Minister of Labour and Deputy Minister of Economic Development Dr. Anil Jayantha Fernando in an interview with the Sunday Observer shared his views on the outcome of President Anura Kumara Dissanayake’s recent visit to India, Fitch Ratings upgrading Sri Lanka’s foreign currency rating and the Government’s ongoing negotiations with the International Monetary Fund (IMF). He said that before the National People’s Power (NPP) Government was set up, the Opposition said that it would be a real calamity and the country would be in a chaotic situation. At present, the Government has won the confidence of local and foreign investors, foreign countries and international agencies.
Dr. Fernando said the Opposition is surprised as they don’t like to see what has happened today. The Former Ranil Wickremesinghe Government had a different agenda regarding the IMF program and they collaborated with the IMF passing on the entire burden to the poor and the downtrodden. There is no taboo that Sri Lanka should not continue with the IMF program. The NPP Government’s strategy is different and we take the practical situation into account and we have reduced the burden of the poor people.
Excerpts of the interview
Q: What was the most significant aspect of President Anura Kumara Dissanayake’s recent visit to India?
A: It had several aspects and the key aspect was to build good bilateral relations with our neighbour and stabilise vibrant diplomatic relations. Our main target is to develop the country and it is not a buzzword or rhetoric by assessing the present situation. Sri Lanka’s economy was in a real abyss and we need to navigate it towards real economic growth. To do that, trade and investment, good relationships and collaborations with other countries are highly important.
As far as socio-economic aspects are concerned, there are strong ties between Sri Lanka and India. As a starting point and to showcase to the world how diplomatic we are, the President made his first official visit to India in good faith. I can categorically say that it was a very successful foreign mission. As I was also part of the delegation, what I noticed was apart from those official aspects, the Indian Government also has great esteem regarding social, political and understanding perspectives.
We could realise India’s readiness to cooperate and bring trade and investments by showcasing our integrity. At all the bilateral meetings, the President categorically outlined the Government’s objective of bringing more investments and broadening investments and trade sectors. The President also stressed the importance of regional peace.
We know that India has a role to play in geopolitics. India is our closest neighbour so we need to maintain a clear stance in our foreign relations. We should not take any stance that would create unnecessary threats to India or the region. If we create sceptism in future, Sri Lanka’s foreign policy, actions and trade and investments would pose a threat to India or the region, we would not be able to create a conducive environment for investments and have an amicable solution between India and Sri Lanka.
We also clearly maintained the same stance all the time. It is an open secret that there is rift between India and China in geopolitical aspects. Let them sort out their issues and we are not going to be a part of it. The President gave a firm assurance that no country or organisation could use our soil in a manner that would become an impediment or create a risk to India. The President categorically said what we need most is peace and harmony that would support trade and investment and long term and sustainable relationships.
Q: What was the outcome of the President’s visit to India from the perspective of labour relations?
A: There were no specific labour related agreements. But by and large, lots of areas in trade and investments were discussed. A joint statement was issued based on that where we focused on many areas not only trade and investment but also other social and cultural and long term bilateral relations.
Specifically, the labour related things were not discussed but the outcome of those discussions is indirectly connected to labour relations. For example labour relations are connected to long-term trade and investments perspectives, development projects on energy, grid connections and potential for investment expansion. As the Labour Ministry, it is our duty how best we create an environment and facilitate the development of skillful labour. That could really be a part of the economy of the country.
Q: Fitch Ratings has upgraded Sri Lanka’s foreign currency rating from the Restricted Default (RD) status, to CCC+. Your comments?
A: These international agencies such as Fitch Ratings, Moody’s and S&P Global Ratings are the key three rating agencies. They are relatively independent agencies and they have strong yardsticks of analysis. It is a fact that the country’s credit ratings were gradually eroding over the past troublesome period and our country was associated with the risk. However, it maintained the range within the B+ but gradually it came down to restricted default due to the wrong policies and politics.
In a restricted default situation, no investor would come because they know that their investments are going to be highly risky. No one wants to take that kind of default risk where there is no compensation or return for it.
That is one of the reasons why our Foreign Direct Investments and possibility of bringing new investments were really discouraged. Other measures that were taken once we formed the Government were establishing law and order, fiscal, foreign and macroeconomic sectors. This was a key for us within this financial stabilisation. We took measures not to further destabilise but to enhance financial stabilisation.
