Land: Sri Lanka’s forgotten asset

By Dhananath Fernando

Originally appeared on the Morning

The headlines are full of talk about asset declarations of ministers. But while the political class debates what they own, the nation has forgotten its real asset: our land. If the forthcoming Budget is to mean anything for growth, it must finally prioritise the country’s most underutilised resource.

Sri Lanka’s land problem is not new. The Harvard Growth Diagnostics study and many others have identified weak property rights as a binding constraint on growth. About 80% of land, including forests and reserves, is owned by the State. Vast tracts lie idle in the hands of Government agencies. Even private land, though held by millions of families, is often locked away from productive use because it exists only in the form of deeds, not secure, State-backed titles.

This distinction is crucial. A deed records the history of a land transaction but does not guarantee ownership. Multiple deeds can exist for the same plot, leaving ownership contested. A title, by contrast, is conclusive proof. It is recognised by the State, cannot be disputed once registered, and gives families and businesses the security to invest, sell, or borrow against it.

The ‘Bim Saviya’ programme, launched in 1998, was meant to move Sri Lanka from deeds to titles. Nearly three decades later, out of 16 million land parcels, just over a million titles have been issued. At the current pace of around 50,000 per year, the process will take 300 years. By then, the world will have moved on, but Sri Lankans will still be queuing at banks, waiting months for loan approvals while surveyors sift through deed histories stretching back three decades.

The consequences are immense. Without secure titles, banks hesitate to lend. Businesses cannot expand. Farmers cannot unlock capital. Families remain vulnerable to fraud. As Hernando de Soto famously described, Sri Lanka is sitting on mountains of “dead capital”.

Why are we stuck? The law itself is outdated, modelled on Torrens systems that do not reflect Sri Lanka’s complex co-ownership, religious, and customary land arrangements. Institutions are fragmented, with responsibility split between the Survey Department, the Land Title Settlement Department, and the Registrar General’s Department. No single body is fully accountable.

Capacity gaps are crippling: more than half of surveyor posts remain vacant. Dispute resolution has collapsed, with only 11% of mediation boards functioning by 2023. Even where land has been surveyed and gazetted, hundreds of thousands of titles remain in limbo.

This is not simply a funding issue. It is a leadership issue. Unless the Cabinet elevates land titling to a national priority, progress will continue to crawl.

The 2026 Budget is the moment to act. Three bold steps can change the game.

First, modernise the law. A legal taskforce must redraft the 1998 act within 12 months, clarifying co-ownership, religious, and State land, and establishing a proper compensation mechanism.

Second, make conversion compulsory. Every sale, mortgage, or inheritance should automatically become a title transaction. Within 15 years, the deed registry could be phased out entirely.

Third, fill the gaps with private capacity and smart financing. Licensed private surveyors can be engaged under Government oversight. Modest registry surcharges and optional fast-track services can reduce reliance on Treasury allocations, while donor or Public-Private Partnership support can be tied to performance milestones.

These reforms would more than pay for themselves. Banks report that title-backed loans can be processed in as little as a week, compared to two or three months for deeds. That is not just about efficiency. It is the difference between a farmer missing a planting season and being able to grow, or a small business waiting months for credit versus expanding immediately.

Most importantly, titles provide ordinary citizens what deeds cannot: security, credit, and peace of mind.

While airtime is wasted on politicians’ asset declarations, Sri Lankans are waiting for their real assets, their land to be recognised and freed. Accelerating ‘Bim Saviya’ is not a technocratic exercise. It is a once-in-a-generation reform that can unlock growth, empower citizens, and give the economy the lifeline it so badly needs.

This budget should finally deliver it.

Housing for presidents vs. housing for people

By Dhananath Fernando

Originally appeared on the Morning

The past week’s talk has been about curtailing housing facilities and other perks for former presidents. Many Sri Lankans are rightly interested in where former leaders live. But here is the real question: why are millions of ordinary Sri Lankans struggling to build their own homes?

Housing is a basic human need. Yet in Sri Lanka, it is not only the poor but even the middle class who fight an uphill battle.

Look around any neighborhood: countless homes remain unfinished. The ground floor is barely complete, steel rods jut out of columns waiting for a first floor that never comes. Walls stand unplastered, kitchens are bare, and curtains are unaffordable. For many families, building a house is a lifelong project, and they often finish only when they are close to retirement.

A few years ago, Advocata research showed just how bad the situation was. Sri Lanka’s housing affordability is among the worst in the world, worse than New York, Tokyo, or London. We rank only behind Shanghai. In simple terms, compared to how much we earn, our housing costs are higher than in some of the richest cities on earth.

Even lifetime savings don’t take us far. A Sri Lankan in the 70th income percentile can only afford a 500 sq ft house. To buy a modest 1,000 sq ft house, you need to be in the top 20% of earners.

Why is housing so expensive? The answer is simple: construction materials are outrageously costly because of sky-high import tariffs. Wall tiles, floor tiles, cement, steel, bathroom fittings, you name it, are all slapped with layers of taxes: CESS, PAL, Customs duty, VAT. Sometimes these add up to over 100%.

Some argue tariffs don’t matter since Sri Lankan companies make many of these products locally. But if that’s true, why do we need tariffs at all?

The reality is that imported materials are often 50–75% cheaper than local products. Once tariffs block competition, local manufacturers raise their prices too. And when tariff rates cross 70% or 100%, imports stop coming in entirely. So the Government doesn’t earn much revenue either; most Customs income actually comes from vehicle imports, not construction materials.

Take the numbers: cement in Sri Lanka costs about 120% more than in China. Steel is 48% more expensive than in Singapore. Tariffs on tiles and bathware are above 70%.

This is not just about houses. High construction costs spill into the whole economy.

Every industry needs buildings and energy. When our costs are higher than the region, our businesses become uncompetitive. Since most construction is financed through bank loans — often at interest rates around 12% — these inflated costs also bleed into debt burdens for families and companies alike.

The Government itself pays the price. Each year, capital expenditure is a major budget item, and inflated costs mean taxpayers get less value for every rupee spent. The tourism sector suffers too. Hotels are expected to renovate every five to seven years, but when construction is so costly, they either delay upgrades or pass the expense onto visitors, hurting competitiveness.

And look at our negative list in trade deals. Most construction materials are excluded, meaning they will stay protected even under free trade agreements. That says a lot about who benefits from keeping costs high.

For small and medium-sized enterprises, the story is even worse. Expanding a workshop, building a new facility, or even basic repairs all become nearly impossible when construction costs are inflated and when credit is tight.

If the Government is serious about helping industries, boosting competitiveness, and giving relief to the middle class, it must bring down the cost of construction. And that means cutting tariffs.

It’s time we cared as much about the housing struggles of ordinary Sri Lankans as we do about the houses of former presidents.

SOE closure is good, but is only the beginning

By Dhananath Fernando

Originally appeared on the Morning

The Government’s recent decision to shut down 33 State-Owned Enterprises (SOEs) is commendable and a step in the right direction. Sri Lanka has far too many SOEs, with the State entangled in almost every sector imaginable – aviation, retail, banking and finance, agriculture, ports, insurance, transport, energy, and even chemical production.

What many people do not realise is that government involvement in business is not just inefficient. It is at the heart of our debt and economic crisis. SOEs are heavily indebted, crowd out credit that should go to the private sector, and operate in areas where private businesses could be far more productive.

Once upon a time, there was an argument that the government should be in business to ensure a ‘level playing field.’ That argument has long expired. Today, SOEs do not level the field, they tilt it. With mounting losses, inefficiency, and distortions, they have undermined competitiveness rather than protected it.

The State already has a stake

It is worth remembering that the Government already has a built-in stake in every business through taxation. Corporate tax is 30% of profits, and once businesses cross the Value-Added Tax (VAT) threshold, a further 18% is levied on value addition. In other words, the State captures a significant share of private profits without having to own or operate businesses.

The problem is that Sri Lanka has too few private businesses because the State has occupied their space and run it unproductively.

The real giants of losses

Closing 33 SOEs is good, but it is only the beginning. Sri Lanka has more than 500 SOEs if one includes subsidiaries and sub-subsidiaries. Some even operate as departments – railways and postal services, for instance, which are technically not SOEs but still run as commercial operations.

In reality, around five large SOEs account for 80% of the losses. These are:

• Ceylon Electricity Board (CEB)

• Ceylon Petroleum Corporation (CPC)

• National Water Supply and Drainage Board (NWSDB)

• Sri Lanka Transport Board (SLTB)

• SriLankan Airlines

Restructuring these giants is critical. Attempts have already been made with the CEB, but as this column has previously argued, reform has been slow and the hurdles to attracting capital remain high.

SriLankan Airlines is another pressing case. Our sovereign credit rating remains partly hostage to the airline’s bond restructuring. The CPC and SLTB are not far behind in the severity of their problems.

A web of loss-making interconnections

One reason Sri Lanka went bankrupt was the unhealthy web of financial interconnections between these SOEs. When the CEB sold electricity below production cost, it borrowed fuel from the CPC, making the CPC loss-making as well.

The CPC, in turn, tried to recover losses by charging SriLankan Airlines higher-than-market prices for jet fuel. The airline was compelled to buy from the CPC since both were Government-owned and it too bled losses.

When all three made losses, they turned to the People’s Bank and Bank of Ceylon for loans, exposing depositors’ money to undue risk. With large amounts of credit guaranteed by the Treasury, private businesses were crowded out both by lack of funds and unfair competition.

A tilted playing field

The distortion is not confined to energy and transport. In insurance, for example, the law required all companies to split life and general insurance operations. The only exception? Sri Lanka Insurance – the State player.

In gaming, the new regulatory authority does not cover the National Lotteries Board or the Development Lotteries Board and private players are barred from entering the lottery market.

In ports, the problem is even more blatant. The Sri Lanka Ports Authority is both regulator and operator. It owns shares in private terminals such as Colombo International Container Terminal (CICT) and South Asia Gateway Terminal (SAGT) while running its own Jaya Container Terminal. It is regulator, competitor, and shareholder all rolled into one. That makes the very idea of a level playing field a joke.

Mixed signals

While shutting down 33 institutions, there are also news reports of the Government expanding into new businesses, such as opening outlets for sugar sales. These mixed signals send the wrong message.

The principle must be simple: the Government should focus on its core mandate – ensuring the rule of law – and let the private sector drive commercial activity. If necessary, regulate. But only when necessary. The State should take its 30% tax share, make tax administration efficient, and leave the rest to entrepreneurs.

The way forward

The next step is the passage of the proposed SOE holding company bill. This will bring most SOEs under a single holding company structure, paving the way for divestiture, Public-Private Partnerships (PPPs), and, where appropriate, outright privatisation.

