Reg.

No: 618211854

Sri Lanka is a Lower Middle-Income country having developing economy based on

agriculture, services, and light industry while resolving basic economic problems (Every
economy has to face the problems of what to produce, how to produce and for whom to
produce) using mixed economic system. This mixed system that combines aspects of
both capitalism and socialism. In mixed economy government intervenes to disrupt free
markets by introducing state-owned enterprises (such as public health public education
systems) regulations, subsidies, tariffs, and tax policies and the balance is subject to the
operation of the price mechanism. The public and private sectors work in a co-operative
manner to attain the social objectives under a common economic plan. Every government
has macroeconomic goals that it wants to achieve; these goals or objectives are key to
ensuring long-term stable economic success. There are five main macroeconomic goals
that most government aim to achieve.

1. Economic Growth (Non-Inflationary)

In other words, this is stable and sustainable economic growth and development
that is “real” (non-inflationary) over the long-term. Economic growth in an
economy is an outward shift in its Production Possibility Curve (PPC). Another
way to define growth is the increase in a country’s total output or Gross Domestic
Product (GDP). The objective of the central bank and government would be an
increase in economic growth without a rise in the rate of inflation.

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In a healthy, growing economy, each year aggregate demand shifted to the right so that
the economy proceeds from equilibrium E0 to E1 to E2 . Each year, the economy produces
at potential GDP with only a small inflationary increase in the price level. But if
aggregate demand does not smoothly shift to the right and match increase in aggregate
supply, growth with deflation can develop.

2. Low Inflation

Inflation is the sustained increase in the price level. The rate of inflation is the
change in inflation over a period. The main causes of inflation are either excess
aggregate demand (economic growth too fast) or cost push factors (supply-side
factors) or monetary inflation. Central banks would like to keep the growth of the
rate at which prices increase at low rates.

Demand-pull inflation – aggregate demand growing faster than aggregate supply

(growth too rapid) If aggregate demand (AD) rises faster than productive capacity
(LRAS), then firms will respond by putting up prices, creating inflation.

Demand-pull inflation means:-

 Excess demand and ‘too much money chasing too few goods.’
 The economy is at full employment/full capacity.
 The economy will be growing at a rate faster than the long-run trend rate.

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 A falling unemployment rate.

If aggregate demand is rising at 4%, but productive capacity is only rising at 2.5%; firms
will see demand outstripping supply. Therefore, they respond by increasing prices.

Also, as firms produce more, they employ more workers, creating a rise in employment
and fall in unemployment. This increased demand for workers puts upward pressure on
wages, leading to wage-push inflation. Higher wages increase disposable income of
workers leading to a rise in consumer spending.

The long trend rate of economic is the sustainable rate of economic growth, it is the rate
of economy without any demand-pull inflation. If economic growth exceeds this long-run
trend rate, then it will cause inflationary pressures.

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Cost-push Inflation-

Rising prices due to higher costs of production and higher costs of raw materials. Cost-
push inflation is determined by supply-side factors (cost-push inflation is different
to demand-pull inflation which occurs due to aggregate demand growing faster than
aggregate supply) Cost-push inflation can lead to lower economic growth and often
causes a fall in living standards, though it often proves to be temporary. Short run
aggregate supply curve shifts to the left, causing higher price level and lower real GDP

Monetary Inflation -

Monetary inflation caused by the expansion in money supply (due to more printing of
money by a government to cover its defects)

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Relationship between Monetary Policy and Interest Rates, the original equilibrium occurs
at E0. An expansionary monetary policy will shift the supply of loanable funds to the right
from the original supply curve (S0) to the new supply curve (S 1) and to a new equilibrium
of E1, reducing the interest rate from 8% to 6%. A contractionary monetary policy will
shift the supply of loanable funds to the left from the original supply curve (S0) to the new
supply (S2), and raise the interest rate from 8% to 10%.

3. Low Unemployment or Full Employment :-

Full employment occurs when the labor force (this counts as people who are
actively seeking jobs or are already employed) is fully employed in productive
work. A person is considered to be unemployed if he currently doesn’t have a job
and is actively searching for one. Having a lower rate of unemployment means
that the economy is more productive. This objective means that as many people
who want to be employed are employed, so the economy is running at or near full
productivity.

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A production possibility frontier shows the maximum output an economy can produce. If
the economy is at point A or B, the economy is on its PPF curve and there is no
unemployment of resources. If the economy is at point D – there is unemployment of
resources and the economy is not at full capacity.

In this diagram full employment at an output of Y2. Here any further increase in AD only
causes inflation. In practice, it is difficult to know precisely what counts as full
employment. Practical reasons make it difficult for every firm to operate at 100%
capacity. But in order to define full employment, we would say there is no demand -
deficient unemployment, only supply-side unemployment (such as structural change).

4 Equilibrium in Balance of Payments :- Equilibrium in Balance of Payments

means that a country’s exports or imports should not be much larger than its
imports or exports. Having a large balance of payments deficit or surplus is not
beneficial for the economy.

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5. Fair Distribution of Income :- A fair or equitable distribution of income means

that the gap between the rich and the poor is not too large. Fair or equitable
doesn’t mean equal, but fair is a relative concept. What could be fair to one
person, may not be fair to another. The government doesn’t want all the wealth
concentrated with a small group of people.

To achieve above macroeconomic goals every government uses below key things, Tax
rate, government expenditure, government borrowing and government budgetary policies
to govern gross domestic product (GDP), changes unemployment, price level, inflation,
rate of economic growth and national income.

Gross Domestic Product (GDP)

Gross domestic product is the total value of everything produced in the country. It doesn't
matter if it's produced by citizens or foreigners. If they are located within the country's
boundaries, their production is included in GDP. The formula to calculate the components
of GDP is Y = C + I + G + NX. That stands for: GDP = Consumption + Investment +
Government + Net Exports (export -imports)

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Quart3rd 2018
2000
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017
Year

Growth 6.
-1.5 4.0 5.9 5.4 6.2 7.7 6.8 6.0 3.5 8.0 8.4 9.1 3.4 5.0 5.0 4.5 3.1 3.8
Rate% 0

Economic Growth

Economic growth is an increase in the production of economic goods and services,

compared from one period of time to another. When looking into main Macroeconomic
criteria of the country it is observed that the growth in Gross Domestic Production of the
country is declining since 2015 from 5% up to 3.1% in 2017.

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Source: Central Bank of Sri Lanka

According to the department of Census and Statistics, in year 2018 Sri Lanka GDP derive
as follows agriculture accounts comprise for 7.0 percent of the gross domestic product
(GDP) and employed population 26.1 percent of the labor force. Agriculture production is
separated as agriculture, livestock and forestry. Agriculture output is divided between
cash crops from plantation namely tea, rubber, coconut which are grown for sales and
food crops from subsistence agriculture. Rice is the major food crop and main livelihood
for over 64 percent of the Sri Lanka’s rural population. Industries account for
approximately 26.1 percent of the gross domestic product and employed population about
28.4 percent of the labor force. Primary manufactures contain food products, textile,
wearing apparels, ceramics, cement, beverages, petroleum products and fertilizer. The
service sector is the largest of the Sri Lankan economy, engaging 45.5 percent of the
work force and contributing 57.7 percent of GDP. Banking, finance, wholesale and retail
trade tourism, telecommunication, IT programing, insurance are the major services of the
services sector.

