Sri Lanka government moves into shop keeping

Nov 07, 2007 (LBO) – Sri Lanka’s government which has been unable to provide adequate public goods such as roads, power or water to its people for years, is getting back into one of the most basic of businesses: shop keeping. “It is proposed to set up a State Trading Wholesale Establishment, which will be a company owned by the Government,” the budget speech tabled in parliament by President Mahinda Rajapakse said.

The firm was expected to streamline supplies to stabilize prices, to import essential commodities when required, and to maintain buffer stocks. The company would also get a 10 million US dollar bank guarantee to import goods.

Second Try

A government owned trading firm, the Co-operative Wholesale Establishment (CWE) collapsed in 2001 during an economic crisis under the weight of more than eight billion rupees of losses.

An attempt to revive it with private sector participation failed after unions opposed a staff lay-off plan and a change of government scuttled a capital injection. But the lay-off resumed later with the government selling off bits of the company’s assets to raise cash.

Earlier marketing firms, including the Paddy Marketing Board and several others had collapsed ignominiously.

Sri Lanka has 136,000 retail outlets spread throughout the 25,000 square mile island and a few dozen state retail firms can hardly help the poor.

Most state retail firms are located in built-up areas, where people come in cars to load up on cut priced goods.

In a bid to keep consumer good cheaper amid rising inflation Sri Lanka’s trade ministry cut import duties on a series of essential goods, with the exchequer losing an estimated 10 billion rupees.

Economists say this would have pushed the already cash-strapped government into printing another ten billion rupees and worsening inflationary pressures.

However President Rajapakse also says the benefits of the tax reduction did not seep down to consumers.

“As such, I propose to confine such tax concessions only to Lak Sathosa outlets, Co-operative Societies and Budget Shops and distribute a welfare pack containing essential commodities at tax free prices to low income groups through these outlets,” he said.

Lak Sathosa is a state retailer set up at tax-payer expense after the collapse of the CWE.

Special Favours

Meanwhile the ailing co-operative societies in the island would also get a million rupee handout at tax payer expense to modernize their shops.

Co-operatives flourished in an earlier era especially when the economy was under heavy government and there was little competition from other private retailers.

The government is also proposing to link 300 co-operative societies around the island to the Lak Sathosa outlets.

Lak Sathosa outlets would also be expanded to 200 on an “urgent basis”. Meanwhile ‘budget shops’ would be set up in more densely populated areas at the cost of 650 million rupees.

While the 100,000 odd other shops serving the people are weighed under various types of tax, the favoured co-operatives would get more breaks to become tax free enterprises.

Co-operatives would be exempt from income tax, value added tax, debit tax, and withholding tax on interest for a period of 5 years.

“Since Co-operative Societies are also exempt from the Economic Service Charge and Provincial Council Turnover Tax, Co-operative Societies and associated Rural Banks will become tax free enterprises in terms of this Budget,” the budget speech noted.

Economic analysts have said that in Sri Lanka special interest groups linked to government get various benefits, tax free perks including salaries, cars, and various tax breaks, while ordinary people in the street eventually pay for these with high inflation.

The 2006 budget brought 19.3 percent inflation to the country, while the 2007 budget so far has brought 19.6 percent inflation up to October as tens of billions of rupees were printed to finance an under-financed budget.

Economic analysts have called for better budgets and reforms to central bank law to block money printing and bring in inflation targeting to prevent the monetary authority from destroying the value of the national currency and impoverishing the population.

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