One of the right measures was to immediately intervene in the debt restructuring program. Debt restructuring is a key mainly due to two reasons. One is we want to get the bankrupt label out. The other one is to open a window for us to go to the market for new financing supported by the investors’ confidence. This didn’t happen in isolation. These are the outcomes of the actions taken by our Government rather than being driven away by slogans or the Opposition just wanted us to do so. We assessed the current situation once we formed the Government, either to continue with this debt restructuring or to do something else. We assessed the situation and it was really paramount for us to quickly finalise this debt restructuring. We did and managed it.
There was some scepticism whether we can complete it before the end of 2024 or this year. We wanted to complete it in 2024 but a little contingency was there due to some technical reasons. That is the reason in the Vote on Account we allocated Rs.3,000 billion as a new debt requirement to facilitate debt restructuring in case we would not be able to finish it within 2024.
But I am happy to say that we have been able to manage that. The Opposition made a big hue and cry that we are going to borrow that much money and it was not so. It was a technical requirement. We saw the situation and put it for the Vote on Account but we didn’t want to use it. We expedited the process and managed to sign the bond exchange agreement on December 20. We have also finalised all other debt agreements with the official creditors except four countries amounting to US$ 300 million.
That was the reason the Fitch Ratings wanted to upgrade Sri Lanka’s foreign currency rating. It is remarkable that Fitch Ratings has upgraded our credit rating by three notches, CCC+. It is historic in Sri Lankan credit rating. It doesn’t mean that we should be really fascinated with that. It is an indication that the investment climate is improving and investor confidence is gradually building. Therefore, Fitch Ratings and other independent agencies within their framework have no way to say that this cannot be upgraded.
That is the reason they have upgraded Sri Lanka’s foreign currency rating. It is indicative in the local Stock market as well. In Sri Lanka’s history, the Stock Market has never reached this range of 15 percent increase and it is a big milestone as far as the local investment is concerned. It is performing well and there would be ups and downs. Simply speaking, I can say the investor’s confidence is being gradually built and it is indicative of this kind of upgrading.
I pass on this message to local and foreign investors to explore the opportunities and possibilities of bringing more investments. The Government is ready to facilitate their investments to be in a very productive context so that they could create more value and develop our country.
Q: The President in his recent speech in Parliament announced several tax cuts and concessions. How do these affect revenue targets and hence economic development targets of the Government?
A: These proposals are to reach our revenue measures. They don’t really affect the development or would not be an impediment for the future growth trajectory. These are not huge tax cuts and we wanted to give more. However, we couldn’t go for that due to the revenue measures and fiscal space. This benefit would induce especially the employees. There was a tendency that middle class employees attempted to flee from the country by looking for employment opportunities in other countries. So, it is a kind of a signal to check this trend and induce employees to have relatively more income whereby their disposable income will increase. That will positively affect the aggregate demand whereby the production can also be increased. That is a positive signal.
As far as the Income Tax and the Withholding Tax is concerned, people are paying huge amounts. It is good if we can reduce the Withholding tax to a lower bracket if possible. We are not in a position to do that at this juncture. However, critical areas were taken into account. As a result, VAT was exempted from locally produced milk and yoghurt. It is a positive signal in terms of production, revenue or disposable income.
On the other hand, the question arises how we are going to compensate for the impact of the tax cut. It is not too big. However, we have made proposals to collect that amount from other sectors. We have other sectors to increase our tax revenue by increasing the tax efficiency and broadening the tax net. As of now, the IMF doesn’t take all those things as very substantive and serious matters. We have to prove them by demonstration by our own actions.
Increasing the Withholding tax from five to 10 percent doesn’t mean that we are going to impose a new tax. It is purely with a view to broaden the tax base and increase the tax efficiency. This doesn’t mean we are going to impose tax on the poor. As of now, those who have low income which is below the tax threshold, still those people are paying five percent. If they don’t go to the Inland Revenue Department and take a tax credit that has become tax revenue to the Government. Our proposal is not that. While increasing the Withholding Tax from five to 10 percent those who are liable to tax, can of course, get this as a credit. It is not a new tax. But those who are below the tax threshold, we are not asking them to go to the Inland Revenue Department and get a tax credit but we would issue directives by April as this will be effective from April 1, 2025. We will introduce a mechanism for those who are not liable to pay tax. That means the banks will not withhold even the earlier five percent. That has to be done within the given direction and plan where there would not be tax evasion. There would not be opportunities for those tax evaders and manipulators to take advantage. It is an utter misinterpretation by a certain section of the media that the Government will impose taxes on the poor.