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Employed population by major economic sector

Economic policy prior to 2015

Somarathne (2019) chartered financial analysis states after 30 years’ civil war economic
growth was significantly higher from 2009 to 2012, This was largely due to rebuilding of
infrastructure and economic integration of north and east after the finished war in 2009.
The economic policy was more inward-looking. The economic growth primarily derived

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from the domestic economy, through large infrastructure spending, funded by the foreign
loans obtained by the Government. Except the promotion of tourism sector, industrial
production and export sector were neglected. As a result, export share of the Gross
Domestic Product (GDP) took notable downward trajectory over the years. The economic
growth increased disposable income (evidenced by the growth of per capita income) of
the people and the miniscule export earnings were quite insufficient to meet import
demand for the manufactured goods. The domestic business sector influenced the
Government to protect domestic industries, largely monopolistic or oligopolistic in
nature, via trade barriers making them less competitive internationally. From the fiscal
side, public debt increased at a rapid phase since the Government borrowed funds for
large infrastructure spending.

In January 2015, the government of Sri Lanka changed and the new government restored
the rule of law and democratic institutions. The political change was also unique in the
history of the country as the two main political parties united to rule the nation. The unity
government’s promise to re -establish democratic governance was significant and further
the government promised to establish law and order in the country which is also of
benefit for economic development of the country. There were significant gains politically
and some economic achievements too. However, the economic performance of the unity
government that was expected to usher in a period of rapid economic growth has resulted
inadequate and disappointing.

The Good Governance government which assumed office on January 8, 2015, pledged to
increase public servants’ salaries by Rs. 10,000. But initially Rs. 2,500 was added as an
allowance to public servant’s salaries without incorporating it in the basic salary. The
government took steps to incorporate the Rs. 2,500 increase with the basic salary from
2016.nearly 1.37Mn state sector employees. Same as government pensioners pension.
The Minister of public administration Mr. Vajira Abeywardena (Hiru 2017) told in
parliament that an additional Rs 12 Billion would be required on annual basis for this
salary increase and pension. Fernando (2018) As per the Treasury Secretary Dr. R.H.S
Samaratunga Sri Lanka’s recurrent expenditure on public sector salaries and pensions will

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account for 44 percent of the government’s revenue in year 2018 across 1,251 entities due
to the ever expanding bureaucracy, a top bureaucrat in the country revealed .based on him
treasury is expected to spend around Rs.900 billion on salaries and pensions of public
sector employees in 2018, out of the government’s expected revenue of Rs.2, 040 billion.

A salary increase means adding more value to the economy. Positively, if it will spend the
hike as soon as possible in local economy. That gives economy another chance to add
more value by making a profit on it. If that increase is kept in the bank, banks will lend it
out to entrepreneurs who will then add value by using the loan. Saving adds to the
leverage banks can use to gather funds to loan out. A salary hike increases the GDP of the
country. However, after government servant salary increase in Sri Lanka, employees get
new housing loans and consumption loans using increased salary income. This was
effected to increase consumer demand and spending. We can prove this because National
Consumer Price Index (NCPI) exhibited mixed movements during 2018, recording 125.8
index points in January and reaching 127.1 index points in December Colombo Consumer
Price Index (CCPI) also exhibited a similar trend to that of the NCPI during the year. The
CCPI increased from 122.8 index points in January 2018 to 126.3 index points in
December 2018.

At the same time government increase pensioners pension after new government
establishment. (‘Daily Fit’ 2018) According to World Bank estimates, by 2030, one in
every five Sri Lankans will be over the age of 60. This means that each family could well
have more than one retired person. With fewer younger people to support a larger ageing
population, it is essential to have income security for the elderly to ensure they remain
independent and have access to a decent quality of life. This pension increase will be
vicious burden in next decade with rapid demographic changes and it will make a rise
government expenditure on pension to cater this whopping increase, government have to
allocate more tax revenues for pensioners without adding any economic benefit to the
economy.

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Source: indexmundi

The pension burden becomes even more daunting when the health costs of an ageing
population are factored in. As Sri Lanka is facing a demographic shift before it reaches a
high level of economic growth, the labor markets will also have to shift so that older
people have to opportunity to continue working if they are able. The policy shifts are
challenging and the longer they are postponed the harder they will become. Srimanna
(2019) People who retire at age of 55 will now have to wait till they reach 60 years to be
recognized as senior citizens to get banking and finance company benefits, according to a
recent Central Bank (CB) directive The 15 per cent special interest paid on fixed deposits
will now be paid for the upper limit up to 1.5 million rupees and eligible to those of 60
years or over. The Government pays the difference between the 15 per cent and the
market standard interest rate offered by commercial banks and NBFIs, the Treasury pays
Rs. 13,000 million rupees per annum for this purpose.

In mid of April in year 2019 government raised Sri Lanka’s national minimum wage per
month for private sector workers is to Rs. 12,500 from the current Rs. 10,000 with effect
from 1st May 2019. After this salary increase workers receive a pay increase, then there
will be a rise in consumer spending. Low-income workers are likely to have a higher
marginal propensity to consume (they spend high % of extra pay). This could also cause a

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multiplier effect, with higher spending causing knock-on effects to elsewhere in the
economy, this should help boost economic growth. However, if we assume labor markets
are competitive and if we assume that a minimum wage does cause lower employment,
then rising unemployment will have a negative impact on aggregate demand. People who
become unemployed would spend less, leading to lower aggregate demand.

Sri Lanka labour markets are perfectly competitive and after national minimum wage
(NMW) above the equilibrium wage, we can expect a fall in demand for labour (Q1 to
Q2), and therefore, there would be excess supply of labour (Q3-Q1). This is known
as real wage unemployment

Government Revenue

The government revenue includes tax income and non-tax income. A tax is a compulsory
financial charge or some other type of levy imposed upon a taxpayer by a governmental
organization in order to fund various public expenditures. Tax systems fall into three

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main categories and those are regressive, proportional, and progressive. Regressive taxes
have a greater impact on low-income individuals than they do on high-income earners. A
proportional tax, also referred to as a flat tax, impacts low-, middle-, and high-income
earners relatively equally. They all pay the same tax rate, regardless of income. A
progressive tax has more of a financial impact on higher-income individuals and
businesses than on low-income earners.

Tax effects can be divided in two fundamental categories

 Taxes cause an income effect because they reduce purchasing power to taxpayers.

 Taxes cause a substitution effect when taxation causes a substitution between
taxed goods and untaxed goods.

