Troubled times ahead

“Enda, enda, laabai kema, enda (Come, come, cheap food, come),” shouted Aldoris, the choonpaan karaya, braking furiously outside our gate in his tuk-tuk.

“Mokakda mae kalabaley (What’s the fuss),” asked Kussi Amma Sera, running to the gate.

“Aei, ena avurudde badu wediwena-ne. Dan api vikunanne badu wedi karanna issara-wela milata (Why, taxes are going up from next year. We are now selling at pre-tax prices),” he said, grinning.

“Monawada mae badu (What are these taxes),” asked Serapina.

“Godak deval wala mila wedi wenawaney janawari sita (Taxes on many goods are going up from January),” said Mabel Rasthiyadu.

Indeed with the increase in VAT to 18 per cent from 15 per cent effective January 2024, a host of consumer goods will rise in prices. The VAT amendments were rushed through Parliament on Monday ahead of Tuesday’s meeting of the International Monetary Fund (IMF) to finalise the second tranche of the US$2.9 billion bailout package for Sri Lanka.

With the VAT hike, several items including wheat flour, infant milk food, rice flour, rice, bread, electricity, petrol, diesel, kerosene, LPG and pharmaceutical drugs and fertiliser will go up in price. VAT exemptions have been removed from 97 items out of a total list of 138 goods.

The VAT increase is set to see inflation rising amidst pressure on consumer prices.

As I was mulling this news, the phone rang. It was Ruwanputha, my young economist friend. “So the VAT amendments were rushed through in Parliament on Monday ahead of the IMF meeting,” he said.

“Yes, this came as the budget debate was also ending,” I said. “The rush was because it appears the IMF may have suspended the facility on Tuesday (at its meeting) if the VAT was not increased and passed by Parliament,” he said.

“The government has an ambitious target to raise tax revenue which would be a burden on the people,” I said.

“It’s not an easy target to fulfil,” he said.

Advocata Institute’s Chief Executive Officer (CEO) Dhananath Fernando, in a recent interview said that the VAT hike will push the prices of goods and services high, leading to an increase in inflation which may slow down the economy. “The economy will slow down by the extent of the increase in inflation,” Fernando was quoted as saying, adding that removal of VAT exemptions will result in prices of some goods increasing by 18-20 per cent.

State Minister of Finance Ranjith Siyambalapitiya has said that the government is expecting an increase in inflation by 2.5 per cent as a result of the VAT hike and the removal of VAT exemptions.

The VAT amendment bill was passed with a majority of 45 votes with 100 parliamentarians voting in favour and 55 opposing. The VAT increase is set to improve government revenue by over Rs. 375 billion while meeting targets outlined in the IMF bailout package.

Sri Lankans are reeling under price hikes on essential commodities. With inflation soaring last year due to the economic crisis, food and fuel prices rose substantially, triggering inflation to unbelievable levels. While the rate of inflation has slowed down considerably, that hasn’t resulted in a price reduction of essential goods. A reduction in interest rates has also resulted in a sharp cut in interest income, particularly for senior citizens who depend on interest income for their daily needs of food and medicines. Costreflective pricing of fuel means transportation costs rise for Sri Lankans.

Last year was a bad period for Sri Lanka with queues for fuel, LPG and other essentials being a common occurrence across the country. Productivity of the working class was down sharply as people had to spend hours in queues – often having to forego at least one meal a day. Many small-time employers/small businessmen – who had no access to fuel unlike big-time exporters for whom the government has made arrangements for a regular supply to their factories – were suffering in queues or at their businesses.

Public agitation was growing and fears rising that the police and the armed forces would face the brunt of the people’s wrath. At least 16 people died in queues while public anger reached a never-before stage. Frequent clashes between police/ armed forces and the public were reported from many locations. While thankfully the situation improved with stocks of sufficient fuel being imported seeing an end to queues, Sri Lanka is still not out of the woods as poverty has increased, affecting more than 60 per cent of the population.

On Tuesday, the IMF’s Executive Board completed the first review of the 48-month Extended Fund Facility (EFF) arrangement for Sri Lanka, allowing the immediate disbursement of around $337 million, bringing the total IMF financial support disbursed so far to about $670 million.

Following the Executive Board discussion on Sri Lanka, Kenji Okamura, IMF Deputy Managing Director said: “Macroeconomic policy reforms are starting to bear fruit and the economy is showing tentative signs of stabilisation, with rapid disinflation, significant revenue-based fiscal adjustment and reserves build-up.

“Performance under the EFF-supported programme has been satisfactory. All quantitative performance criteria for end-June were met, except the one on expenditure arrears. All indicative targets were met, except the one on tax revenues. Sri Lanka’s agreements-in-principle with the Official Creditors Committee and Export-Import Bank of China on debt treatments are consistent with the EFF targets. They are an important milestone putting Sri Lanka’s debt on the path towards sustainability.

“To ensure a full and swift recovery, sustaining the reform momentum and strong ownership of reforms is of paramount importance. Key priorities include advancing revenue mobilisation, aligning energy pricing with costs, strengthening social safety nets, rebuilding external buffers, safeguarding financial stability, eradicating corruption and enhancing governance.”

The government also needs to ensure its social safety net reaches out to the poor. There would also be pressure on government finances with possible handouts to the poor and under-served communities ahead of elections in 2024.

As I wound up my column, drinking my second mug of tea brought by Kussi Amma Sera, my thoughts were on how citizens would face the plethora of price hikes next year, particularly since to many, incomes have come down with no wage increases in sight.