Q: Under the IMF agreement, the previous Government imposed many taxes on the working class which have drastically reduced their salary income. Are there any plans in place to reduce the burden of the working public?
A: We need to go step by step. Tax threshold has been increased from Rs.100,000 to 150,000 to improve the disposable income of the working class. If the income of an employee is less than Rs.150,000 per month, he is not supposed to pay any taxes and that is a big relief for them. Apart from indirect benefit, the key aspect of the exemption of the Withholding Tax is to increase tax threshold along with broadening the first slab of Rs.500,000 per annum to Rs. 1 million. That means in terms of the monthly calculation those who earn Rs. 150,000 are not required to pay any tax. Those who earn more than Rs. 150,000 are required to pay tax starting at six percent. For example, if somebody earns Rs. 230,000, he would be taxed only for Rs.80,000 at the rate of six percent. Therefore, it is a huge relief for those who earn less. In future, we would see whether these tax rates can be brought down further.
Q: The unemployment rate has gone up slightly after the economic crisis of 2022 and also the Covid-19 pandemic. How do you plan to create new employment opportunities for youth through vocational training and other such avenues?
A: The main strategy to increase employment and bring the unemployment level down is to create more job opportunities in the private sector, small, micro small and medium sector enterprises. So, the plans are on track now. You can see some of the things during 2025. It is not going to solve the problem by offering more and more jobs in the public sector. It doesn’t mean that we are not going to recruit to the public sector. We want to have a very efficient and productive public sector as well. As of now there is an issue in the public sector not because of the present Government but due to the issues of the previous Government.
While solving all those things, there are lots of vacancies in the public sector especially in technical and high expertise and we want to recruit people. There will be a big employment generation in the private sector with new investmenst and new opportunities in the micro small and medium sector by creating a strong and skillful public sector which caters the needs of the public. This is the plan. It would not be able to completely see the outcome of the plan in 2025 because we have to work given the constraints. We want to create an environment where people tend to work and find more job opportunities rather than just waiting to get a subsidy from the Government.
Until then we give substantial subsidies to the needy people as well. We have a good social protection program. In the future we will come out with social safety programs while creating more opportunities for people to get jobs.
Q: The country’s economic development declined during the past few years due to the Covid-19 pandemic and 2022 economic crisis. However, the World Bank has projected a positive growth trajectory for Sri Lanka 2024 and 2025. What are your plans to accelerate economic development?
A: The forecast for 2025 and 2026 is dependent on many macroeconomic variables such as the country’s situation, financial stability and exchange rates. So many indicators are taken into account. Among them, stability and investor confidence play a key role. As far as the Government is concerned, we have identified key focus areas in 2025 such as tourism, manufacturing sector, energy sector and IT related industries to maintain this particular trajectory and navigate the economy towards more growth and development. Digitalisation can also change the landscape of economic development. Connected towards medium term objectives in 2026, we would explore new industries in energy, gas exploration, manufacturing, logistics and trading, naval and maritime hubs. We have thought of these strategically important areas while addressing quickly applicable things in 2025 as decided.
Q: At the same time, the NPP Government is being accused of continuing the same IMF program adopted by the former Ranil Wickremesinghe Government. Why was this necessary and will the Government continue the same agreement going forward?
A: This has to be analysed carefully about what the Opposition disseminated in society on the IMF program. They tried hard to say either the Government will continue the same program or renegotiate it. Whether we like it or not, the renegotiation means we are continuing the IMF program. The other option is to scrap it. But if we scrap it at this juncture that would be really disastrous. That is not our wish. If we scrap the IMF program and think of another path the country would be further dragged into trouble. However, the Opposition parties would like us to do that because they don’t like our Government to be there and the final outcome of our Government would take a longer period of time.
Therefore, we had a choice. We didn’t continue the IMF program as former President Ranil Wickremesinghe had planned. There were negotiations but we didn’t go to negotiate the parameters that they had set. If we are to negotiate the basic parameters, even the DSA and the basic structure, it takes a longer time. We have to rescue the public and that is why we decided to continue the IMF program. Even in our manifesto, we categorically said that we would not derail the IMF program but will renegotiate with them within the given parameters. That is why we increased the tax threshold and expedited governance measures to create a very level playing democratic environment for investors.