Some SOEs must be privatised fully. Others should enter PPPs. But the guiding principle should remain the same: let the private sector run businesses, not the State.

Closing 33 SOEs is a start. But unless we confront the inefficiency of the big five and end the distortions that SOEs create across the economy, Sri Lanka will remain stuck in the same cycle of loss, debt, and stagnation.

Tariff hikes on onions and potatoes: Farmers protected, poor forgotten

By Dhananath Fernando

Originally appeared on the Morning

Over the last few weeks, while the Government and Opposition sparred over political theatre, ‘crossing the Rubicon’ as they call it, a decision with far more impact on ordinary people went largely unnoticed. The import tariffs on big onions and potatoes were increased to Rs. 50 and Rs. 80 per kilo, respectively.

The Minister claims that earlier the Special Commodity Levy (SCL) was Rs. 10 for big onions and Rs. 60 for potatoes. The justification? Protecting farmers.

Yes, farmers matter. But protecting them at this cost by placing the full burden on consumers is unacceptable. Sri Lanka is still reeling from its economic crisis. According to a LIRNEasia survey, four million people fell into poverty during the crisis, raising the total to seven million.

World Bank data suggests nearly 25% of Sri Lankans now live below the poverty line. The Department of Census and Statistics (DCS) estimates that one needs around Rs. 17,000 per month just to stay above it. In this context, how do we justify a Rs. 80 and Rs. 50 tariff on two of the poorest man’s dry rations?

When ‘protection’ means higher prices

These tariffs are not unique to onions and potatoes. Similar duties apply to many day-to-day essentials. Take onions: the DCS notes that the retail price is about Rs. 140 per kilo. With the revised SCL, the price will likely hit Rs. 170–180. That means nearly one-third of the price is simply a tax disguised as ‘farmer protection.’

Potatoes tell the same story. At Rs. 300 a kilo, the extra Rs. 20 levy pushes the price to Rs. 310–320. Roughly a quarter of the price is tax. Supermarket shelves already show potatoes at Rs. 340 and onions between Rs. 190 and Rs. 230.

So should we not protect farmers? Of course we must. But let’s remember: farmers already receive fertiliser subsidies, seed subsidies, and other support. If further protection is needed, the better way is direct cash support linked to output. That way, the cost does not cascade to millions of poor consumers who have no escape. After all, the number of onion and potato farmers is tiny compared to the number of people who eat them.

A breeding ground for corruption

Tariffs that change overnight also open space for corruption. Anyone with inside information can import just before the revision and pocket huge windfalls after the levy kicks in. With commodities like onions and potatoes, which last more than a month in storage, the temptation is obvious.

We have been here before. Remember the sugar levy hike years ago? That saga exposed how easy it is to game the system with commodities that have long shelf lives. Garlic, rice, and other essentials are also caught in this cycle of discretionary tariff tinkering.

The vicious cycle

High food tariffs ripple through the entire economy. When essentials become expensive, workers from estate labourers to factory staff inevitably demand higher wages. Over time, these wage pressures erode competitiveness and trap the country in a vicious cycle of high costs and low productivity.

Even the International Monetary Fund’s (IMF) Governance Diagnostic has flagged this issue, urging Sri Lanka to remove discretionary powers over tariffs and taxes. Reforms to the Strategic Development Projects Act are meant to address exactly this kind of arbitrary policymaking.

Who really drowns in the Rubicon?

At a time when taxpayers are already stretched thin, paying some of the highest personal taxes in the region and facing steep border taxes on everything from food to vehicles, an SCL of Rs. 80 on potatoes and Rs. 50 on onions is simply unfair. If farmers are to be supported, it should be done directly, with incentives for productivity, not by inflating the grocery bill of every struggling household.

Politicians may talk about crossing the Rubicon. But for the poorest of the poor, the Rubicon is not crossed; it is drowned in. And they drown in it under the weight of a rising cost of living.

Sri Lanka’s railways can’t run on ticket fixes alone

By Dhananath Fernando

Originally appeared on the Morning

The Deputy Minister of Transport has earned much praise on social media for streamlining the online ticket booking process, especially for scenic train journeys like the one to Badulla.

The change is simple but effective. Moving forward, the name and ID card or passport number used to purchase a ticket must match the person boarding. Authentication will be checked before you step on the train.

This intervention is commendable. But in economics, problems rarely end at the surface. This ticket issue is only a symptom of something much deeper.

The root problem is a classic demand-supply mismatch. When tickets sell out within minutes, only to appear in the black market at two or three times the price, with buyers still willing to pay, the signal is clear: demand far outstrips supply. One way to fix this is to raise prices so that limited resources (in this case, train seats) are allocated more efficiently. The other way is to increase supply so that more people can enjoy the ride.

Sadly, our current system does neither. The result? A thriving black market. Even with the new rule, there is still room for ticket manipulation at the gate. Ticket checkers now have the discretion to allow someone onboard whose details don’t match exactly and when there is scarcity, that discretion can be monetised.

Consider the plight of a tourist agent. A train ride from Colombo to Ella is often a must-have in a Sri Lanka travel package. But with no forward booking option, agents can’t guarantee it until clients confirm. Tourists, being tourists, change plans. Some may decide on the ride after they land. Without flexibility in the system, we simply miss out and so do hotels, tuk drivers, and restaurants along the Ella-Badulla route.

The Deputy Minister’s action fixes a short-term loophole. A lasting fix means addressing supply. That requires running more trains to Ella, catering to different market segments with different service levels. But to do that, we must partially unbundle Sri Lanka Railways. Maintaining the track is a different skill set from operating engines, which in turn is different from managing passenger services. Station management and facilities are yet another field.

These can be run by separate entities – some public, some through public-private partnerships. Multiple operators would naturally compete to offer better booking systems, more frequency, and pricing that reflects demand. The result? Convenience for passengers and new economic activity along the line.

Sri Lanka Railways is no small outfit. It employs around 14,000 people and carries more than 300,000 passengers every single day. If the facilities were improved with faster services, cleaner stations, and reliable scheduling, that number could grow significantly. What we provide now is only the bare minimum of what is possible. With proper investment and reform, the railway could move far more people, cut road congestion, and become a competitive transport choice rather than a last resort.

And yet, we have barely touched another major opportunity: cargo transport by rail. Right now, the railway’s contribution to freight movement is minimal. This is a missed economic opportunity.

Moving goods by train is cheaper, more energy-efficient, and takes pressure off our congested roads. Properly developed, a modern rail cargo service could connect ports, industrial zones, and inland markets, cutting logistics costs and boosting trade competitiveness. It is a market just waiting to be tapped if we have the vision and the reforms to make it happen.

There is also an untapped goldmine in land assets. Sri Lanka Railways owns some of the most valuable land in the country, much of it in high-value urban and tourist areas. Train access makes these lands even more valuable. But under the current Railways Act, long-term leases are near-impossible. That means this land sits idle, locked away from productive economic use.

Meanwhile, the railway bleeds money. Between 2010 and 2020, it lost roughly Rs. 300 billion. Losses in 2023 alone were Rs. 11 billion, and in 2022, Rs. 12 billion. This is unsustainable not just for the balance sheet, but for a country already straining under heavy public debt.

This is not a story about ticket booking. It’s a story about how poor reforms, lack of competition, and outdated laws have drained resources from a sector that should be a profit centre for the Government and a vital artery for public transport and cargo movement.

If we keep patching the symptoms while ignoring the disease, the losses will keep mounting, the black markets will keep thriving, and the opportunity for Sri Lanka Railways to be a driver of growth will remain stuck at the station. The choice is ours: keep running on the same broken track, or reform the system so that our trains carrying both people and goods can finally pick up speed

NOT TOO LATE FOR A WINNING BET: The need to redraft the Gambling Bill

By Sudaraka Ariyaratne

Originally appeared on the Morning

After weeks of discussion, the Committee on Public Finance (COPF) approved the Gambling Regulatory Authority (GRA) Bill last Wednesday (13).

While the Bill faces its second reading in Parliament tomorrow (19), its many deficiencies remain helping create a regulator not worth its salt.

Gaming encompasses both gambling; games of pure chance like casinos and lotteries and betting, which mixes chance with skill, such as horseracing.

Despite moral arguments against gaming, a blanket ban is unlikely to be effective. Singapore learned this the hard way and legalised gaming under strict regulation in 2005.

A legal, well-regulated gaming industry mitigates the social ills of gambling more effectively than a blanket ban that allows the ills to multiply in the confines of the shadow economy.

Moreover, a legal, well-regulated gaming industry can also promote tourism, boost growth, generate revenues, and protect consumers.

Sri Lanka’s gaming industry - comprising casinos, betting centres, and lotteries - has operated for decades without a proper regulatory framework.

The recent opening of Melco’s City of Dreams casino in Colombo introduces the integrated resort model and an international investor for the first time, revolutionising the industry.

Melco arrives at a crucial time for the industry, which relies mainly on patrons from India, China, and the Middle East.

As the only regional country west of Southeast Asia with legalised casinos, Sri Lanka has faced little competition so far, but with the UAE and Thailand planning new casinos with international partners, it can no longer delay introducing a proper regulator and the rubber stamp of integrity that comes with it.

As Colombo Port City courts investors for its integrated resort, a robust regulatory framework is essential to attract a global player like Melco, which is an internationally listed corporation.

Such investors signal not only industry growth but also that Sri Lanka is business-friendly. Yet Melco already laments regulatory uncertainty; ‘Although we have obtained the Sri Lanka License, there is considerable uncertainty about how the legal and regulatory environment may change,’ notes its 2024 annual report.

Without clear regulation, new international investors are unlikely to enter soon.

The GRA Bill was thus a welcome move, but its many deficiencies make it unlikely to position Sri Lanka as a competitive regional player. Instead, it risks creating an ineffective regulator, mirroring Cambodia’s struggling, poorly-regulated gaming industry.

First, the GRA Bill targets mostly casinos, exempting lotteries and largely ignoring the growing betting sector, making the misnomer of the gaming regulator as a gambling regulator in the Bill seem intentional.

While amendments to include lotteries under the regulator are said to be on the way, little light has been shed on the negligence of the betting industry in the Bill - particularly the many international online betting platforms frequented by local patrons, including online prediction markets for sports and elections.

The moment calls for a true Gaming Regulatory Authority, not merely a Gambling Regulatory Authority.

The Bill gives the Minister of Finance excessive power, making the regulator an executor of the Minister’s will rather than an independent body. The Minister can appoint board members and the Director General, make regulations, issue binding directives, and control the authority’s funding through budget allocations.

