Sri Lanka has perverse link between trade and budget deficit: Nishan de Mel

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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.

verite-research-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.

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Nirmalan Dhas
Nirmalan Dhas
5 years ago

On a small island with a population of only twenty million people with an average IQ of just 79 and therefore on the border of mental retardation, it is natural that an urge to import goods that are not produced on the island should emerge. Instead of attempting to reduce this urge it is better to use it as a force that drives the generation of revenue.

If the government does not know how to do this then it can always pay to find out how. The successors of Efward Bernays are doing very well and can be hired to accomplish mass perceptual modification,

Shee Lankan
Shee Lankan
5 years ago

The motor car is an investment in Sri Lanka. You get the dual advantage of usage and as a holder of value. Most who bought cars prior to August 2015 did so expecting prices to go up. It was so easy to make that decision as everybody saw the higher taxes coming. This keeps on happening and every 3 to 5 years busineses in motor vehicles make windfall profits.

Shee Lankan
Shee Lankan
5 years ago

The govt is dependent on imports for revenue. The people benefit from imports as they get to enjoy goods at reasonable prices that cannot be met by local products. The imports are encouraged by the customs officials for different reasons. The actual value of import values are likely to be much higher than whats recorded. The govt, the people, the traders benefit basically do to cheaper or efficient production of goods by other nations.