The Former finance minister Mr. Ravi Karunanayake vigorously followed up and made
strenuous effort to improve the revenue collection process. Hence, the government was
able to increase the government revenue to marginalize the effect of highest-ever increase
in the Government expenditure in the recent history. To his credit, with only three main
institutions under his purview, he was successful in increasing the Government revenue
by 21% and 16% during 2015 and 2016 respectively and it was decline in year 2017 to
10.7% to and year 2018 to 8.8%. This effort bucked the declining trend observed in
Government revenue during the previous decade. After 10 years, the Finance Ministry
was able to increase Government revenue as a percentage of GDP. The Finance Minister,

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for his exertion to establish fiscal consolidation via raising revenue, was recognized as the
Best Finance Minister of the Asia Pacific region by financial magazine The Banker.

Good governance government amend the inland revenue act in 2017 and act No 24 of
2017 was enforced from 01st April 2018 onwards and previous Inland Revenue Act No.
10 of 2006 was repealed, subject to certain transitional provisions incorporated into the
new Act. most important provision in the new Act to expand the tax base and increase
income tax revenue.

“Colombo page” (2018) According to the Finance Minister Mangala Samaraweera the act
will ease the burden on the low-income people and effectively implement the revenue
laws on the high-income group. The Minister earlier said the main objective of the new
Inland Revenue Act is to simplify the tax system in order to create an investor friendly
environment that will attract more foreign direct investments. He says the present tax
system in place is complicated and that investors find it difficult to understand. The Act
will reduce the indirect taxes levied from the people from 80% to 60% and increase the
direct taxes from 20% to 40% within three years. The Minister notes that there has been

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no increase in tax revenue in parallel to the rise in the country's income and Sri Lanka's
tax revenue remains low when compared to other countries in the region.

The new Inland Revenue act will make it obligatory for eligible taxpayers to pay their
taxes. However, people earning an annual income below Rs. 1.2 million (Rs. 100,000 per
month) will not be taxed under the new act. (in previous act tax free limit was 750,000)
However, taxes will be imposed at 4% on incomes from Rs. 100,000 to Rs. 150,000, 8%
from Rs 150,000 to Rs 200,000, 12% from Rs. 200,000 to Rs. 250,000. 16% from Rs.
250,000 to 300,000 and 20% on incomes from Rs. 300,000 to Rs. 350,000. For income
above Rs. 350,000 the tax rate would be 24%. The tax will be charged on the employees'
total income including salaries, commissions, overtime allowances, bonuses, transport
and other allowances, rentals for rent, electricity and telephone allowances, entertainment
allowances, and a variety of other allowances. With this newly-introduced tax policy, less
people are required to pay PAYE taxes, due to the tax exempt income limit being higher.
Also, as the tax rates increase at larger income blocks, individuals in the middle-income
brackets would pay lower taxes than at present. But because under the new tax regime tax
rates will increase beyond 16 percent, the rich are obliged to pay a higher tax rate than at
present.

With new PAYEE tax act, it may have bad impact to the economy because in higher
income employee have to pay more PAYE tax and professional’s (higher income) labour
supply have elastic supply. It means quantity supplied change more than price change.

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Most of the taxpayers will be discouraged. Government tax target was higher income
class, but professionals will be daunting and they will migrate (brain drain) due to under
higher income tax situation. Conversely high income business sector taxpayer contraction
their business due to burden income tax method. Meanwhile increased PAYEE tax
exemption limit will be a reason for reduce tax payees net.

After increase income tax, above the quantity of professional labor hours supply can
expect to fall in Q1 to Q2 , and therefore, there would be deadweight loss in tax revenue.

(Arunathilake & Jayawardene 2017) refers, Sri Lanka’s private sector professionals are
set to lose a large portion of their take-home pay after a PAYE tax hike to 24 per cent
from 16 per cent came into effect on April 1 prompting them to find greener pastures in
foreign countries, a recent CEO’s forum in Colombo revealed. They warned that the
country’s public sector will collapse as a result of the impending dearth of professionals
heading the business entities due to migration of top management personnel for overseas
jobs in countries like New Zealand, Australia, West Asia and the African region. Chief
Executive Officers (CEO’s), Chief Financial Officers (CFOs), Chief Administrative
Officers (CAOs), top level accountants, and senior executives as well as senior managers
and technical officers, etc. will be taxed at 24 per cent of their take-home pay following
the imposition of the new PAYE tax. The increase in tax revenue was the aim of this

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move of the government, but it should also consider the grievances of a handful of
taxpayers before burdening them with heavy taxes as the cost of living is sky rocketing
alarmingly.

Although PAYE tax rates will increase for individuals with high incomes (monthly
income of more than Rs. 300,000), the number of taxpayers with such high incomes is
low and as a result the revenue will be decreased. One reason for the decrease in tax
revenue was the higher threshold at which individuals are taxed. Less people pay taxes
due to the higher threshold and the new tax regime has also removed concessions given in
the earlier tax regime which provided a lower tax rate for professionals. Taxpayers will be
discouraged with new taxes and the government will lose, not gain. As an example the tax
rate of a person with an annual income of Rs. 1.5 million is 8 per cent previously but with
the new tax regime it will be only 4 per cent. The Rs. 50,000 tax free vehicle allowance
was made liable to PAYE. Therefore, if any private sector official having a company
vehicle will have to pay an additional sum of money as PAYE tax. Previous income tax
act was exempted first vehicle from the tax. But now it will consider for taxation. Under
previous income tax act, a person earning Rs. 100,000 and a transport allowance of Rs.
50,000 had to pay Rs. 1500 as taxes. A transport allowance of up to Rs. 50,000 for a car
and petrol was tax free. Under the new tax rates, the employee deemed to be earning Rs.
150,000 will be taxed at Rs.2000 a month while a person earning Rs. 150,000 and a
transport allowance of Rs. 50,000 would be taxed Rs. 5,501 a month.

These measures had led to the frustration of private sector professionals which prompted
them to leave the country for greener pastures and it will disturb the smooth functions of
the private sector. In largest company, an average of 40 senior executives are entrusted
with the task of managing a corporate with around 1300 employees, if the majority of
them leaves the entity then it well collapse. On the other hand, it is difficult to train with
experienced senior managers with required skills as the present education system is not
producing personnel to suit the job market. However, the Employees Provident Fund and
the pension have been exempted from the taxes.

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According to the Sirirmanna (2018) The new PAYE tax limit is slightly more progressive
and income equalizing than the old PAYE tax system. This means, the richer will pay
more personal income taxes than the poor. According to the IRD, as of 2015, just 426,496
employees paid PAYE taxes and only 135,170 individuals paid PIT. If the tax
administering process can be improved to net more tax payers, the revenue collected can
increase. The share of individuals paying PIT is especially low. According to the
estimates, only two out five required to pay PIT, is actually complying. Therefore,
including more people in the tax net can increase the revenue collected.

In addition, a five percent (5%) tax is levied on the interest earnings on bank deposits in
the country and on the money received from overseas workers. A tax has also been
introduced on the profits from the sale of a properties including houses and vehicles. The
Capital Gain Tax will be 10% of the profits and will be calculated based on the market
price of the property on 30th September 2017. However, if the payee lived in the property
for more than 3 years, the tax will be exempted. The profits earned from selling shares in
stock market will not be taxed. A supply and demand diagram showing the effects of land
value taxation. As the supply of land is fixed, the burden of the tax falls entirely on the
land owner. There is no change in the rental price and quantity transacted, and no
deadweight loss.

