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Tax increase a must to grant salary hikes: Bandula Gunawardana

21 Aug 2021

  • Lockdowns have pushed country’s economy backwards by -3.6%
  • Cost of Living Cabinet Subcommittee moves to address issue of rising prices
  • Protesters fail to present alternative to address global price increases
  • 86% of Govt.’s tax revenue spent on state salaries and pension payments
  • Tax reductions won’t reduce prices if exchange rate continues to fluctuate
  • US-China trade war prevented world from working together during pandemic
By Yoshitha Perera With the crippling effects of the Covid-19 pandemic hitting all aspects of life in Sri Lanka, and the country facing a serious economic downturn as a result, public concerns mount over issues such as cost of living and scarcities in the face of a growing forex crisis.  In an interview with The Sunday Morning, Minister of Trade Bandula Gunawardana explained the present condition and the Government’s plans to overcome these matters. Following are excerpts of the interview. What is the country’s present cost of living situation? We are now facing an epidemic that has never happened before in the history of Sri Lanka. Due to the rapid spread of Covid-19, economic growth in all other countries in the world, except China, declined in 2020. In the neighbouring Maldives, the growth rate is -32% due to the closure of the country. In Sri Lanka, due to several lockdowns in 2020, the economy went backwards by -3.6%. Due to this reason, the local and global supply chains are in chaos. At present, the world is in a state of uncontrollable shortage of goods and rising prices. During World War II, a similar situation arose, yet it was not that serious. At that time, the world’s economists came together to find a solution. Accordingly, organisations like the World Bank and International Monetary Fund (IMF) were formed. It was from these organisations that the leaders had restored the world economy. Sri Lanka is also a member of these two organisations and we have the opportunity to work with the global financial system. At this juncture, a conference of world-class economists is needed to manage the situation. However, unfortunately, the world is not coming together because of the trade war between the superpowers, the US and China. Developing countries like Sri Lanka suffer the most from this. We have to face uncontrollable factors and challenges at this time, whether we like it or not, no matter what government we have. What recent measures have been taken by the Cabinet Subcommittee on Cost of Living to minimise the rising cost of living? The Cabinet Subcommittee on Cost of Living is paying special attention to this matter at all times. Rice is the staple food of Sri Lanka. Yet, there are many problems with the price due to overactive rice mafia. At present, there’s a large number of middlemen who collect stocks of rice by paying higher prices for paddy. If the paddy price becomes Rs. 60, the rice price becomes Rs. 120. If we buy paddy at Rs. 70, rice costs around Rs. 140. Before the Government came into power, the paddy farmers received on Rs. 30; later it was increased up to Rs. 50 by the present Government, but then the middlemen further complicated it. For this reason, the Cabinet, on 17 August, took some tough decisions. If stocks collected by intermediaries are not registered under the Consumer Protection Act, those stocks will be purchased by the government and distributed among the public through Sathosa and Co-operative outlets. We will not allow the price to be lower than the guaranteed price. The Paddy Marketing Board (PMB) purchases any quantity according to the guaranteed price. If the maximum retail price (MRP) is exceeded, the existing fine has increased to Rs. 100,000, and a gazette notification was issued on 18 August, following cabinet approval. The Cabinet also approved the importation of 6,000 metric tonnes (MT) of rice from Pakistan for emergency use. Cabinet approval was granted to increase the number of paddy mills owned by the Co-operative and Sathosa networks in consultation with the private sector to commence seven paddy mills in the Anuradhapura, Polonnaruwa, Hambantota, Kurunegala, and Ampara Districts, equipped with new and modern machinery. Accordingly, we will continue to provide rice for less than Rs. 100 over the next three years as well. When the Sathosa network was handed over to me, the loss was Rs. 20 billion and suppliers had to pay Rs. 8 billion. The total loss was Rs. 28 billion. We hope to break even Sathosa by the end of this year. We are also taking steps to increase the Sathosa branch networks with 600 more outlets. Through the State Trading Corporation (STC), we have started Q Shops, which are like mini supermarkets. We will take the necessary measures to set up three Q Shops in each divisional secretariat by the end of this year. Plans have already been made to build 1,000 Q Shops. Accordingly, steps are being taken to make this network the largest retail chain in Sri Lanka in the future. The STC would also commence the importation of new products and essential commodities. Until now, all goods