawn or withdraw from the IMF extended fund facility agreement. NPP intends to cover the lost tax revenue by increasing the taxes on liquor, cigarettes and casino businesses.

RW as well as SJB say that they would increase the minimum government employee salary by 24%. SJB proposes to reduce the price of 50kg fertilizer bag to Rs.5,000. It is said that salary increase was discussed with the IMF but it was not mentioned that how it was financed. The defense expenses were kept at a high level even after the end of the war but none of the candidates mentioned that it would be reduced.

NPP does not suggest to increase the salaries of the government employees but they have proposed to increase the expenses on education gradually to the level of 6% of the GDP and to increase the expenses on health to 3% of GDP. In 2025 total government expenses is limited to 12.6% of GDP according to IMF agreement. (This will be slightly changed in the coming years) Hence allocation for all the other expenses would be limited to 3.6% of GDP which is unrealistic. There are no alternative proposals to increase the revenue.

NPP mentioned that if elected the Debt Sustainability Analysis which was the base of the IMF agreement will be revisited. It is their right to do so. If not agreed IMF will reject the proposal.

The agreement with the IMF from the point of view of the financial stability of the state is mostly commendable. However IMF is not a nonpolitical organization. That is the reason why China is not paying much attention to the IMF and Frontline Socialist Party rejects the IMF agreement in toto irrespective of the benefits of it to the state of Sri Lanka.

There are 190 member countries of the IMF and they have the voting rights and allocated quota. The USA is having 16.5% of the total votes and the allocation to China is 6.08%. Russian Federation is having 2.59% of the total votes and India is having 2.63%. Percentage of Sri Lanka is 0.14%. G7 countries alone have 41.25% of the total voting rights. Therefore, USA is having a significant influence on the IMF.  These are the geopolitical facts in which we are operating and the state should be able to handle this if the necessity arises.

It is a welcome move that there is a fruitful dialogue on the election manifestos in comparison to the previous elections. Unlike the previous occasions the state is pressed with the availability of funds. Now it is not possible to print money and get loans as we wish as done in the past. This fact should be understood by the politicians as well as by the voters. Some of the proposals in the election manifestos are similar to some of the proposals in Sri Lankan government budgets. When there is a shortage of funds some of the proposals will fly out of the window.