A truly independent, incorruptible regulatory body requires that the Constitutional Council has a say in the appointment of its board members, that the Director General is appointed through a competitive process, that the authority is granted more independent rules-making power, that the Minister does not have the power to issue binding directives on its activities, and that it is funded through license/regulation fees as opposed to budgetary allocations.

This last point is crucial as a lucrative industry requires competent, well-paid regulators, which weak funding cannot support.

The Bill also neglects the tourism-gaming link, failing to grant the tourism sector ex-officio board representation or stipulate industry experience as a qualification for board appointments.

In contrast, with Sri Lanka Tourism Development Authority having ex-officio representation on the board, and experience in hospitality being recognised when appointing board members, the regulatory authority could be better geared towards tourism development.

Given the higher entry barriers for local patrons - locals are levied an entry fee of $ 50 to enter casinos in Sri Lanka under Casino Business (Regulation) Act of 2010 - tourists are the target consumer base of most casino operators in Sri Lanka, and as such, the tourism sector deserves a greater say in the regulation of the industry.

When it comes to local patronisation of gambling, however, lotteries cannot be ignored. Low-income Sri Lankans participate in the industry via lotteries, which are extremely regressive, given that the government uses lotteries to redistribute revenues that it collects from low-income groups back to them.

Given that the inefficiencies and corruption at the lottery boards result in the redistribution of less than 20% of their revenues back to the public, their inclusion under the purview of the gaming regulator is paramount.

The GRA Bill is weak on online gaming, only licensing local operators, which does little to curb youth addiction to international platforms. Singapore’s new online gaming law shows that stronger measures are needed to protect the youth from addiction to online gaming than the Bill currently provides for.

The Bill also neglects the regulator’s role in information collection, which is the lifeblood of effective regulation.

While electronic gaming equipment and slot machines record transactions automatically, the regulator should be able to trace every table game transaction. The regulator should ensure that all transactions are properly recorded with the help of AI, CCTV, and supervisory oversight.

Such information is crucial for monitoring odds and thus protecting consumers. It can also help the Inland Revenue Department with revenue assurance, and would even allow Sri Lanka to tax operators on gross gaming revenue rather than self-reported profits - a global norm in an industry prone to profit manipulation, especially via the shifting of overheads to a highly taxed part of the business - such as gaming - as a form of tax optimisation, particularly in a wholly-owned integrated resort environment.

The Bill’s penalties are also grossly inadequate for a billion-rupee industry. Most offences carry fines of Rs. 100,000 and/or two years’ imprisonment, which will not deter violations. These penalties should be raised to match international norms to ensure real deterrence.

The GRA Bill, as it stands, is woefully inadequate for establishing a robust regulatory framework. Its many deficiencies risk creating an ineffective regulator that maintains the status quo at best, or a Frankenstein whose dangers are yet unknown at worst.

Truthfully, Sri Lanka lacks the domestic expertise to build a strong gaming regulator alone. The government must therefore seek international expertise - particularly from Singapore, the Philippines, and Macau - to redraft the Bill rather than pass it in unjustified haste.

As this is Sri Lanka’s first attempt at gaming regulation, it is far easier to get it right now than to amend entrenched laws later, when vested interests will have multiplied. By passing the Bill in its current form, the NPP government - elected to fight corruption - risks a major gamble, increasing both corruption risks and rent-seeking vulnerabilities.

Macau aims for $ 30 billion in gross gaming revenues in 2025, with Singapore and the Philippines targeting around $ 7 billion each. Sri Lanka’s gaming industry could reach $ 1 billion in a decade, but achieving this - and its broader economic benefits - requires a robust regulatory framework, which demands an improved Bill.

(The writer is a Research Consultant at Adcovata Institute and a doctoral candidate at Rice University.)

Milking the tax system

By Tormalli Francis

Originally appeared on the Morning

• Why VAT exemptions sour the market

A Value-Added Tax (VAT)-free litre of milk or cup of yoghurt may feel like relief at the checkout, which is in fact a silent distortion of lost revenue, stifled competition, and a marketplace where not all producers compete on an equal playing field.

The Government’s VAT exemption on locally produced milk and yoghurt is presented as a move to improve child nutrition and support local dairy farmers. On the surface, it appears humane and sensible; after all, what government wouldn’t want to make nutritious food more affordable while reducing dependence on imports?

But public policy, like milk, can curdle if left unchecked.

Milk production in Sri Lanka is a long-standing traditional industry that has endured for thousands of years, producing over 500 million litres of milk annually (Figure 1), with more than 130,000 farmers (Figure 2) contributing to the production of milk islandwide.

Yet this exemption, packaged with its good intentions, highlights a recurring policymaking problem in the Sri Lankan economy: sacrificing long-term efficiency for short-term optics. In reality, VAT exemptions, however well intentioned, often distort the tax system, weaken the fiscal base, and may ultimately harm both consumers and the very farmers they are meant to protect.

Equal tax, equal opportunity

In a sound tax system, neutrality is essential; similar goods should be taxed in similar ways, and the system should not favour one product or producer over another.

Exempting only locally sourced milk and yoghurt breaks this principle. It grants preferential treatment to domestic producers, while imported milk powder, which is still a staple in many urban Sri Lankan households, remains subjected to VAT. This selective exemption can hinder fair competition, discourage innovation, and misallocate resources, ultimately compromising market efficiency.

This distorts market dynamics. Producers of other dairy products such as cheese, butter, and especially curd face a cost disadvantage, not because of inefficiency but because of policy. The exemption becomes a de facto subsidy, not through open direct Government expenditure but through hidden distortion in the tax system.

A country case example of a similar situation is seen in Georgia, where VAT exemptions apply to domestically produced milk and dairy products but not to imported or reconstituted alternatives. While intended to support local farmers and consumers, this approach creates an uneven competitive environment. Producers who rely on imported inputs including those making value-added dairy products face rising costs without benefiting from the exemption.

Such policies also break the VAT chain, as inputs are subjected to VAT and outputs are exempted. This raises production costs, especially for downstream manufacturers, distorts price signals, and leads to inefficient resource allocation across the sector.

Undermining revenue for reform

In the context of Sri Lanka’s fiscal challenges and commitments to international financial institutions like the International Monetary Fund (IMF), it is important to broaden the tax base.

VAT exemptions reduce potential Government revenue, which could otherwise be allocated to essential public services or targeted welfare programmes. Maintaining a wide array of exemptions complicates tax administration and undermines efforts to achieve long-term fiscal sustainability.

When tax revenue is eroded by such sector-specific exemptions, this shifts the burden elsewhere – either to other goods or services or to Government borrowing. Sri Lanka is in a period of fiscal crisis, with IMF-backed reforms requiring revenue generation. Exemptions reduce tax income from a high-volume essential product, limiting funds for healthcare, education, or infrastructure.

Ad hoc policy changes and weak tax administration have been the major contributors towards the decline in tax revenue, which have brought in fiscal challenges. A well-developed tax system is an efficient revenue instrument, but exemptions and reduced rates erodes its performance.

Basic commodities such as milk and yoghurt are often the options for exemptions or reductions in most Low-Income Developing Countries (LIDCs). In 2020, the VAT exemptions in these countries amounted to 1.3% of GDP. Revenue loss from such policies tends to outweigh the actual gains for the vulnerable groups.

Better tools for better targets

A key justification for exemptions on milk and yoghurt is to improve nutrition and support dairy farmers by making these products more affordable for vulnerable groups and increasing farmer incomes.

The dairy industry has been identified as the priority sector for development among the other livestock sub sectors in the country for its crucial role in reducing nutritional deficiencies across all age groups, and serving as a key source of affordable, high-quality nutrition for the population.

But VAT exemptions are an imprecise way to deliver support. While they aim to make basic commodities more affordable, such blanket policies often result in an imbalance, as higher-income households benefit more than the intended low-income groups.

A greater proportion of basic commodities are consumed by the richer households with greater purchasing power as they are likely to capitalise on these tax breaks. This misalignment highlights the inefficiency of VAT exemptions as a tool for social welfare. It is, in essence, a regressive subsidy disguised in the language of progressivism.

With exemptions having a progressive impact, they are poorly targeted ways to help low-income households, showcasing that directly targeted mechanisms will be better tools to address distributional concerns.

If the goal is to improve nutrition among the most vulnerable and improve farmers’ livelihoods, Sri Lanka should focus on strengthening targeted, transparent support systems. Direct transfers to low-income households, investment in school milk programmes, input subsidies to farmers, and upgrading the dairy industry infrastructure would deliver an efficient and equitable alternative.

These measures ensure that support reaches those who need it most without distorting market signals or undermining long-term efficiency.

Not a structural solution

Sri Lanka’s VAT exemption on locally produced milk and yoghurt may feel like a compassionate move, and in some ways, it is. But ultimately, it’s a fiscal quick fix, not a structural solution. A neutral tax system with broad based rates and minimal carve-outs helps maintain fairness, supports productive specialisation, and sustains Government revenue.

If we want to nourish our economy as well as our children, we must move from tax distortion to targeted policy. Milk can be good for the bones, but only when it doesn’t weaken the backbone of the economy.

(The writer is a Research Analyst at Advocata Institute)

(The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of this publication)

Figure 1: Trend of total annual local milk production (million litres) – 2015-2024

(Source: Livestock Statistics, Department of Census and Statistics)

Figure 2: Number of dairy farmers by district – 2024

(Source: Livestock Statistics, Department of Census and Statistics)

Solutions to Trump’s tariffs lie beyond negotiating tables

By Dhananath Fernando

Originally appeared on the Morning

We all hope that by 1 August, Sri Lanka will secure a better deal with the United States on the proposed tariffs affecting around 25% of our total exports. Continued engagement is essential, but we must recognise a hard truth: the real solutions go far beyond negotiations.

Even if we manage to win a 0% tariff deal with the US, that alone won’t fix our export problem. Our exports aren’t underperforming because of foreign tariffs; they are underperforming because we are not competitive enough. The problem lies at home.

While diplomatic efforts must continue, meaningful results will only come from bold, domestic trade and investment reforms. And those reforms must happen together, not in isolation.

Consider the recent India-UK Free Trade Agreement. It is expected to boost bilateral trade by $ 34 billion. The UK will cut average tariffs on Indian goods from 15% to 3%. Tariffs on whisky and gin will fall from 150% to 75%, and down to 40% within 10 years. Car tariffs will drop from over 100% to 10%. On the other hand, 99% of Indian exports to the UK, including textiles, food, and footwear, will enter tariff-free.