Meanwhile, the value added tax on various

goods purchased by foreigners arriving in
the country will be returned to them at the

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airport when they depart from Sri Lanka. After imposed new Inland Revenue Act taxes
on children’s bank savings accounts under the age of 18 was removed due to displeasure
remonstrance raised from phalanx.

Government need to consider Laffer curve when considering income tax changes. The
Laffer Curve states that if tax rates are increased above a certain level, then tax revenues
can actually fall because higher tax rates discourage people from working. Equally, the
Laffer Curve states that cutting taxes could, in theory, lead to higher tax revenues. It starts
from the premise that if tax rates are 0% – then the government gets zero revenue.
Equally, if tax rates are 100% – then the government would also get zero revenue –
because there is no point in working. If tax rates are very high, and then they are cut, it
can create an incentive for business to expand and people to work longer. This boost to
economic growth will lead to higher tax revenues – higher income tax, corporation tax
and VAT. The importance of the theory is that it provides an economic justification for
the politically popular policy of cutting tax rates.

However, economists disagree on the level at which higher tax rates actually cause
disincentives to work.

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Another component of government income is excise tax. Sri Lanka collects over 92
billion in revenue from the Excise taxation of cigarettes in year 2018. A 25 to 30 percent
increase in excise taxes can increase revenue by about a billion rupees. Therefore,
attention to setting taxes professionally will have huge benefits to the government.
According to the finance minister, taxes on cigarette increased by 12 percent (12%) in
2019. The average increase will be 5 rupees per cigarette stick and Nation Building Tax
was introduced to cigarettes. Meanwhile a 2,500 rupee tax per kilo of beedi (a coars
cottage industry) ciggarette will be raised to 3,500 rupees, It will increase the price of a
stick of beedi by 50 cents.

Cigarette and liquor have inelastic demand. Hence quantity of cigarette and liquors
change percentage smaller than price change percentage. Therefore, government able to
collect higher tax revenue when increasing the tax on cigarette and liquor.

Good governance government revise Sri Lanka’s domestic retail prices of petrol and
diesel on a monthly basis and the adjustment of prices based on the cost-reflective
formula computed in line with international oil prices. Sunday time (2018) written, A liter
of petrol when unloaded at the harbour costs only Rs. 78.43, they said adding that the

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total tax levied by the government is Rs. 60.63. The total is Rs. 139.06 (78.43 + 60.63). A
liter of petrol is sold for Rs.145.Therefore the additional profit for the government was
Rs. 5.94, they pointed out. A liter of diesel is unloaded at Rs. 83.70. The tax is Rs. 32.14.
The total is Rs. 115.84 (83.70 + 32.14). The liter of diesel is sold at Rs.118. The
additional profit was Rs. 2.16 from a liter of diesel, they claimed. However, the
Government was compelled to use this additional profit to offset the losses of CPC which
stood at Rs.217 billion at the end of 2017 and it lost a further Rs.18 billion up to April
2018 due to selling products below cost.

Impact of fuel price change in monthly basis: - fuel has inelastic demand therefore total
tax revenue will increase when the price increase. However, this regressive tax will
increase inflation, because fuel is an essential good. Hence tax burden will hit much
harder in low incomer’s. The rise in price of petrol would decrease the demand for cars.
petrol and diesel are complementary goods. There is an inverse relationship between
petrol and car demand .

In graphs “A” shows increase of petrol prices from P0 to P1, petrol demand will decrease
to Q to Q1. Meanwhile demand for the car will be shrink. (Graph B). Furthermore, the
increasing of petrol price also will affect the investment of government in public
transport. When the price of petrol rises, drivers are spending more money on petrol.
Thus, consumers may prefer to use public transport rather than using their own car. The
quantity demanded for public transport will increase. In order to prevent shortage in
public transport, the government may spend more on the public transport to increase
quantity supplied, for example purchase more buses and hire more bus drivers.

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Government Expenditure

A government spends money towards the supply of goods and services that are not
provided by the private sector but are important for the nation’s welfare. Government
spending goes to the nation’s defense, infrastructure, health and welfare benefits.
Furthermore, governments subsidize startup industries or industries that cannot propel
their operations with funding by the private sector, such as transportation or agriculture.

Government spending can be a useful economic policy tool for governments. Fiscal
policy can be defined as the use of government spending and taxation as a mechanism to
influence an economy. There are two types of fiscal policy: expansionary fiscal policy,
and contractionary fiscal policy. Expansionary fiscal policy is an increase in government
spending or a decrease in taxation, while contractionary fiscal policy is a decrease in
government spending, or an increase in taxes. Expansionary fiscal policy can be used by
governments to thrive the economy during a failure. For example, an increase in
government spending, directly increases demand for goods and services, which can help
increase output and employment. On the other hand, contractionary fiscal policy can be
used by governments to cool down the economy during an economic recession. A
decrease in government spending can help to keep inflation under control. During
economic downturns, in the short run, government spending can be changed either via
automatic stabilization or discretionary stabilization. Automatic stabilization is when
existing policies automatically change government spending or taxes in response to
economic changes, without the additional passage of laws.

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After Expansionary fiscal policy, supply curve SRAS1 move to right side and new supply
curve SRAS2.and with expansionary fiscal policy demand curve shift to the right from
point A to point C Expansionary fiscal policy is use to speedup economy without causing
too much inflection.

After Contractionary Fiscal Policy, demand curve AD1 move to left side and new demand
curve AD2.and demand was shrink. Price level will reduce to P1 point to P2 point and
inflationary gap will be reduce to Y1 point to Y2 point.

Gross Domestic Expenditure (GDE) which is the combination of consumption and

investment expenditure at current market prices. According to the central bank annual
report 2018, GDE has grew by 7.9 per cent in 2018, compared to 11.7 per cent growth
recorded in 2017. Further, GDE amounted to Rs. 15,511.8 billion in 2018. This was
supported by the growth in both consumption and investment expenditure which grew by
8.3 per cent and 6.8 per cent respectively, in 2018, compared to the respective growth
rates of 10.3 per cent and 15.8 per cent recorded in 2017. Considering the constant prices,
GDE grew by 3.2 per cent in 2018, compared to 3.8 per cent growth recorded in 2017. In

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this regard, investment expenditure grew by 6.6 per cent in 2018, compared to 8.2 per
cent growth recorded in 2017. However, consumption expenditure at constant prices
recorded a slow growth of 1.6 per cent in 2018, compared to the growth of 1.8 per cent
recorded in 2017. Considering the growth rates of consumption and investment
expenditure, in terms of current and constant prices, it indicates that the price pressure
largely impacts consumption expenditure than the investment expenditure in 2018.

