ECONOMYNEXT – Sri Lanka is discussing with the International Monetary Fund giving incentives to draw investments to the country, President Anura Kumara Dissanayake said as attempts are made to take the country on a growth path after its first sovereign default.
“We are of the stance we must create an attractive investment environment and attention must be paid to giving some concessions to incentivize investments,” President Dissanayake said at a conference in Colombo with the International Monetary Fund.
“We are discussing that with the IMF.”
Sri Lanka has met targets in a number of areas, but Sri Lanka also has to reach a target on foreign direct investments.
“We have to get sufficient foreign direct investment. We are not inviting FDI from the point of a strong economy but a weak one,” President Dissanayake said.
“We are now recovering, but is that enough to bring investment?”
A country loses sovereignty after an economic collapses, he said.
“A nation cannot maintain sovereignty when the economy has collapsed,” President Dissanayake said. “When the economy has collapsed the state cannot be independent. Whether we like it or not, we lose our sovereignty and independence.”
“As a nation we have to recover our independence and sovereignty. For that a strenous effort, an un-ending effort will be made. There are some actions that has to be still done as the political leadership, public officials and as members of the public.”
With its own efforts Sri Lanka has to come to a level where it can repay debt, President Dissanayake said.
President Dissanayake said many small and medium enterprises had crashed.
“Ninety percent of them have fallen not due to their management errors but due to the collapse of the general economy,” he said. “So we have to help them. Not for a long time but for them to stand up.”
When central banks cut rates and fires credit, which then lead to currency crises leading and high prices, leading to loss of purchasing power and a collapse of domestic demand, SME’s which are relatively highly leveraged end up with reduced sales, while larger firms with stronger franchises survive.
Rate cuts then have precipitously reversed in a hurry to re-establish the lost confidence in the currency, leading to snowballing debt and defaults and weakened banking system.
Unemployment also rises.
In Sri Lanka there is out-migration to to more stable countries especially in the Middle East where currency board style regime make it difficult for ‘full employment’ growth policies to be conducted and there is long term monetary stability, leading to imports of labour and low taxes.
The resulting remittances then help in the recovery from the currency crisis, under an IMF program.
Sri Lanka has been advised not to give tax breaks to companies in general as the country tries to boost revenues and strengthen government finances.
Long tax holidays under the Strategic Development Project Act, which are discretionary, had also come under fire for being discretionary and prone to corruption.
Unlike East Asian countries with monetary stability, Sri Lanka now high rates of income tax, after several years of growth volatility after the end of a 30-year civil war as the country ran into a series of currency crises and default in the wake of aggressive macroeconomic policy.
East Asian nations that reject Anglophone macro-economic policy for growth (full employment policies or potential output targeting), and avoid currency crises as a result have steady growth, no currency crises and income tax rates of 20 percent and VAT around 10 to 14 percent.
In Cambodia, the latest growth and FDI story in East Asia, macro-economists have been made completely helpless to create forex shortages and depreciation through dollarization.
However, the IMF is advising de-dolllarization which can give a few unelected macroeconomists the power to ‘cut rates’ with printed money and trigger monetary instability like neighboring Laos and Sri Lanka, critics say.
After the end of a civil war, macro-economists cut rates repeatedly, to push up the cost of living to 5 percent, claiming past 12 month inflation index gave them ‘space’ to print money, triggering a series of currency crises from around 2011.
In the 2015/16 crisis, a mid-corridor rate targeting was introduced – now called the single policy rate.
In 2018, rates were cut with printed money as taxes were raised on the claim that ‘fiscal policy is tight and therefore monetary policy should be loose’ after claiming for years that budget deficits were the source of inflation, though all credit is credit, whether private or state.
In 2020 macro-economists added tax cuts to rate cuts to target potential output leading to sovereign default as forex shortages emerged and made up the shortfall with printed money instead of allowing rates to go up. (Colombo/June17/2025)