What does this mean for Sri Lanka? Simply put, Indian products will now have a significant edge in markets we once competed in. Even though Sri Lanka benefits from the UK’s new Developing Countries Trading Scheme (DCTS), India’s preferential trade access will make its goods more competitive than ours.

India isn’t stopping there. Trade agreements with the European Union (EU), Chile, the Gulf Cooperation Council, New Zealand, the European Free Trade Association (EFTA, comprising Switzerland, Norway, Iceland, and Liechtenstein), and ASEAN are all underway. Each deal pulls the rug further from under our feet.

Unlike India, Sri Lanka is not a large market. We don’t have the leverage to bring global powers to the table. Beyond basic-level conversations with Bangladesh, China, and Indonesia, we haven’t shown much interest in trade deals. The agreements we have signed – with Singapore and Thailand – are gathering dust. The long-stalled Comprehensive Economic Partnership Agreement (CEPA) with India remains a missed opportunity.

Let’s be honest. Competing with India in terms of price, scale, and often even quality is becoming increasingly difficult. That’s why the rational path forward is clear:

1. Integrate deeper with India

2. Unilaterally reduce trade barriers

3. Use this openness to attract investment

India’s aggressive trade strategy gives its exporters – and its value chains – a global advantage. If Sri Lanka can position itself as a reliable partner within India’s export ecosystem, we can gain by being part of its value chain. But to do that, we must get our house in order.

Currently, all our focus is on negotiation tables. But investment will not come unless we fix our own fundamentals. That means reforms in land use, labour laws, and industrial zones. Investors are not waiting for handshakes and smiles; they are looking for reliable, efficient, and reform-oriented partners.

Meanwhile, new regulatory pressures are emerging in our traditional markets too. The EU’s new Corporate Sustainability Due Diligence Directive (CSDDD) will reshape how businesses operate. 

This law requires large EU companies – and by extension their global suppliers – to actively prevent human rights and environmental violations across their operations. Without flexible labour regulations and well-functioning industrial zones, Sri Lanka risks losing even the markets we already have.

So here we are, caught between slow internal reforms and an aggressive global trade race.

The opportunity is still within reach. Deeper integration with India, along with smart reforms, can turn Sri Lanka into a competitive, attractive export and investment hub.

One year ago, Parliament passed the Economic Transformation Bill. One year later, we are still talking, not doing. That alone proves that solutions to US President Donald Trump’s tariffs – and many of our economic woes – won’t be found across negotiation tables. They begin right here, at home.

Electricity reforms at risk

By Dhananath Fernando

Originally appeared on the Morning

• Don’t let amendments derail investment and progress

A new conversation is unfolding around electricity sector reforms in Sri Lanka. After years of debate, there has been broad political consensus on two core principles:

• The urgent need for investment in the sector

• The structural reforms necessary to attract that investment – specifically, the unbundling of generation, transmission, and distribution

The logic is simple: generation, transmission, and distribution are fundamentally different businesses, each with unique asset types, risk profiles, and operational needs. Only by separating them can we improve transparency, increase efficiency, and create space for private capital to flow into each segment.

While there was promising alignment in this direction, the latest developments suggest we may be reversing course, creating uncertainty for investors and risking long-term progress.

The new amendments: One step forward, two steps back?

The 2024 Sri Lanka Electricity Act made an important move by further unbundling generation by source – hydro, coal, thermal, and wind – recognising that each comes with distinct technologies, operating models, and investment requirements. For instance, managing a coal plant requires an entirely different skillset and infrastructure than managing a wind farm.

However, the proposed new amendments roll back this approach by consolidating all generation entities under a single holding company. This re-centralisation undermines the very rationale for unbundling in the first place. It introduces operational inefficiencies and reduces cost transparency, making it harder for regulators to set fair and efficient tariffs.

Even more concerning, the amendments propose that the Government retain 100% ownership – effectively shutting the door on private capital.

The real cost of Govt.-only investment

If the Government intends to invest in electricity infrastructure, it must do so by borrowing through Treasury bills or bonds, adding to the national debt and worsening our already precarious debt-to-GDP ratio. Credit rating agencies will take note, likely downgrading Sri Lanka’s sovereign rating.

More critically, the cost of capital for the Government is around 9% – a prohibitively high rate for infrastructure investment. Every rupee spent here is a rupee less for health, education, or social safety nets.

Let’s not forget: in 2023, the Government injected Rs. 126 billion into the Ceylon Electricity Board (CEB). In 2024, the CEB posted a Rs. 144 billion profit, but only because of that prior cash infusion. Continued State dominance in investment only perpetuates a cycle of dependency.

Why private capital is not forthcoming

Even borrowing from domestic banks is becoming difficult. The Central Bank has capped bank exposure to the electricity sector at 25% of Tier 1 capital (and 55% in aggregate), with strict timelines to reduce this by 2030. These prudential limits are vital for financial system stability, but they also restrict the flow of private lending to the sector.

Another common route – borrowing with a Treasury guarantee – has also become costlier. Under the 2024 Public Debt Management Act, every Treasury guarantee must now carry a risk-based premium. When the CEB explored borrowing $ 50 million from the Asian Infrastructure Investment Bank, the risk premium alone was 4.8%, pushing the total cost of borrowing even higher.

Grid capacity and the renewable energy paradox

None of these challenges exist in isolation. Without urgent investment in transmission and distribution, additional solar or wind generation is meaningless – the grid simply cannot handle the load.

In a recent discussion with Advocata Institute, International Solar Alliance Director General Ashish Khanna emphasised the critical need for grid upgrades and private sector participation. Even Sri Lanka’s Prime Minister participated in early dialogues on a country partnership framework to this effect.

Yet, the new amendments – with their insistence on 100% State ownership and a two-year delay in further unbundling – send precisely the wrong signal. Investors see this as a red flag, not a green light.

Global implications and geopolitical costs

The concerns are not limited to domestic stakeholders. Leading development partners – including the World Bank, Japan International Cooperation Agency (JICA), and Asian Development Bank – have already expressed reservations about the proposed amendments.

We must remember that Japan is a key member of the Official Creditor Committee and one of Sri Lanka’s most consistent development partners. Our multilateral creditors hold a large portion of Sri Lanka’s foreign debt. Their support will be critical not only for the power sector, but for our entire economic recovery as well.

At a time when we are exploring regional grid connectivity and aspiring to meet 70% of energy demand through renewables, these regressive amendments risk turning vision into mere wishful thinking.

The electricity sector does not operate in a vacuum. It is tied to our economic recovery, fiscal health, investment climate, and geopolitical standing. The proposed amendments, while perhaps well-intentioned, threaten to undermine years of consensus-building and policy progress.

We urge policymakers to reconsider. The reforms must be guided not by bureaucratic convenience or outdated control models, but by pragmatism, transparency, and investor confidence. If we fail to course correct now, the cost won’t just be measured in kilowatt hours – it will be measured in lost opportunities, rising debt, and a future dimmed by indecision

Fixing the checkout bottleneck

By Dhananath Fernando

Originally appeared on the Morning

• Time to modernise e-commerce taxation

Delays in delivery and regulatory confusion around e-commerce platforms have become a pressing concern for consumers and small businesses across Sri Lanka. As parcels pile up at Customs and prices surge unexpectedly, it is time to take a step back and understand the root of the problem – and the economics behind it – before rushing to find solutions.

Many wonder how e-commerce platforms like Temu, AliExpress, and eBay offer such a vast variety of goods at prices far below those in local retail shops. The answer lies in a concept known as ‘long tail economics,’ popularised by Chris Anderson in 2004. 

Unlike traditional retail models that rely on selling large quantities of a few popular products, long tail economics thrive by offering a wide range of niche items in small volumes. Digital platforms are well suited for this, as they don’t bear the physical storage and shelf-space constraints that burden brick-and-mortar stores.

In conventional retail, stocking niche items is often unprofitable; they take up space and sell slowly. But online marketplaces can list millions of such products without significant overheads. Their costs are further reduced by economies of scale in shipping, especially when handling a large number of small parcels.

Until recently, Sri Lanka allowed such parcels to enter under a simplified flat-rate tariff system – typically around Rs. 850 per parcel – based on weight rather than the Harmonised System (HS) code. For low-weight or low-value items, some tariffs were not imposed at all. 

This system made cross-border e-commerce accessible and affordable, and in doing so, empowered many Sri Lankan entrepreneurs and gave consumers access to a wider variety of goods at lower prices.

However, it also led to concerns. The simplified system was being exploited by some to bring in commercial-scale shipments disguised as personal use, thereby bypassing higher taxes. Customs officials and industry stakeholders raised questions about revenue loss and the legality of weight-based tariffs under the Customs Ordinance. 

As a result, authorities moved to tighten the rules: now, all parcels must be declared by HS code and taxed accordingly, regardless of weight.

The unintended consequence? Long delays at Customs, consumer frustration, rising costs, and uncertainty for both consumers and e-commerce platforms. The system, simply put, is not ready to handle such granular processing at high volumes.

So what is the way forward?

The answer isn’t to block e-commerce; it’s to build a smarter system.

Create a legal framework for vendor tax collection

Globally, many countries have adopted a vendor collection model, where e-commerce platforms collect taxes at the point of sale and remit them to the authorities. But in Sri Lanka, this isn’t legally possible yet. First, the Government must establish a clear legal mechanism for platforms to collect tariffs and remit them to Customs or the Inland Revenue Department.

In implementing a vendor collection model, Sri Lanka can also introduce a minimum threshold, requiring only platforms that handle a certain number of parcels per month to participate in the scheme. This ensures that the system is manageable and initially applies to larger platforms with sufficient volume and technical capacity, avoiding undue burden on small or infrequent operators.

Integrate Customs tariff systems via API

Even if legally allowed, platforms must be able to accurately determine the applicable tariff at the time of purchase. That is where Application Programming Interface (API) integration becomes essential. 

Most e-commerce platforms already tag products with HS codes. If Sri Lanka Customs’ Automated System for Customs Data (ASYCUDA) system is integrated with these platforms via API, tariff rates can be automatically calculated during checkout. 

The buyer would then see the full landed price, including taxes, before paying. The platform would act as a collection agent and remit the amount to Customs, minimising leakage and increasing transparency.

Simplify and rationalise tariffs

At the heart of the issue lies another critical challenge: Sri Lanka’s tariff structure is overly complex. We apply Customs duty, PAL, CESS, and VAT, often with wildly varying rates depending on product specifications. 

For example, tissue paper and wet wipes carry different rates, and the difference is even starker between wet wipes with fragrance and those without. This complexity makes compliance difficult and systems integration nearly impossible.