Meanwhile, export of goods and services at current prices recorded a growth of 13.2 per
cent in 2018, in comparison to 14.6 per cent growth in 2017, while import of goods and
services grew by 12.4 per cent in 2018, compared to 13.4 per cent growth recorded in
2017. Since the import of goods and services represents a higher value in absolute terms
than export of goods and services, net external demand at current prices contracted by
10.3 per cent in 2018, compared to 10.1 per cent contraction recorded in 2017. At
constant prices, export of goods and services grew marginally by 0.5 per cent in 2018,
compared to 7.6 per cent growth recorded in 2017 while import of goods and services
recorded a slower growth of 1.8 per cent in 2018, in comparison to 7.1 per cent growth
recorded in 2017. Accordingly, net external demand at constant prices contracted at a
slower pace of 3.5 per cent in 2018, compared to 6.5 per cent contraction recorded in
2017. Reflecting the above developments, GDP at current prices which consists of GDE
adjusted for net external demand, amounted to Rs. 14,449.9 billion in 2018 recording a
growth rate of 7.7 per cent, compared to 11.9 per cent growth in 2017. At constant prices,
GDP grew by 3.2 per cent in 2018 in comparison to 3.4 per cent in 2017.

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 Reg. No: 618211854

According to the Daily fit (2019), One key proposal in Budget 2019 is to expand
Samurdhi to 600,000 people. Samurdhi is the largest social welfare program in the
country, which was allocated Rs. 43 billion in 2017 and already has about 1.4 million
families on its roster. Many analysts, and even politicians themselves, have admitted that
the selection process for the program has been less than ideal, with many families that are
not below the poverty line competing to receive Samurdhi funds.

Budget 2019 will attempt to adjust this but given that Sri Lanka has a high percentage of
near-poor families, inclusion remains attractive. The World Bank, in a 2016
benchmarking exercise, found Samurdhi has had a minor and decreasing impact on
poverty reduction. Samurdhi transfers are too small to make a large impact on poor
households’ budgets, as they contributed only 1.7% to household consumption of the
poorest 20% of the population in 2012/13. In other words, subtracting the Samurdhi
benefit from household consumption would increase the national poverty rate by 2.1%
points in 2020. But by 2012/13, the comparable figure had declined to merely 0.6%
points.

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 Reg. No: 618211854

Expansion of Samurdhi privileges Vs poor people by district.

One of the largest subsidies given in Sri Lanka is for fertilizer, the fertilizer subsidy,
which is about Rs. 15 billion in value, had been allocated each year to give farmers,
especially rice farmers, fertilizer at a concessionary cost. Daily Fit (2018) mentioned,
When the Government came to power in 2015 they changed the fertilizer subsidy into a
cash transfer system, which on the surface seemed to be a positive step. However, what
policymakers did not fully grasp was the inherent complications and issues in converting
the entire subsidy into a countrywide cash transfer system.

Initially the Government announced that all farmers should open state bank accounts to
get the money, but this ran into controversy after farmers protested the move as being too
complicated. The Government then backtracked and said any bank account would do.
Even after the cash was finally transferred they were unable to find fertilizer at that price
in the market. Then in a final twist of fate, there was a severe fertilizer shortage last year
just when the rice crop desperately needed it. All this came on top of the worst drought in
40 years. It was simply too much. 

Gain
to
buyer
–B
Gain
to

Supplier –F Welfare gain E+I

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 Reg. No: 618211854

After the subsidy farmers were unable to find the fertilizer at that market price, this
happened due to increased quantity of demand. This situation happen in short time period.
Because suppliers can’t address the whopping demand. In higher demand black market
will be created and that price max will be P2

Budget deficit

A budget deficit occurs when government expenses exceed government revenue and it

indicates the financial health of a country. It leads to an accumulation of public sector
debt. If the deficits are unsustainable, this can cause rising bond yields (higher interest
payments) and in the worst case, lead to a loss of confidence in the government. A nation
wishing to correct its budget deficit may need to cut back on certain
expenditures, increase revenue-generating activities, or using a combination of the two.

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 Reg. No: 618211854

There is another way to reduce government deficit is bailout. In some circumstances,

countries can be eligible for a bailout from an international organization, such as the IMF.
This means they can draw on temporary funds to help with temporary liquidity shortages.
The bailout may reassure investors and give the country more time for dealing with the
deficit. A bailout usually comes with strict instructions on reducing the deficit – this may
be politically easier when it is enforced from the outside. Sri Lanka is a member of IMF
since 1950 and Sri Lanka request a loan from IMF and it was arranged IMF loan of
US$1.5bn and it was approved on June 3rd, 2016.The final tranche of USD 164.1mn loan
that Sri Lanka was to receive in November 2018 with extension of one additional year. In
its statement the IMF declared that Sri Lankan authorities should renew their efforts to
strengthen SOE governance and transparency, including advancing a restructuring plan
for Sri Lankan Airlines and completing energy pricing reforms, building on important
progress with the implementation of the fuel pricing formula. If government take loans
from foreign source to budget deficit, it is positive impact to local investors. Because it
will reduce harness of local loanable funds. IMF loan can repay the interest and the
principle amount in installments. In fact, money borrowed from other countries can be
invested to spur the economy toward reviving GDP.

Savings

Saving is the source of the supply of loanable funds and supply comes from those who
have extra money to save or lend out. This lending can occur directly such as purchase of
a bond or directly as savings in bank. High interest rate make savings more attractive and
savings will increase. Because savers looking for a risk-free way to earn some interest on

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money, having with a high yield and less risk they will select savings. With new inland
revenue act, a five percent (5%) withholding tax is levied on the interest earnings on bank
deposits in the country and introduce new withholding tax on children’s bank savings
accounts under the age of 18, which minor accounts are having had more than 1.2 Mn.
After this daunting tax changes, that household peoples were discourage on savings, and
the any given interest rate this tax were affected. Hence the quantity of loanable funds
supplied at each rate savings were decreased and the supply of the loanable funds were
reduced. Most criticized issue was claim withholding tax on children’s savings.
Government expectation was to increase the tax revenue using low cost deposit. But
what happened is dwindle the minor savings and minor account tax was removed due to
displeasure remonstrance raised from phalanx.

Five percent (5%) withholding tax is levied on the interest earnings on bank deposits will
discourage the savers and saving will decrease SLF1 to SLF2. Meanwhile interest of the
loanable funds will increase r0 to r1 and reduce the loanable funds LF0 toLF1.

Investment

Investment can refer to any mechanism used for generating future income. Investment is
the source of demand for loanable funds and demand for the loans comes for households,
business and government, who wish to borrow to make investment. Low interest rates
make investment financed by borrowing more attractive. With lower interest rates
investment gives a relatively better rate of return because the cost of borrowing is low. At

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 Reg. No: 618211854

a low rate of investment, more projects will have a rate of return higher than the cost of
borrowing.