were imported with the assistance of the private sector, but in the future, a government agency will prepare procedures to import essential commodities. Currently, we are having discussions with several key importers and manufacturers to implement this procedure. Consumer rights groups claim that there is a sharp price increase in almost all daily-use products and services, and that it indicates the Government’s inability to control the rising cost of living. What are your thoughts on this statement? People can say anything that comes to mind, since there are people who stand up for the interests of different companies and individuals without any basis. Yet, no one suggests a solution. How do you control the high cost of living in Sri Lanka when world commodity prices are rising? What the Government can do is control the rate of increases in commodity prices. On the one hand, some say to close the country. If the country closes, goods from small export industries such as tea, coconut, and rubber will not be exported. Because of that inability, foreign exchange rises. Yet, not a single critic is ready to give a solution to this. Trade union leaders campaigning for higher wages have no understanding of the subject. As the cost of living rises, so does the demand for higher wages. When wages increase, people’s purchasing power increases for a short period of time. But if wages increase and production does not increase, there will be a gap. In 2020, the Government’s tax revenue was Rs. 1,216 billion and we had spent Rs. 1,052 to pay salaries and pensions for government servants. Eighty-six percent of tax revenue had been spent on government worker salaries and pensions. Now, the only thing we have to do is to take a tax, to obtain a 5% or 10% tax for every item purchased by consumers, and add it to the Social Security Fund, as a solution to the problem of health and education sector wages. These services are provided free of charge, but it is a huge service to the country. The Covid-19 pandemic had already affected most Sri Lankans who are in the low-income category. Many daily wage earners and private sector employees were forced to leave their jobs. How will the Government address this issue? There are only 1.5 million government employees. However, there are 6.5 million private and self-employed people in the country. The majority of them have lost their income by now, due to the prevailing pandemic situation. The Government has no money to provide for these people. We have paid Rs. 5,000 thrice, but now, we don’t have money to provide assistance for these people. People are claiming that goods at the controlled price are not accessible at nearby groceries and other supermarkets. With the present situation, some people can’t even reach Sathosa outlets where they can buy goods at the controlled price. To address all these issues, how would the Government introduce a viable and practical mechanism? The Ministry had also made arrangements to distribute a relief package including 20 essential food items such as rice, flour, sugar, tea, and lentils. The distribution of the package started on 19 August for a period of two weeks, at a cost of Rs. 1,998. The decision was made since most people have been home-quarantined. People can call the 1998 hotline and we are taking steps to launch this service free of charge. A company named Bell Solutions is providing assistance and Sathosa outlets will distribute the relief package within 24 hours to homes. The value of these goods is around Rs. 2,500, if we buy them at a normal shop. The Opposition is claiming that the reduction of tax on some daily-use products didn’t benefit the consumer. What is your view on this statement? How can the tax reduction on daily-use products benefit the consumers? Taxes are just one factor in the pricing of goods. It is useless to reduce taxes. If the exchange rate goes faster than that, the people will not get any relief by reducing taxes. Do you think the recent price hike in LP gas has addressed the issues faced by LP gas importers, where there would not be any shortages in the future? During the last six months, the price of LP gas in the global market has increased, but this price hike cannot be bearable for a private sector company. For Litro, the Government is paying Rs. 500 per gas cylinder, but for Laugh Gas PLC, the Government can’t pay that amount. We have to tell the truth to the consumers. The relief which was given to these gas companies is temporary and there will be more shortages in the future with the global price hikes. We don’t have a cost-reflective price formula for gas, electricity, fuel, and other import items. The Government is to set up a new company affiliated to the Ceylon Petroleum Corporation (CPC) to address LP gas issues in the market. Will this not result in another loss-making entity to the government? That is a good solution, but it cannot be sold at a lower price than the current price. Implementing such a company is an easy task, but if it is to be maintained, gas cannot be provided for less than the current price. That would be a huge loss to the company.


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