A long-term solution would be to rationalise and simplify tariffs, bringing rates down and harmonising classifications. Simpler tariffs would mean lower prices for consumers, less room for manipulation, and more efficient revenue collection. In fact, a digital tax model could bring in more transparent revenue over time.

Let the consumer decide

Some argue that e-commerce platforms threaten local manufacturers or offer low-quality goods. But quality is a judgement for the consumer to make. If an item is poor in quality, buyers won’t return to it. 

Attempts to block platforms in the name of protectionism will hurt entrepreneurs who use these platforms and rob consumers of choice. A better approach is to let competition and transparency decide what thrives in the market.

The real issue isn’t e-commerce; it’s outdated regulation. With the right legal and technological framework, Sri Lanka can embrace global trade, empower local businesses, and ensure fairness in taxation. It’s time to stop punishing what works and modernise the system that supports it.

Electricity reform: The battle between control and competitiveness

By Dhananath Fernando

Originally appeared on the Morning

The amendments to the Sri Lanka Electricity Act of 2024 have once again stirred public discourse, as key international development partners – namely the Asian Development Bank (ADB), World Bank (WB), and Japan International Cooperation Agency (JICA) – have raised serious concerns about their implications.

Sri Lanka’s power sector reform journey, particularly the unbundling of the Ceylon Electricity Board (CEB), has been a prolonged and often politically fraught conversation. The recent economic crisis made one thing clear: inefficiencies and structural rigidities in the energy sector are no longer sustainable. 

In response, a new bill was passed, aiming to restructure the sector by unbundling the CEB into generation, transmission, and distribution entities. This was intended to facilitate grid upgrades, improve renewable energy absorption, and lower costs while improving service delivery.

Yet, the devil – as always – is in the details. The accompanying table contains a summary of the four key concerns raised by development partners, along with the corresponding responses from the Director General of the Power Sector Reforms Secretariat.

On the surface, the responses summarised in the table seem to address concerns. But policy isn’t judged by intentions; it is judged by results. And to get results, legislation must be clear, enforceable, and resistant to misuse by future governments. Unfortunately, the Electricity Act still leaves many grey areas, which could cause more problems than it solves.

Take permanent Government ownership, for instance. The Government says it will only hold on to generation and distribution companies for now, but there is no clear legal path or timeline for opening up future entities to investment. Without clear guarantees, this could become a case of kicking the can down the road, keeping control within State hands while blocking much-needed capital and innovation. 

Then there is the issue concerning a National Transmission Network Service Provider (NTNSP). Even if the NTNSP won’t directly handle power generation, it will still own companies that do. This undermines the principle of unbundling, which is all about separating who generates power from who transmits it, so that the playing field is fair for everyone. You cannot say you are de-merging the system while letting one player wear two hats.

On the question relating to the Lanka Electricity Company (LECO), the response says only the CEB’s 55% stake is involved and that LECO will remain independent. But the act gives enough flexibility for future decisions that could quietly erode LECO’s autonomy. Without explicit protections written into law, these assurances are only as strong as the next government’s intentions.

Finally, on tariffs: while the regulator is supposed to have the final say, the phrase “in consultation with the Ministry of Finance” in legal terms can mean joint decision-making. That could politicise price-setting, delay reforms, and discourage private investment. What investors want is clarity; ambiguity is their biggest fear.

In public policy, it is not the intent but the outcome that matters.

At the heart of all four concerns lies a common thread – control over market dynamics and decision-making. Two underlying fears appear to drive the insistence on Government ownership: the fear of losing control over a strategic sector and the pressure from trade unions worried about losing the privileges that come from monopoly protection. These are not unfounded concerns, but they are not sufficient justifications to resist reform.

Strategic interest is best preserved not through outright ownership but through strong regulation. Maintaining Government ownership over generation and distribution does not guarantee better outcomes for consumers. Instead, a robust, independent regulator and a competitive market architecture are more likely to deliver efficiency, lower costs, and innovation.

Moreover, modernising our grid is critical not just for absorbing renewable energy but also for positioning Sri Lanka to eventually export electricity, especially through grid connectivity with India – a long-term but strategic goal.

Another key principle is that legislation should be designed not just for today’s leaders but to guard against potential misuse by future actors with less noble intentions. A vague clause, even with the best current leadership, can become a tool for rent-seeking or manipulation down the line. 

The ambiguity around the Ministry of Finance’s involvement in tariff setting, for instance, opens the door for potential political interference, even if unintentional.

The political economy of reform is such that ambiguity breeds resistance, from investors and insiders alike. Leaving grey areas in legislation invites both capital flight and capture by vested interests.

Ultimately, the Electricity Act must be evaluated on its ability to foster competition that is regulated, not ownership that is politicised. The objective should be clear: maximise consumer benefit in terms of price, reliability, and national security. In chasing control, we risk losing all three. 

Concerns and responses 

Summary of concerns by WB, ADB, and JICA

Response by Director General of the Power Sector Reforms Secretariat

1. Permanent Government ownership

Legislating 100% permanent State ownership for key electricity entities limits flexibility, deters private investment, and increases the long-term burden on the Government.

The Government of Sri Lanka will retain 100% permanent ownership only in the generation and distribution companies created through the preliminary transfer. Further unbundled entities, except for hydropower, will not be subjected to this restriction.

2. Concerns with National Transmission Network Service Provider (NTNSP) structure

Including LTL Holdings and Sri Lanka Energies under the NTNSP undermines unbundling, risks conflicts of interest, and reduces transparency.

The CEB’s stakes in these entities are classified as assets to be transferred to the NTNSP. The NTNSP will be limited to transmission functions. No re-bundling will occur, and power purchase agreements will be managed competitively by the National System Operator (NSO).

3. Distribution company risks

Merging LECO into the new distribution company disregards operational and governance structures, risking reversal of previous efficiency gains.

Only the CEB’s 55% stake in LECO will be affected. LECO will remain a separate legal entity, with the freedom to pursue private investment. There will be no full absorption.

4. Tariff-setting ambiguity

Changing “after consultation” to “in consultation” with the Ministry of Finance in tariff-setting risks undermining regulatory independence.

Although tariffs are now to be set “in consultation with the Ministry of Finance,” the regulator retains final authority, in accordance with national tariff policy.

When goods don’t cross borders, soldiers will

By Dhananath Fernando

Originally appeared on the Morning

• The hidden costs of the Israel-Iran war for Sri Lanka

The escalating conflict between Israel and Iran carries serious repercussions for Sri Lanka on multiple fronts. 

In economic terms, there is no winner in any war; all parties, including those not directly involved, will suffer. Unfortunately, Sri Lanka is likely to be one of those casualties.

Humanitarian impact

An estimated 20,000 Sri Lankans live and work in Israel. If the conflict escalates and lives are lost, the Government will be under pressure to intervene and repatriate citizens. 

This would strain an already tight budget and add pressure to the national balance sheet. However, human life must take priority and any necessary rescue operations must be conducted swiftly.

Beyond the immediate human toll, loss of life could trigger political tensions at home, affecting community relations and domestic stability.

Exports and trade

Both Israel and Iran are key export markets for Sri Lanka. In 2023, exports to Israel were valued at approximately $ 90 million, with key products including bulk tea, rubber products, seafood, and coconut-based goods. Meanwhile, Iran accounted for $ 67 million in Sri Lankan exports, primarily bulk tea.

However, the bigger risk lies beyond these direct trade flows. As major markets like the US, UK, and European Union (EU) align themselves with different sides of the conflict, global trade dynamics could shift dramatically. Increased military expenditure, market polarisation, and slower consumer demand in Western economies could impact Sri Lanka’s export growth across the board.

Meanwhile, our imports from Israel – mainly tech products, plastics, and precious stones – amount to roughly $ 100 million annually. Some of these are intermediary goods essential for local production. 

Imports from Iran are smaller (about $ 25 million), largely fertilisers and food items, but equally vulnerable to disruption. War-driven supply chain breakdowns and rising costs will further strain sectors already under pressure.

Fuel prices and economic slowdown

Middle Eastern instability typically drives global oil prices higher. Already, crude and refined oil prices are rising – the Murban crude variant used at our Sapugaskanda Refinery is up by nearly 10%. Higher global prices must be transparently reflected in local pump prices to avoid market distortions.

It is vital that the Government allows these price signals to flow through while maintaining prudent monetary policy. Artificially low interest rates could lead to currency depreciation, accelerating inflation and further compounding the fuel price shock. If managed correctly, we can minimise the fallout. If not, we risk another wave of inflation at a critical juncture.

In addition, falling remittances and a global economic slowdown will directly impact one of the most critical requirements for Sri Lanka’s debt sustainability – economic growth. Weak growth could force the country into a second round of debt restructuring, and even a modest external shock could be enough to trigger a crisis, given the fragile fundamentals of our economy. 

The only solution is to accelerate economic reforms – removing trade barriers, restructuring State-Owned Enterprises (SOEs), and pursuing sound monetary policy – to build resilience and minimise risks.

Remittances

Sri Lanka receives about $ 40 million in remittances from Israel per quarter. Any major disruption to employment in Israel could directly impact these inflows. 

Moreover, broader instability in the Middle East could affect other labour markets where Sri Lankans are employed, reducing remittance income – a crucial source of foreign exchange for debt servicing and stabilising the currency.

Geopolitical risks

As global powers take sides, Sri Lanka faces new geopolitical challenges. The late Iranian President Ebrahim Raisi visited Sri Lanka last year to inaugurate the Uma Oya project, funded by Iran. Iran also donated the Sapugaskanda Refinery, a longstanding symbol of economic ties.

Israel, in turn, remains an important partner, offering employment opportunities and a growing trade relationship. But with key allies like the US and UK backing Israel, and powers like China and Russia leaning towards Iran, Sri Lanka risks being caught between competing camps.

We must now carefully manage these pressures. Maintaining neutrality while safeguarding national interests will require skilled diplomacy.

A wake-up call

This war is a stark reminder of the importance of global trade and the value of building strong, diversified economic relationships. The situation echoes the famous quote: “When goods and services do not cross borders, soldiers will.”

For Sri Lanka, the lesson is clear: deeper economic engagement and robust reforms are not just about prosperity, they are essential to protecting national stability in an uncertain world. 

Tuk-tuk economy: Where algorithms meet asphalt

By Dhananath Fernando

Originally appeared on the Morning

In mainstream media, clashes between app-based ride-hailing taxis and traditional taxis are frequently reported, especially in tourist hotspots such as Kandy, Sigiriya, and even at the Bandaranaike International Airport. 

However, many Sri Lankans, including tuk-tuk drivers, do not fully understand the economic logic behind this. Often, the debate centres on high commissions taken by app companies or the notion that international ride-hailing platforms repatriate profits overseas.