According to the vision 2025 plan introduced by good governance government in 2018,
the vision is to make Sri Lanka a rich county by 2025 and it will be doing so by
transforming Sri Lanka into the hub of the Indian ocean. Based on the enterprise Sri
Lanka Vision 2025, government introduce loan schemes. For some of these loans full
interest is paid by government. Some of such loans are Rs. 300,000 loan "Maadya Aruna"
for Registered journalists to purchase media equipment, Rs 50,000 "Diri Savi" for poultry
producers and the self-employed to purchase deep freezers, Rs 1.5Mn "Arambuma” for
Young graduates to start a business.75% interest paid by government for "Riya shakthi"
4Mn loan for owners of school service van to purchase a 32 seat school buses, Rs 500,000
loan for "Govi Navoda" for small scale farmers and farmer's organization to mechanize
cultivation activities.50% interest paid by government “Ran Aswenna1 ” Rs 1.5 Mn for
small farmers, “Ran Aswenna 2” 300Mn loan for agro & fish processing establishment
and “Ran Aswenna 3” loan of 750Mn for commercial scale farming."Rivi balasavi" loan
of 350,000 for house hold solar power units "Souduru Piyasa" 200,000 for House
renovation, “Green loan" of 1. Mn for small scall hotelier’s organic fertilizer producers.

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 Reg. No: 618211854

With new concessionary loan scheme will increase the loanable funds demand and
interest will be increase DLF1 to DLF2 due to high demand LF0 to LF1. That increase interest
portion r0 to r1 will bare by government.

Interest rate

Interest rate is the price of the loan. It represents the amount that borrowers pay for the
loans and the amount that lenders receive on their savings. Nominal Interest rate is the
interest rate as usually report -the money returns to savings and cost of borrowing. Real
Interest is one that has been adjusted for inflation. (Nominal Interest rate % -Inflation %)
Supply and the demand for the loanable funds depends on real interest rate.

In reality, Government budget deficit affect the real interest rate. When government
reduce national savings by running a budget deficit, the interest rise and investment fall. It
means that investment is important for long run economic growth. Government budget
deficit reduce economic growth rate. The government deficit is associated with an
increase in long-term interest rates. Any effort towards lowering the expected level of
future national savings places upward pressure on expected short-term interest rates.
Conversely, an increase in interest rates will result in an increase in future budget deficits,
lowering domestic investment and reducing the future level of output. This is because
domestic investment is mostly financed out of national savings.

Government use another way to cover budget deficit using bond assurance. This affects
the amount of liquidity. Treasury bonds impact the economy by providing extra spending
money for the government and consumers. This is because Treasury bonds are essentially
a loan to the government that is usually purchased by domestic peoples and institutes. For
a variety of reasons, foreign governments purchase a large percentage of Treasury bonds.
In effect, they are providing the government a loan. This allows to spend more, which
stimulates the economy. It also increases the government debt.

In the year 2015 February 27 , government advertised for treasury bonds of Rs.1 Billion.
And former governor Arjuna Mahendran orders to accept Rs.10 billion. Arjuna
Mahedran’s, decision causes interest rates to increase rapidly. Four months later PTL
sells same bonds to EPF at higher price. Infamous Perpetual Treasuries Limited makes

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over Rs.5 billion in profits after controversial bond issue. After that on 29th & 31st March
2016, former finance minister Ravi Karunanayake instructs state banks to bid low, but
violates assurance. State banks suffer opportunity loss and EPF bids low but buys same
bond from PTL in secondary market making millions in losses.2015 – 2016 , EPF
purchased 140 billion worth treasury -bonds from secondary market – 80 % from PTL.

Government budget deficit gets worse. Hence government have to borrow more and
government issued more bonds in 2015. The supply of bonds (demand for loanable funds)
will increase, bond prices will fall, and interest rates will rise.)

In above diagrams, the supply of bonds will increase and bond prices will fall. Therefore,
interest rates will rise .

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 Reg. No: 618211854

March 29 and 31 in year 2016 PTL start liquidating their savings (selling their bonds),
bond prices will fall, and interest rates will rise. former finance minister Ravi K.
instructed state banks to bid low. This caused current bond prices to fall and current
interest rates to rise. But EPF buys same bond from PTL high price in secondary market,
making losses in millions.

In above diagrams, the supply of bonds will decrease and bond prices will rise. Therefore,
interest rates will decrease.

Foreign Exchange Reserves

Foreign exchange reserves are assets held on reserve by a central bank in foreign
currencies. These reserves are used to back liabilities and influence monetary policy.
Foreign exchange reserves can include banknotes, deposits, bonds, treasury bills and
other government securities. These assets serve many purposes but are most significantly
held to ensure that a central government agency has backup funds if their national
currency rapidly devalues or becomes all together insolvent.

As
per
the

‘Economynext’ (2019), Sri Lanka's gross official

reserves dropped to 6,005 million US dollars in February 2019, down 147 million dollars

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 Reg. No: 618211854

from 6,152 million US dollars in January 2019,Foreign reserves are down 1.9 billion US
dollars from a peak of 7,914 billion reached in the current credit cycle which started with
the end of a 2015/2016 balance of payments crisis.Net foreign assets of the Central Bank
were down to about 4 billion US dollars by end-December2018.Sri Lanka's Central Bank
stopped collecting forex reserves in February 2018, suddenly halting sterilization auctions
(to mop up inflows), taking the first steps to generate monetary instability. In March, the
Central Bank terminated term reverse repo deals.

In April, active money printing began with tens of billions of rupees printed to generate
excess liquidity and enforce a rate cut. The Central Bank then let go of the peg with
excess liquidity remaining in the system undermining the credibility of the peg. Policy
improved slightly with interbank markets being kept short with partially sterilised
interventions and a rate hike in the second half of 2018, though permanent liquidity was
injected via a reserve ratio cut. The Central Bank depreciated the rupee from 153 to 180
to the US dollars in 2018 amid capital flight and exporter hold-backs with confidence
worsened by a political crisis in October. The Central Bank is still keeping interbank
markets short with overnight or term injections to sterilise earlier interventions, which
tends to support the rupee. In February, the Central Bank was a net buyer of 29 million
US dollars from the interbank market, reventing the rupee from floating cleanly and
moving higher.

Data showed that the Central Bank had also bought 33 million dollars in January just as
the currency stabilised with confidence returning to the market, while selling 36 million
dollars to enforce convertibility undertakings in both sides of the peg, signaling to forex
market participants about the latest level of the exchange rate that it was happy with. In
2017, the Central Bank depreciated the rupee, apparently for real effective exchange rate
(REER) targeting, despite mopping up inflows and generating a balance of payments
surplus, amid weaker domestic credit.

Analysts have warned that as long as the Central Bank injects new money into the
banking system while enforcing convertibility undertakings (pegging including a REER

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 Reg. No: 618211854

peg), it will not be able to collect forex reserves to repay debt.In March, Sri Lanka sold a
2.4 billion US dollar bond, replenishing reserves that were used to repay loans. In
January, reserves dropped due to loan repayments, although peg pressure had waned.

International Trade

International trade is the exchange of goods and services between countries. International
trade gives rise to a world economy, in which prices, or supply and demand, affect and
are affected by global event. Trading globally gives consumers and countries the
opportunity to be exposed to goods and services not available in their own countries.
Almost every kind of product can be found on the international market: food, clothes,
spare parts, oil, jewelry, wine, stocks, currencies, and water. Services are also traded like
tourism, banking, consulting and transportation. A product that is sold to the global
market is an export, and a product that is bought from the global market is an import.
Imports and exports are accounted for in a country's current account in the balance of
payments.

