New Government Strengthens Ties with India while making bold tax reforms
- 5opn1
- December 21, 2024
- Weekly Economic Review
- New Government Strengthens Ties with India while making bold tax reforms
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Weekly Economic Review
The transformation of the new Sri Lanka government from Janatha Vimukthi Peramuna (JVP)’s stance from staunch anti-India sentiments to a cooperative diplomatic relationship with New Delhi represents a remarkable evolution in the island nation’s political narrative.
This shift underscores that even deeply entrenched political animosities can be replaced by pragmatism and partnership, offering a glimmer of hope for the region’s stability and growth.
President Anura Kumara Dissanayake’s visit to India symbolizes a significant shift in Sri Lanka’s political and diplomatic landscape. The JVP’s evolution from hostility to cooperation with India reflects its recognition of the need for pragmatic partnerships in addressing economic challenges and fostering regional stability.
With a balanced foreign policy, fiscal reforms, and a focus on public welfare, the Dissanayake administration is navigating a complex geopolitical and economic environment. These efforts, coupled with support for SMEs and measures against financial fraud, demonstrate a commitment to rebuilding Sri Lanka’s economy and restoring public trust in governance.
President Anura Kumara Dissanayake’s recent visit to India has garnered widespread attention. Amid Sri Lanka’s ongoing economic crisis and declining confidence in traditional political parties, alternative political forces like the JVP have captured the public imagination. While the visit faced criticism from anti-India factions, many welcomed the JVP’s recalibrated stance, viewing it as a sign of inevitable political change.
Dissanayake’s visit was not merely symbolic but marked a significant turning point for the JVP’s political journey. Once defined by its hostility towards India, the party now seeks to foster cooperation in areas such as trade, infrastructure, and maritime security. Discussions were forward-looking, focusing on mutual economic interests and regional stability.
Economic Collaboration Takes Center Stage
Sri Lanka’s economic challenges—worsened by mismanagement, the COVID-19 pandemic, and foreign debt—dominated discussions during Dissanayake’s visit. India has emerged as a critical partner, extending credit lines, supporting essential imports, and investing in infrastructure projects.
Dissanayake acknowledged India’s role in stabilizing Sri Lanka’s economy and emphasized collaboration in renewable energy, digital technology, and infrastructure development.
This newfound pragmatism reflects the JVP’s evolving political maturity. Once shaped by the bitter legacy of the 1987 Indo-Sri Lanka Accord, the JVP now views India as a key partner in addressing shared challenges such as regional security, post-war reconciliation, and economic development.
India’s “Neighbourhood First” policy has further strengthened its position as a stabilizing force in Sri Lanka, particularly in the Tamil-majority regions still recovering from the civil war.
A Balanced Approach to Foreign Policy
A hallmark of the JVP led NPP government’s new approach is its emphasis on balanced foreign relations. While previous Sri Lankan administrations leaned heavily on China for infrastructure funding, often resulting in debt traps and compromised sovereignty, Dissanayake has signaled a recalibration.
The the oolden days JVP remains critical of unbalanced foreign engagements, including controversial Chinese projects like the Hambantota Port deal.
However, India’s role is not seen as a replacement for China but as part of a diversified strategy to strengthen Sri Lanka’s global partnerships.
Foreign Minister Vijitha Herath reinforced this stance, stating that Sri Lanka would not approve Indian projects that harm its economy or sovereignty. During Dissanayake’s visit, only two Memoranda of Understanding (MoUs) were signed—one on avoiding double taxation and another on training 1,500 Sri Lankan civil administrators in India. Other proposals, including those related to connectivity, energy, culture, education, and regional security, remain under discussion he said this week .
India-Sri Lanka Free Trade Agreement: A Roadmap for Progress
Trade relations between India and Sri Lanka have been a focal point of bilateral discussions. Under former President Ranil Wickremesinghe, trade negotiations aimed at an upgraded Free Trade Agreement (FTA) began, with hopes for an early harvest investment agreement in 2024. However, these talks were paused as the new government reviewed its trade policies.
India’s commerce ministry is expected to resume FTA negotiations, with a comprehensive trade deal potentially concluded by 2026. This agreement could cover expanded goods, services, investment, and trade facilitation, addressing concerns in Sri Lanka about opening its markets. India’s willingness to maintain asymmetrical treatment for Sri Lanka and provide trade-related aid may foster stronger business ties and regulatory cooperation.
Fiscal Reforms and Public Welfare Initiatives
In a departure from the secrecy of previous administrations, President Dissanayake has disclosed elements of his government’s upcoming budget ahead of its February 2025 presentation.
As part of the International Monetary Fund (IMF) agreement, Sri Lanka plans to increase the withholding tax on deposits from 5% to 10%, with exemptions for low-income earners. To address public concerns, a special unit in the Inland Revenue Department will guide citizens on tax exemptions and claims.
The government has also pledged to remove the Value-Added Tax (VAT) on local fresh milk and yogurt products to enhance children’s nutrition. Additionally, the tax on service exports will be reduced from 30% to 15%, providing relief to exporters. However, the doubling of the withholding tax has drawn criticism for its potential impact on low- and middle-income earners.
Support for SMEs and Economic Stability
The Central Bank of Sri Lanka (CBSL) has introduced relief measures for Small and Medium Enterprises (SMEs) affected by the Easter Sunday attacks, the pandemic, and challenging macroeconomic conditions.
These measures, developed in collaboration with the Sri Lanka Banks’ Association, include rescheduling non-performing loans, waiving unpaid interest, and offering additional working capital facilities. Borrowers must engage with banks’ Business Revival Units and submit revival plans by March 2025.
Key aspects of the relief package include:
Rescheduling loans based on repayment capacity and acceptable business revival plans.
Waiving unpaid interest accrued from April 2019 to December 2024. Encouraging banks to provide additional relief, including working capital, based on borrowers’ needs.
CBSL has urged licensed banks and borrowers to collaborate effectively to ensure uniform implementation of these measures, emphasizing timely repayments to prevent prolonged financial strain.
Combating Prohibited Financial Schemes
CBSL has intensified efforts to combat fraudulent financial schemes, which threaten economic stability and public welfare. Utilizing investigative powers under the Banking Act, CBSL has targeted 20 institutions since 2011 and continues to investigate additional schemes. Public awareness campaigns, digital resources, and collaborations with social media influencers have been pivotal in educating the public about the risks of engaging in such schemes.
In 2023 and 2024, CBSL conducted over 700 awareness sessions, reaching more than 50,000 participants. These initiatives highlight the importance of financial literacy and the need for vigilance against deceptive financial practices.