At the ‘Ignite Growth Conference’ organised by the Advocata Institute, PickMe Founder Jiffry Zulfer shed light on the economic transformation driven by platforms like PickMe and its main competitor, Uber.

The core concept of ride-hailing apps is the ability to match demand and supply within a limited geographic radius in real-time. According to Zulfer, PickMe facilitates around 20 rides every second, striving to ensure that passengers always have a ride available and that drivers remain engaged and productive.

This matching of demand and supply has created significant market efficiency. On average, a driver using the app completes around 17 hires per day, compared to just 7-10 hires for a driver waiting at a tuk-tuk stand or roaming the streets. As a result, app-based drivers utilise their vehicles approximately 81% of the time, compared to just 39% for traditional drivers.

From an economic perspective, this availability of information – knowing who needs a ride and who can provide one – drives greater efficiency, not just for passengers and drivers, but for society at large as well. According to Zulfer, PickMe has covered over one billion passenger kilometres and now transports more people daily than Sri Lanka’s railway system.

Early investors in PickMe saw returns of up to 300 times their original investment, and it is likely the Government benefited as well, collecting around 30% in taxes. App-based drivers now earn on average 40% more than traditional taxi drivers, transforming the lives of 30-50% of tuk-tuk drivers in a population of 1.2 million tuk-tuk owners in Sri Lanka. 

In essence, the biggest beneficiaries of this shift have been ordinary working-class drivers, passengers, investors, and the Government.

PickMe is now listed on the Colombo Stock Exchange, opening the door for broader public investment and shared benefits.

It is crucial to recognise that when demand and supply are allowed to interact freely, it creates a win-win outcome for all stakeholders, unlike Government-run businesses, which often favour one group at the expense of others.

Zulfer also categorised tuk-tuk drivers into three groups based on their engagement: a large segment contributes less than three hours per day, a second tier less than six hours, and only a minority works full-time (over eight hours) through the platform. Interestingly, more women are now joining the platform, unlocking new income opportunities and increasing female participation in the workforce.

The PickMe Founder further explained that when adjusting for inflation, ride prices had decreased, providing passengers with real financial benefits beyond mere convenience. At the time of launch, the app’s per-kilometre rate was Rs. 33, compared to the Rs. 40 charged by traditional meter taxis. This holds true across other ride-hailing platforms as well. 

Unfortunately, many policymakers still struggle to grasp the fundamental economic principles at play – how market forces, when allowed to operate freely, can uplift the average citizen.

Ride-hailing services have since expanded into motorbike transport, courier services, and food delivery. These platforms are now among the largest ‘restaurant’ operators in the country, despite not owning a single restaurant. 

The same model has given rise to the ‘dark kitchen’ phenomenon, enabling home-cooked meals and micro-businesses to reach a wide customer base. This has changed food habits, offered consumers more choice, and encouraged families to spend more time together with the convenience of food delivery.

Zulfer’s economic logic applies beyond transportation. It holds true for other network-based platforms like Booking.com, Airbnb, and others. The average person, especially those with entrepreneurial spirit, stands to benefit the most.

In Sri Lanka, the majority of room inventory is offered by micro and small-scale lodge owners. Online platforms have empowered them to tap into the tourism ecosystem and earn foreign income, something that was previously out of reach.

Understanding the economic logic of network-based industries is crucial for Sri Lanka’s growth. These platforms enhance productivity, generate opportunities, and create wealth. While foreign direct investment and trade policy are important, we must also pay attention to the power of networking demand and supply.

Imagine a world where the same happens to our entire public transport system. Things will not be perfect, but they definitely would be in a much better form than it is at the moment.  

By simply enabling the right environment – often by not interfering – governments can allow these industries to flourish, driving economic efficiency, opportunity, and prosperity for all.

Meeting pricing equilibrium during the fuel crisis

(Source: Slide presented by PickMe Founder Jiffry Zulfer at the ‘Ignite Growth Conference’)

From Sri Lanka to Singapore

By Dhananath Fernando

Originally appeared on the Morning

A 100-year journey or a 40-year leap?

For many Sri Lankans, one of the most common points of comparison is Singapore. We have heard time and again how Singapore once lagged behind Sri Lanka in terms of GDP per capita but eventually surpassed not only Sri Lanka but also many other developing nations worldwide. 

Given that both countries are in Asia and that Singapore once looked to Sri Lanka as an aspirational model, it is natural for Sri Lankans to frequently draw comparisons between the two.

Recently, at the Advocata Institute’s ‘Ignite Growth Conference,’ Central Bank of Sri Lanka Assistant Governor Dr. Chandranath Amarasekara presented a slide illustrating how long it would actually take for Sri Lanka to reach Singapore’s current GDP per capita under different growth scenarios.

Dr. Amarasekara projected the timeframe based on Sri Lanka’s GDP per capita growth at 3%, 5%, 6%, and 8% annually. For context, GDP per capita is a commonly used measure to gauge a country’s economic prosperity. Currently, Sri Lanka’s GDP per capita stands at approximately $ 3,800, while Singapore’s is around $ 84,000.

The calculation estimates the number of years it would take for Sri Lanka’s GDP per capita to grow from $ 3,800 to $ 84,000, assuming compound annual growth at different rates:

• 3% growth rate: 105 years

• 5% growth rate: 64 years

• 6% growth rate: 54 years

• 8% growth rate: 41 years

The challenge of comparing Singapore and SL

In my view, comparing Singapore and Sri Lanka directly is difficult because the two nations offer entirely different value propositions. Singapore is essentially a city state with a population of six million, whereas Sri Lanka is over 3.5 times larger in terms of population. 

The demographics, political landscapes, and economic structures are vastly different. However, from an economic perspective, an average Singaporean is 21 times wealthier than an average Sri Lankan.

To put it in simple terms:

• Singapore, with just six million people, generates an economic output of $ 500 billion

• Sri Lanka, with 21 million people, produces less than $ 90 billion

Learning from Singapore without copying 

While it may not be meaningful to copy Singapore’s model outright due to fundamental differences in culture and circumstances, there are key economic principles Sri Lanka can adopt.

A rock-solid monetary framework

One of Singapore’s greatest strengths is its monetary stability. The country’s financial system remains robust thanks to sound economic policies developed under visionary leaders like Goh Keng Swee.

A stable currency is crucial because wealth is stored in the form of money. For example, if a farmer produces 100 kg of rice and sells it for Rs. 20,000, depositing that money in a bank means converting his labour into a universally accepted currency. If inflation erodes the value of that currency over time, it discourages productivity. A monetary system that fails to preserve value will ultimately undermine economic progress.

Many admire Singapore’s modern infrastructure, but what they often overlook is the country’s strong monetary foundation. Interestingly, the same Dr. Goh who helped shape Singapore’s economy also advised Sri Lanka, but his recommendations were never fully implemented.

The right policy framework

While reaching Singapore’s current economic level may seem like a monumental task, the key lies in laying the right policy framework. If the right economic policies are put in place, progress will follow naturally. It is not about chasing Singapore’s end results but rather about focusing on the right processes to achieve sustainable growth.

Instead of fixating on when Sri Lanka will become like Singapore, we should prioritise fundamental economic reforms in areas like trade, investment, and labour policies. If we get these right, the rest will take care of itself.

(Source: ‘Ignite Growth Conference’ presentation by Dr. Chandranath Amarasekara)

Bracing for Trump’s tariff storm

By Dhananath Fernando

Originally appeared on the Morning

US President Donald Trump’s second term seems to be keeping all people around the world on their toes. The changes and policies, along with their implications, will be complicated, and we have to do our homework to gain an advantage or at least survive in this game.

The new Trump administration has suggested reciprocal tariffs, meaning the same tariff rates applied to each country that they charge for US products. 

Already, a 10% tariff is in effect for non-energy products from Canada and a 25% tariff on energy-related products from Canada. Additionally, a 25% tariff has been imposed on Mexican products, alongside an additional 10% tariff on Chinese products, bringing the total tariff on Chinese products to 21% (from around 11% previously).

SL’s opportunities and challenges

Before Sri Lanka gets affected by any reciprocal tariff, we first need to understand our total exports, including services. 

According to Harvard’s Atlas of Economic Complexity, we export about 21% to the United States. When it comes to apparel, about 40% of our apparel exports are destined for the US. 

Accordingly, the first line of impact for Sri Lanka would be potential consumption contraction in the US. With high tariffs even against Canada, China, and Mexico, as well as increased prices of essential products, the US consumer will likely reduce spending on non-essential items such as seasonal clothing. It is normal consumer behaviour to postpone purchasing decisions if expenditure on essentials like energy and rent increases.

The second line of impact has both positives and negatives. China and Mexico also supply apparel to the US. If relative prices of Sri Lankan apparel become lower following the 25% tariff for Mexico, we might gain an advantage. 

Similarly, we could become more competitive than China, which now faces an overall 21% tariff. Therefore, we must be cautious and prepared, recognising it is not just tariffs on Sri Lanka directly but also tariffs on others that can bring us opportunities or challenges.

The danger lies in the final stage if the US imposes reciprocal tariffs. The US would consider imposing the same tariffs for Harmonised System (HS) codes as the other trading country imposes on US products. 

There is discussion that the US might not only consider customs duties but also other tariff barriers and even non-tariff barriers. In that case, Port and Aviation Levy (PAL), Commodity Export Subsidy Scheme (CESS), Social Security Contribution Levy (SSCL), and Value-Added Tax (VAT) might be considered, according to some reports. 

This decision depends entirely on the Office of the US Trade Representative (USTR) defining ‘unfair trade practices.’ Media reports indicate that the USTR is expected to analyse all data and make a decision on reciprocal tariffs by 1 April.

We must recognise that Sri Lanka’s average tariff rates are significantly higher than those proposed by the US to China, Mexico, and Canada. A 25% tariff in Sri Lanka is considered low, as our effective tariff rates reach nearly 100%, and for vehicles with excise duties, it exceeds 200%. It is joked that even Trump would become confused if he learnt about Sri Lanka’s tariff structures and that he might learn a tough lesson from us.

In the context of reciprocal tariffs, price-sensitive product categories such as food, apparel, and rubber products may face higher prices in US markets. Ultimately, the real impact will depend on how other competing export markets are affected by US tariffs and non-tariff barriers and how these affect US consumption and global economic growth under new trade dynamics.

Meanwhile, Europe and other powerful countries are targeting the US with reciprocal tariffs, which could trigger global supply chains to consider relocation and create new incentive structures. This can present either an opportunity or a disaster for Sri Lanka.