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 Reg. No: 618211854

Foreign trade shift supply curve to the right.

Sri Lanka Current account

deficit

The Generalized Scheme of Preferences (GSP) of the European Union (EU) is a trade

arrangement that allows developing countries to pay less or no duties on their exports to

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 Reg. No: 618211854

the EU. The EU offers GSP programs to help vulnerable countries to reduce poverty,
improve governance and foster a process of sustainable development. Generalized
Scheme of Preferences Plus (GSP+) is a special component of the GSP scheme that
provides additional trade incentives to developing countries already benefitting from
GSP. The EU introduced GSP+ with the aim of providing more extensive market access
than the standard GSP scheme, giving beneficiary countries duty free access to EU
markets for over 7200 products. Sri Lanka has been a beneficiary of the EU’s standard
GSP since the scheme’s inception, and it began to benefit from GSP+ on 15 July 2005.
However, on 15 August 2010, the EU suspended Sri Lanka’s GSP+ status.

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 Reg. No: 618211854

The European Union (EU) reinstated the EU GSP Plus facility to Sri Lanka with effect
from 19 May 2017. Importantly, this will provide Sri Lankan exports a level playing field
with other countries.

According to the Daily Fit (2018), After regaining GSP+ Overall, EU exports are increase
by 11% in the last 12 months. Apparel accounts for nearly 60% of exports and has grown
~8%. Apparel volume growth has outstripped revenue by 1-2%, suggesting modest
sharing of pricing benefit with customers Last two months’ exports have been strong. An
estimate of the increase in jobs for the apparel sector along is at least 7,500… excludes
locally-sourced fabric. We have already achieved an increase in exports of $150m which
is ~1/3rd of our stated target of $500m increment for the apparel sector.

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 Reg. No: 618211854

Hasitha Premaratne, Group Finance Director of leading apparel exporter, Brandix Group,
commented: “The apparel sector promotes inclusive growth and job creation. It is not just
the big three (Brandix, MAS, Hirdaramani) manufacturers that have had an immediate
uplift in EU volumes from the GSP concession but many SME manufacturers, local fabric
producers such as Teejay and Hayleys Fabric, other participants in the value chain (e.g.
trim suppliers, packaging, logistics), and thousands of operators, who we are obliged by
the EU to pass on benefits to.

Other notable growth sectors are fisheries and tyres .Fisheries volume of exports has
literally doubled since the removal of the fish ban and regaining GSP Plus , business links
restored and new orders received. Rubber tyres and gloves volume growth is lower than
value, suggesting benefits from pricing increases and the strengthening euro.In 2017, Sri
Lanka had the highest ever export earnings of 15.1 billion dollars and this year it may rise
further to 17.4 billion dollars. 2017 was also a record year for foreign investment. FDI
inflow was a record 1.9 billion dollars last year and in 2018 it may rise to around 2.5
billion dollars. 

When consider subsidy impact to export county and import country. Sri Lanka is a small
exporter when considering world market Therefore, Sri Lankan exporters can’t influence
to world price. Consumers of the product in the exporting country experience a decrease
in well-being as a result of the export subsidy. The increase in their domestic price lowers
the amount of consumer surplus in the market. Export subsidy effects on the exporting
country's producers. When we consider in import country side the decrease in the price of
both imported goods and the domestic substitutes increases the amount of consumer
surplus in the market. Export subsidy effects on the importing country's producers.
Producers in the importing country suffer a decrease in well-being as a result of the
export subsidy

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 Reg. No: 618211854

As per the above graphs, world price is P w, After subsidy domestic price will increase
same as subsidy amount. Because exporter will be able to get more income using subsidy.
Therefore, domestic price will increase to Ps. and export quantity will increase to D2 to S2.

Tariff

A tariff is a tax imposed by a government on goods and services imported from other
countries that serves to increase the price and make imports less desirable, or at least less
competitive, versus domestic goods and services. Tariffs are generally introduced as a
means of restricting trade from particular countries or reducing the importation of specific
types of goods and services. Sri lanka governmet use this terrif to contol import and
increase the tax revenue . eg vehicles,b-oniance garlic rice,petrol,diesel,curd oil.

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Sri Lanka Ministry of Finance announced that the special commodity levy on imported
big onions and potatoes had been increased with effect from May 2nd 2018.In such
situation. Price of onions and potatoes were increased by imposed tariff.in below graph
price increased to P to P1 and quantity of imports were constriction from Q1-Q2 to Q3-Q4.
Government revenue will increased.

Foreign Direct Investment

A foreign direct investment (FDI) is an investment in the form of a controlling ownership

in a business in one country by an entity based in another country. It is thus distinguished
from a foreign portfolio investment by a notion of direct control.

In 2017, Foreign Direct Investment (FDI) into Sri Lanka grew to over $1,710 billion
including foreign loans received by companies registered with the BOI, more than

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doubling from the $801 million1 achieved the previous year and to facilitate Foreign
Direct Investment (FDI), Sri Lanka launched an innovative online one-stop shop to help
investors obtain all official approvals. To mark the occasion, this blog series explores
different aspects of FDI in Sri Lanka.

Rupee Devaluation

Devaluation is the decision to reduce the value of a currency in a fixed exchange rate. A
devaluation means that the value of the currency falls. Domestic residents will find
imports and foreign travel more expensive. However domestic exports will benefit from
their exports becoming cheaper.

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 Reg. No: 618211854

When Good governance government minister Ravi Karunanayake was sworn in as the
Minister of Finance in January 2015, the Sri Lankan rupee stood at 134.03 rupees against
the US Dollar. During his tenure of two and a half years, the Sri Lankan rupee
depreciated by 15.3% - Rs. 20.5, to Rs. 154.53 against the US dollar by the end of May
2017.Karunanayake’s successor Mangala Samaraweera was thereafter sworn in as the
Minister of Finance in May 2017. The Sri Lankan rupee which then stood at 154 rupees
against the US Dollar plunged to a new low of Rs. 160 against the US Dollar by June
2018.By the 20th of September 2018, the rupee further plunged to Rs. 170 against the US
dollar. Thereafter, within a period of two months, the rupee further depreciated by another
ten rupees, and by the 23rd of November 2018, the rupee plunged to Rs. 180 against the
US Dollar.During Minister Mangala Samaraweera’s tenure as the minister of finance, the
Sri Lankan rupee has depreciated by 19.11% or by approximately Rs.30

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 Reg. No: 618211854

With rupee devaluation net export will rise due to high income. An increase in aggregate
demand cause to expansion of aggregate supply leading to a higher equilibrium level of
national output (increase real GDP).

