Indrajit Coomaraswamy, Governor, Central Bank of Sri Lanka: Interview

Interview: Indrajit Coomaraswamy

How will the Inland Revenue Act affect the tax structure and foreign direct investment (FDI)?

INDRAJIT COOMARASWAMY: The Inland Revenue Act will simplify the tax structure and widen the tax base. It addresses declining government revenue-to-GDP ratios and increases tax progressivity. The introduction of taxpayer identification numbers, and efforts to improve tax administration and compliance, will also boost collection. Furthermore, removing tax holidays and ad hoc tax concessions will reduce tax expenditure. These have been replaced with an upfront investment allowance to promote both domestic and foreign investment. A simpler, fairer and more transparent tax structure will bring us closer to the conditions necessary to attract FDI.

What policies will keep inflation in the 4-6% range?

COOMARASWAMY: The central bank aims to make more data-driven decisions to manage both price pressures and inflation expectations. We are working with the IMF to improve our technical capabilities, and to introduce legal and accountability frameworks to enact the new flexible inflation-targeting regime.

The ongoing revenue-based fiscal consolidation process will also help keep inflation within the targeted range by containing excess aggregate demand in the medium term. In order to mitigate short-term price pressures, the government is expected to take appropriate fiscal and supply-side measures, while encouraging the economy to improve efficiency and productivity in domestic supply-chain management.

How can the deficit be reduced to 3.5% of GDP?

COOMARASWAMY: The government is already following an ambitious fiscal consolidation path to enhance revenue, rationalise recurrent expenditure and keep capital expenditure at its current level.

There is a three-pronged effort supporting this process: improving tax structure, upgrading tax administration and strengthening institutional support. In addition, expenditure will be maintained at the desired level by rationalising recurrent expenditure and aligning public investment programmes with national goals.

With these measures, the tax revenue-to-GDP ratio is expected to increase to around 16% by 2020, while total government revenue will be increased to around 16.5%. Government expenditure is expected to be 20% of GDP by 2020, meaning there will be a 3.5% budget deficit, in alignment with the stated target.

What policy changes can affect the exchange rate?

COOMARASWAMY: The central bank is currently transitioning to a flexible inflation targeting regime, which aims to establish inflation as the nominal anchor while allowing greater exchange rate flexibility. The success of this policy will hinge on central bank autonomy and sound fiscal-monetary coordination. Commitment to maintaining a low inflation rate will keep the country competitive without putting undue pressure on the nominal interest rate. The central bank is also designing a framework to manage the exchange rate, reaffirming its commitment to market mechanisms.

Which reforms could help attract investment?

COOMARASWAMY: Consistent domestic policies to improve competitiveness and strengthen institutions will be instrumental in attracting FDI. The country needs to improve investment policy predictability by ensuring policy coherence, transparency and consistency; standardising incentives with clear eligibility criteria; and implementing a speedy investment approval process. Streamlining new business registration through a single window will improve both ease of doing business and the coordination required to attract and retain FDI.

Furthermore, establishing clear policies with a well-defined legal, regulatory and institutional framework will encourage public-private partnerships (PPPs). Health care, leisure, tourism, education, ports and aviation all hold potential for greater PPP formation.