Solutions

To attract new supply chains and assembly components, we must quickly work on basic factor market reforms. Having adequate land ready for industry and a flexible labour force with business consciousness is essential. Secondly, simplifying and lowering our tariff structure is critical, even though it might be somewhat late. 

Additionally, exploring exports towards East Asia and the Indian market is increasingly vital. Whether our US market shrinks or not, we should prepare to explore other markets, primarily India and East Asian countries. Strengthening foreign relationships, activating business chambers, and intensifying diplomatic missions to strengthen ties is necessary. 

Accelerating regional free trade agreements and conducting market sentiment research can help Sri Lankan entrepreneurs expand their exports. Fundamentally, economics never expires – even during trade wars or crises, strong economic fundamentals provide the best way to survive and thrive. We must move from hope to action.

Where did Sri Lanka export all products to in 2022?

Source: Harvard Atlas of Economic Complexity

Where did Sri Lanka export textiles to in 2022?

Source: Harvard Atlas of Economic Complexity

NPP’s maiden Budget

By Dhananath Fernando

Originally appeared on the Morning

The National People’s Power’s (NPP) maiden Budget will be presented to Parliament tomorrow (17). Ideally, a budget should not contain surprises – neither on the income front nor on the expenditure front. Government expenditure is the real tax burden on people; they ultimately bear the cost through taxes, inflation, or both.

Generally, a budget consists of two key components. The first is revenue and expenditure, while the second is the policy direction of the Government. This time, the business community is particularly focused on the latter, as it is evident that income and expenditure must align with the International Monetary Fund (IMF) programme.

Adhering to IMF targets 

The 2025 Budget has no alternative but to adhere to the parameters set by the IMF. While micro-level details and specific projects may change, key indicators such as gross financing needs, Government revenue-to-GDP ratio, primary balance, and debt-to-GDP ratio must be maintained as agreed under the IMF programme.

Additionally, the previous Government introduced new legislation under the economic transformation framework, covering many of the IMF’s targets. Achieving a Government revenue target of 15.1% of GDP will be a major challenge. Value-Added Tax (VAT), corporate tax, and income tax have already reached their upper limits, leaving limited scope for further increases. The Government is likely to bridge part of the revenue gap through vehicle importation.

When governments face revenue shortfalls, ad hoc taxes or sudden tax increases are common, often targeting sin industries such as tobacco and alcohol. However, the Budget must adhere to sound tax principles, ensuring simplicity, transparency, neutrality, and stability. 

The focus should be on simplifying the tax system and improving the efficiency of tax administration, as poor administration is as harmful as a bad tax system. Any unexpected changes in revenue policies could harm businesses, erode investor confidence, and slow down the economy. The best way to achieve the 15.1% revenue target is through efficiency measures and broadening the tax base.

Over 50% of recurrent expenditure towards interest payments

Sri Lanka has little control over its expenditure, with over 50% of spending allocated to interest payments. In 2023, approximately 90% of tax revenue was spent on interest payments. 

Currently, Sri Lanka has one of the highest interest payment-to-revenue ratios in the world, raising concerns about the possibility of a second debt restructuring. Post-debt restructuring, the Government has minimal room for fiscal adjustments.

While Government employees and various sectors may expect relief packages, the reality is that there is no fiscal space to accommodate such demands. It is true that salary structures for senior Government positions need improvement to attract the right talent, but this can only be achieved by restructuring the lower levels of the public service, which absorb the bulk of the salary bill.

Another solution is to drive economic growth and increase labour force participation, reducing the proportion of Government employees relative to the total workforce. Blanket salary increments are difficult to implement without compromising capital expenditure, which is crucial for long-term development. 

Currently, 20% of recurrent expenditure is allocated to salaries and wages, while pensions account for approximately 8%. Given this context, expecting significant relief packages is unrealistic, and any attempt to provide them could lead to long-term economic instability.

Investment should prioritise healthcare, education, social protection

Government spending should prioritise critical sectors such as healthcare, education, and talent development. However, expenditure in these areas – including the ‘Aswesuma’ social safety net – was lower than expected last year. 

The IMF has pointed out that Sri Lanka did not fully allocate the funds intended for ‘Aswesuma,’ which serves as the primary social safety net for the country. Ensuring proper allocation to these essential sectors is crucial.

Focus should be on structural reforms

Rather than solely focusing on balancing income and expenditure, the Government should use the Budget as an opportunity to set a clear policy direction. 

Key areas requiring structural reforms include land policies, labour laws, the export sector, and energy markets. These reforms are fundamental to Sri Lanka’s economic growth, as the country’s challenges are largely structural rather than issue-specific.

We will have to wait until tomorrow to see the extent to which the Government seizes this opportunity. Instead of expecting widespread relief measures, the public should push for meaningful policy reforms – an essential step for securing Sri Lanka’s future

(Sources: CBSL, Advocata Research)

(Sources: CBSL, MOF Annual Report, Advocata Research)

The power of know-how over industry selection

By Dhananath Fernando

Originally appeared on the Morning

In most of our export strategies, the starting point has been the Government deciding which industries should drive exports – some of these decisions are data-driven. 

Accordingly, we examine current export figures and sometimes focus on expanding existing product segments. Secondly, we target additional industries with the expectation that exports can be boosted. While both approaches seem logical at first glance, we need to understand the broader framework of how to grow exports effectively.

Most of the time, we perceive exports as industry-specific, but in reality, exports are about know-how. Know-how becomes a product, and know-how makes a product competitive. However, know-how is not just knowledge – it is sometimes tangible, existing in tools, but more often, it is intangible. 

It is akin to Lasith Malinga’s bowling action and his ability to deliver pinpoint yorkers. We can analyse Malinga’s technique, attempt to replicate his action, and even learn from his strategies through interviews or YouTube videos. Yet, even with all this information, it is extremely difficult to replicate his unique skill set. 

Malinga possesses tangible components such as his slinging action, run-up, and release style, which can be considered tools. He also has knowledge that he shares through various platforms. However, his true know-how – what makes him exceptional – remains elusive, even to himself. 

This difficulty in transferring know-how is likely why the Mumbai Indians recruited Malinga both as a player and later as a coach in the Indian Premier League. If we consider Malinga as a product, he is export-competitive and his value lies in a combination of factors, primarily his unique know-how.

When a country seeks to expand exports, the know-how ecosystem is what determines success or failure. Our apparel manufacturers, for example, possess specialised knowledge that enables them to produce garments at the lowest cost while maintaining high quality. 

Initially, their products were relatively simple, but over time, they evolved in complexity. The industry experimented with various approaches – ethical garment production, lean manufacturing, and women’s empowerment – learning from both successes and failures to refine a sustainable model.

Today, Sri Lanka’s apparel exports are not merely about physical products but also the know-how that allows us to compete globally. Know-how thrives within an ecosystem that supports industries. 

For this to develop, the Government must provide entrepreneurs and businesses with the freedom to access and test resources – what economists refer to as factor markets. Land, labour, and capital must be available with minimal restrictions on a level playing field. 

This is why licensing requirements can be detrimental to exports; they obstruct access to essential resources, thereby stalling know-how development. For instance, if land acquisition is difficult, apparel firms may struggle to operate or innovate. Similarly, excessive labour regulations can increase operational costs, making products uncompetitive and disrupting the know-how ecosystem. Such obstacles discourage exports.

Another common discussion on boosting exports revolves around diversifying the export basket. To understand how diversification occurs, we can refer to Harvard’s Center for International Development, where Prof. Ricardo Hausmann uses the analogy of monkeys and trees in a forest.

In a forest, monkeys do not leap from one end to the other; they move from branch to branch. Similarly, export diversification does not occur in giant leaps but through adjacent product categories. Existing exporters and individuals within the know-how ecosystem expand into related fields. 

For instance, if we excel in gemstone exports, an adjacent category would be jewellery. This is why Government intervention in selecting export industries with large targets is often ineffective – diversification and expansion naturally occur within adjacent categories.

In making more complex products for export, Prof. Hausmann employs an economic theory likening diversification to a Scrabble board. If we have only three letters, our word combinations are limited. However, with four letters, the number of possible words increases exponentially. 

Therefore, minimising restrictions on factor markets – such as land and labour – enables more access to ‘letters,’ allowing for greater diversification.

Additionally, some ‘letters’ contribute significantly to forming words, like the letter ‘A,’ which is more versatile than a letter like ‘Z’. Similarly, removing barriers to factor markets increases the potential for new export combinations.

In Sri Lanka, our export strategy has traditionally relied on the Government selecting industries for growth. While this approach may work to some extent, if we seek rapid export expansion – like Vietnam – we must focus on the framework rather than forcefully pushing selected industries.

In today’s global economy, no country manufactures all its products on its own. Most nations produce parts, components, and assemblies, relying on international trade to complete final products. If we fail to open our economy to trade, our export ambitions will remain unfulfilled. Trade enhances competitiveness and provides access to multiple ‘letters’ at optimal costs.

Foreign Direct Investments (FDIs) are another crucial element in this equation. FDIs bring in individuals with specialised know-how, much like acquiring a player of Malinga’s calibre. They also introduce advanced technology, enabling the creation of more ‘letters’ and exponentially increasing the potential for new products over time.

If Sri Lanka is serious about exports, we need to focus on the process and the journey. We hope that the upcoming Budget will establish key milestones to guide us in the right direction.

Overcoming structural barriers to achieve export growth

By Dhananath Fernando

Originally appeared on the Morning

Sri Lanka has been trying to solve its export puzzle for a long time, with a new export target set at $ 36 billion by 2030. 

As of November 2024, the country had approximately $ 11.6 billion in merchandise exports and $ 3.1 billion in services exports, totalling around $ 16 billion. Over the next five years, exports are expected to double, requiring an annual compounded growth rate of approximately 14%.

Many policymakers define Sri Lanka’s export challenge as a lack of diversity in the export basket, limited access to international markets, or insufficient value addition. While these factors are valid, the core issue is that Sri Lanka is not competitive. 

This lack of competitiveness is not due to an inherent incapability but rather the result of policies and structural inefficiencies that have rendered the country uncompetitive. Often, this fundamental issue is misdiagnosed as a lack of targeting, leading to constant shifts in focus towards different sectors or products every three years without addressing the root causes of uncompetitiveness.

Addressing competitiveness 

Addressing public policy challenges is inherently complex, as solutions impact various stakeholders, making change management difficult. 

One of the primary mistakes governments and policymakers make is attempting to target specific sectors for export growth. Instead, focus should be placed on sectors where Sri Lanka has a competitive advantage. 

