Jan 22, 2016 (LBO) – Sri Lanka’s economic policy is governed by political pressures which is evident in the perverse link between the trade deficit and the budget deficit, a top economist observed.
Nishan de Mel of Verité Research says the inconsistency in government policies is the key underlying problem contributing to this issue.
Trade taxes are reduced to increase revenue, especially from motor vehicles, widening the trade deficit and creating pressures on the exchange rate, he said.
“Normally, if you have a budget deficit and if you have a trade deficit you have a solution,” de Mel said.
“Why don’t you increase your taxes on trade that will automatically reduce imports and increase revenue,” he said.
“Because if you increase your taxes on trade, when there is a trade deficit; that’s a good policy and when you do that you are going to increase the tax income.”
De Mel however stated that since Sri Lanka has very high trade taxes especially on motor vehicles the government revenue increases from reducing the taxes as shown in the graph.
“Our trade taxes especially on vehicles are so high; you make more money from reducing the taxes than by increasing the taxes.”
De Mel referred to this politically driven policy as a perverse link between the trade deficit and the budget deficit.
He was speaking at a forum organized in collaboration with Asia Securities and Verité Research recently.
In his address, de Mel also stated that the growth outlook for Sri Lanka in 2016 remains fairly positive, with the construction sector continuing to drive growth.
Sri Lanka has relied on construction and import driven consumption in repeating cycles of boom and bust.
This has driven post war growth but has not developed into a model for sustainable growth.
Long term sustainable growth requires key structural issues in the Sri Lankan economy to be addressed, he outlined.
These include the low labour force participation rate, especially amongst females, compared to the rest of South Asia; the high dependence on employment in the agriculture sector, which is the least productive sector; and declining government revenue.