The only way to determine competitiveness is through practical application – by actively engaging in export activities rather than relying solely on theoretical projections. In the modern economy, competitive advantage extends beyond specific products to elements such as design, lead times, and supply chain efficiencies – factors that may not be immediately evident to a single decision-maker.

The global trade landscape is shifting from finished products to parts and components within value chains. However, when the Government plans around traditional industry categories, it often overlooks this evolving reality. 

For any product or component to be manufactured competitively, key resources – land, labour, capital, and entrepreneurship – must be accessible and efficient. Sri Lanka’s export underperformance, poor diversification, and lack of market access stem largely from bottlenecks in these factor markets. 

When essential factors of production do not function effectively, innovation stagnates, restricting export diversification and the development of components for various products, including value-added goods. 

If businesses can achieve higher margins through value addition, they would naturally do so. If they choose to export raw materials instead, it suggests the presence of barriers, misaligned incentives, or a competitive disadvantage in value-added production.

To illustrate this, consider the hypothetical case of exporting iron ore. A country rich in iron ore but burdened with high energy costs will find exporting raw ore more advantageous than converting it into steel. Conversely, a country with lower energy costs, proximity to industrial zones, and high steel demand will have a competitive advantage in steel production. 

This principle applies across all industries – cost structures, infrastructure, and resource availability dictate competitiveness.

A complex problem   

Compounding the problem is the interconnected nature of these issues. Solving one aspect alone will not fix the broader export challenge. 

In Sri Lanka’s case, high energy costs place any export industry at a price disadvantage. Subsidising energy is often proposed as a solution, but ultimately, taxpayers bear the cost. 

Similarly, labour costs remain high due to regulatory barriers. For instance, if a major tech company wanted to relocate its regional office to Sri Lanka, the country lacks an adequate pool of IT graduates. Addressing this would require either allowing foreign professionals to work in Sri Lanka or significantly upskilling the local workforce.

Export development also requires capital and entrepreneurship. Capital can be acquired through debt or equity, but debt financing is currently not a viable option for Sri Lanka. Equity investment remains possible, but attracting such investment necessitates improving Sri Lanka’s investment climate. This highlights the urgent need for reforms within the Board of Investment (BOI). 

Additionally, facilitating foreign entrepreneurs’ ability to enter Sri Lanka – through streamlined visa processes and work permits – is essential. The Department of Immigration and Emigration must play a role in this.

For capital to flow, investors require developed lands with ready-to-use infrastructure, minimising lead time and operational delays. Without addressing these factor market inefficiencies, traditional export strategies will continue to fail. The global export market is now highly fragmented, with the future lying in the production of components and participation in global value chains rather than focusing solely on finished products.

Ultimately, the export sector is too complex for any single individual or institution to plan entirely. It is an organic, competitive field where businesses strive to add value through quality and cost efficiency. 

The role of the Government should be to facilitate this process by removing barriers and creating an environment conducive to competition. If the right conditions are in place, export growth will naturally follow and Sri Lanka will achieve its ambitious targets.

Rethinking tax policy in Sri Lanka

By Dhananath Fernando

Originally appeared on the Morning

• The case for adhering to tax principles

Many Sri Lankan budget speeches are essentially discussions on Government expenditure. Revenue proposals are often introduced piecemeal before the budget and frequently fail to align with basic principles of taxation. 

Under the current International Monetary Fund (IMF) programme, Sri Lanka has committed to achieving a revenue target of 15% of Gross Domestic Product (GDP) by 2025, increasing to 15.5% by 2026. Additionally, a primary balance target of 2.3% in 2025 must be met and maintained. 

While we have already exceeded the primary balance target, this achievement has come at the cost of cutting capital expenditure, which will likely impede long-term growth.

Tax revenue has met targets, primarily through record-high import tariffs collected at the border by Sri Lanka Customs, amounting to Rs. 1,500 billion. However, relying on such high border tariffs impacts both the cost of living and the cost of raw materials, adversely affecting exports and local production.

The need for adhering to tax principles

It is crucial that the Government prioritises adherence to fundamental principles of taxation when implementing revenue measures. Over-reliance on border taxes is not a sustainable strategy for achieving a higher tax-to-GDP ratio.

Why border taxes are problematic

Generating revenue through border taxes disproportionately affects importers, as they incur significant costs upfront, even before generating profits. In contrast, profit-based taxes are levied only after profits are realised, making them less burdensome from a cash flow perspective. The time value of money amplifies the impact of upfront border tariffs on profitability.

Sri Lanka’s import basket comprises approximately 80% intermediate and capital goods, with only 20% being consumer goods. Tariffs on these critical imports drive up production costs, ultimately increasing the price of exports and even domestic goods. For example, the Rs. 65 tariff on rice accounts for about 50% of its production cost, leading to a nationwide increase in meal costs by approximately the same margin.

A tax base built on three pillars

Globally, taxes are traditionally levied on three bases:

What you earn (e.g. income tax, corporate tax)

What you buy (e.g. Value-Added Tax, or VAT)

What you own (e.g. property tax)

Principles for an effective tax system

Simplicity: Taxes must be simple for taxpayers to understand and for authorities to collect and enforce. Overly complex tax structures with numerous thresholds lead to lower compliance, reduced revenue, and enforcement challenges. A standard and straightforward tax system is key to maximising efficiency and minimising leakage.

Transparency: Transparency in taxation fosters trust and reduces opportunities for corruption. For instance, Sri Lanka’s import tariff system, based on Harmonised System (HS) codes, lacks transparency due to its cascading structure. Similarly, ambiguities in income tax policies create doubts and complications. Transparency is especially critical for tariffs, which, even when necessary, must be clear and predictable.

Neutrality: Taxes should not create winners and losers by favouring or penalising specific industries, products, or sectors. For example, in 2015, Sri Lanka imposed taxes on profits from the previous year, undermining the fairness of the system. The primary purpose of taxation is revenue generation, not market distortion. Lowering tax rates can expand the tax base, ultimately increasing revenue and minimising evasion.

Stability: Tax rates should remain consistent over time to provide predictability for taxpayers. Frequent changes to tax rates, such as the numerous adjustments to VAT in Sri Lanka, create uncertainty, open avenues for corruption, and undermine economic stability. Temporary taxes and tax holidays should also be avoided to maintain consistency and fairness.

Taxes on property: A case for caution

Among all forms of taxation, taxes on property ownership are particularly burdensome. This is because taxpayers often have to forgo another revenue source to meet their property tax obligations. 

If a property generates income, that income is already taxed under income tax laws. Imposing an additional property tax not only constitutes double taxation but also discourages wealth creation. Such policies can deter investment and economic growth, undermining broader development objectives

Balancing revenue generation and expenditure

Sri Lanka urgently needs to increase tax revenue due to its high expenditure, particularly on interest payments, which account for approximately 50% of total expenditure. This is not repayment of debt but merely the cost of servicing bad debt. While room for expenditure cuts is limited due to the predominance of recurrent spending, hard restructuring is necessary to reduce this burden.

Although the Government has achieved a primary surplus by reducing capital expenditure, this strategy will have adverse long-term effects on growth. Therefore, adhering to fundamental tax principles is critical to improving Government revenue sustainably without jeopardising the country’s economic prospects.

Source: CBSL, Advocata research 

Source: CBSL, Advocata research 

A new era or more turbulence?

By Dhananath Fernando

Originally appeared on the Morning

• The challenges facing Sri Lanka’s next president

The Presidential Election has been announced. Ideally, by 22 September, there will be a new president with a new mandate from the people.

Sustaining power will be more difficult than winning the election. Generally, from the very first day after assuming office, things start to fall apart. This will be the first election after the ‘Aragalaya,’ and we do not know the ground reality.

The last power transition wasn’t smooth. While there was a democratic element in appointing the eighth President after the resignation of the former, that episode had many dark elements, including a massive economic contraction and impact on human lives.

Focus on economics and corruption

Previous elections had a national element, but this time the focus is completely on economics and corruption. The good news is that the path forward is well defined, including macro targets. The International Monetary Fund (IMF) Governance Diagnostic has provided the main reforms needed to curtail corruption, with timelines and responsible institutions. Most of these are non-controversial.

This time, all candidates will also have to declare their assets electronically. We, as the people, should demand that the Commission to Investigate Allegations of Bribery or Corruption (CIABOC) enforces this.

The new president must deliver on anti-corruption promises because the demands of the ‘Aragalaya’ have not been met yet. However, some promises, like recovering assets overseas, are not easy to execute. Therefore, delivering on the anti-corruption sentiment is challenging.

Delivering on the economic front is equally tough. After debt restructuring, our interest rates will likely remain high. When interest rates are high, the cost of capital is higher, slowing down investment.

For instance, buying a computer to automate manual work becomes difficult when money is hard to source due to high interest rates. As a result, our economy will not grow. If the economy is slow to grow, it invites another crisis. Simply put, if the economy doesn’t grow, our debt will not be sustainable.

In other words, if the economy is slow to grow, it indicates that we are heading towards another debt crisis. The next leader must ensure both growth and stability.

The second piece of good news is that we at least have an idea of what targets we need to achieve on the economic front. Our debt-to-GDP ratio must gradually come down to 95% and our revenue must increase by improving our tax net.

Many promises about increasing Government sector salaries and public sector expenditure are good, but will be difficult to keep.

Limited options

In this context, there are two limited options available to increase money and productivity.

The first is improving productivity in what we already do. Simply working harder and putting in more effort can help. For example, reducing the number of holidays by 10% should increase the economy’s momentum because people will work more. But this race cannot be won solely by working harder. We must also look into channels for improving productivity without capital investments.

One such area is opening up business ventures that change the business format. For example, app-based taxi companies have significantly improved the productivity of both passengers and drivers by connecting potential riders with drivers. Companies like Booking.com connect tourists looking for lodging with small-scale lodging options.

Changing the business model has increased income for many people, reduced expenditure for many, and decreased waiting times, increasing overall productivity. The new leader must leverage this productivity lever.

The second option is to reform State-Owned Enterprises (SOEs) to attract capital. Allowing SOEs to undergo privatisation and Public-Private Partnerships (PPPs) can attract capital through investments. Additionally, rather than incurring losses, private entities can generate revenue for the Government through taxes and improve productivity.

The third option is to release land to improve productivity and circulate capital. Providing land ownership to people allows them to use it as security to unleash capital from the banking system, improving productivity.

Beyond these three options, any president will have limited choices. Relying on geopolitical powers in a highly volatile geopolitical environment may also be unfeasible.

Therefore, the challenge for the new president extends beyond getting elected. The real challenge is navigating the period after the election, which will undoubtedly be tougher than getting elected.