Advantages of devaluation

Exports become cheaper and more competitive to foreign buyers. Therefore, this provides
a boost for domestic demand and could lead to job creation in the export sector. A higher
level of exports should lead to an improvement in the current account deficit. This is
important if the country has a large current account deficit due to a lack of
competitiveness. Higher exports and aggregate demand (AD) can lead to higher rates of
economic growth. Devaluation is a less damaging way to restore competitiveness than
‘internal devaluation‘. Internal devaluation relies on deflationary policies to reduce prices
by reducing aggregate demand. Devaluation can restore competitiveness without reducing
aggregate demand. With a decision to devalue the currency, the Central Bank can cut
interest rates as it no longer needs to ‘prop up’ the currency with high interest rates.

Disadvantages of devaluation

Devaluation is likely to cause inflation because all imports will be more expensive and
aggregate Demand (AD) increases – causing demand-pull inflation. Firms/exporters have
less incentive to cut costs because they can rely on the devaluation to improve
competitiveness. The concern is in the long-term devaluation may lead to lower
productivity because of the decline in incentives. Thus, reduces the purchasing power of
citizens abroad. e.g. it is more expensive to buy essential good like milk powder, sugar,

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 Reg. No: 618211854

dhal . It will impact to reduced real wages. In a period of low wage growth, a devaluation
which causes rising import prices will make many consumers feel worse off. Large and
rapid devaluation may discourage international investors. It makes investors less willing
to hold government debt because the devaluation is effectively reducing the real value of
their holdings. In some cases, rapid devaluation can trigger capital flight. If consumers
and government have debts, e.g. mortgages in foreign currency – after a devaluation, they
will see a sharp rise in the cost of their debt repayments. This occurred in Sri Lanka now,
when many had taken out a loans in foreign currency and after the devaluation it became
very expensive to pay off loans.

Suggestions to enhance the economic Performance in Sri Lanka.

Sri Lanka is a beautiful country that carries a lot of historical cultural significance with
having natural resources. First Country should have one strategic plan and that plan
should carry forward by every government. Every government Major responsibility
should be national security of the country. As an example ester Sunday attack is a clout
for Sri Lankan tourisms sector. Because more than any other economic activity, the
success or failure of a tourism destination depends on being able to provide a safe and
secure environment for visitors. As a result, foreign direct investment, arrivals of tourist
was decrease. Tourism and remittances are two of the top contributors to foreign
exchange earnings to Sri Lanka. Tourism in third place, accounting for over USD 4
billion in foreign exchange earnings. Hence, government should get immediate action to
increase and ensure Sri Lanka as a safest place to tourism such as increase the
government security/ government can attract tourists using famous character like
Dilantha Malagamuwa, Sri Lankan Cricket team to improve prestige of Sri Lanka.
Government can encourage local tourists giving finance concessionary period for hotel
owners giving tax exemption (VAT/NBT/PAYE).Sri Lanka is an island in the Indian
ocean. We can increase and major use this for fisheries activities and establish a salmon
factory to export salmon fish. We can establish a new sea plan services for tourist. To
reduce time wasting need to introduce internal flight service at lowest price. Sri Lanka
have more educated people Hence we can send well educated and experience, skillful
labours to foreign then we can increase our foreign revenue.

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 Reg. No: 618211854

Sri Lanka road have more traffic due to most of the people use private vehicles for
transportation. This issue was due to Sri Lanka dosen’t have efficient public transport
system. Hence need to develop efficient public transport service and need to establish
public car parks in bus/train stations, because people will use their own vehicles ,comes to
station. then we can reduce our city traffic in the country it will impact (reduce)to demand
of petrol diesel. need to reduce tax on electric cars and buses to encourage electric
vehicles.

Reference List

1. Somarathne, L 2019, ‘Evaluation of economic performance 4 years into

Yahapalana Government’, Daily fit, 18 January, Viewed 387 2019,
http://www.ft.lk/columns/Evaluation-of-economic-performance--4-years-into-
Yahapalana-Government/4-671080
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 Reg. No: 618211854

2. Hiru news,2017 Government announce 15% salary increase for public sector from
January, viewed 38363 November 2017,
http://www.hirunews.lk/176060/government-announces-15-salary-increase-for-
public-sector-from-january
3. Fernando, N 2018,’ Public sector salaries, pensions to gobble 44% of govt.
revenue this year’, Daily Mirror, 17 September 2018,
http://www.dailymirror.lk/article/Public-sector-salaries-pensions-to-gobble-of-
govt-revenue-this-year--155593.html
4. Daily Fit 2019, ‘Pension problems’, Daily fit, 27 February, viewed 97 2019,
http://www.ft.lk/ft-view/Pension-problems/58-673589
5. Bandula,S 2019, ‘60 + age designated as Sri Lanka senior citizen for banking
purposes’, Daily Mirror,19 May 2019,
http://www.sundaytimes.lk/190519/business-times/60-age-designated-as-sri-
lanka-senior-citizen-for-banking-purposes-349502.html
6. Colombo page 2018, ‘Sri Lanka’s new tax Act comes in to effect from today’, 01
April 2018,
http://www.colombopage.com/archive_18A/Apr01_1522552569CH.php
7. Arunathilake N & Jayawadene P 2017, ‘Distribution and revenue implications of
Sri Lanka’s new Inland Revenue Act’ Daily Mirror, 26 September 2017,
http://www.dailymirror.lk/article/Distribution-and-revenue-implications-of-Sri-
Lanka-s-new-Inland-Revenue-Act-137279.html
8. Times online 2019, ‘Children's savings accounts exceeding Rs 1.2 million to be
taxed’ Times online 13 March, viewed 205 2019,
http://www.sundaytimes.lk/article/1076265/childrens-savings-accounts-
exceeding-rs-500000-to-be-taxed
9. Sirimanna B 2018, ‘Lanka’s private sector professionals up in arms against new
PAYE tax’ Sunday times, 06 May , viewed 327 2018,
http://www.sundaytimes.lk/180506/business-times/lankas-private-sector-
professionals-up-in-arms-against-new-paye-tax-292591.html
10. Sunday times 2018, ‘Mathematics of fuel pricing’ Sunday times22 July 2018
viewed 1053, http://www.sundaytimes.lk/180722/business-times/mathematics-of-
fuel-pricing-303479.html

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11. Daily fit, ‘Welfare and budgets’ , Daily Fit ,07 March, Viewed 70 2019,
http://www.ft.lk/ft-view/Welfare-and-budgets/58-674119
12. Daily fit, ‘Fertilizer subsidy’ , Daily Fit ,09 April, Viewed 768 2018,
http://www.ft.lk/ft-view/Fertiliser-subsidy/58-653021
13. Daily fit, ‘The International Monetary Fund and Sri Lanka’ , Daily Fit ,26
February, Viewed 506 2019, http://www.ft.lk/opinion/The-International-
Monetary-Fund-and-Sri-Lanka/14-673511
14. Economynext, ‘Sri Lanka forex reserves drop to US$6,005mn in Feb’
,Economynext, 18
March2019,.https://economynext.com/Sri_Lanka_forex_reserves_drop_to_US$6,
005mn_in_Feb-3-13755-1.html
15. Daily fit, ‘GSP Plus impact’ , Daily Fit ,20 August, Viewed 2602
2018.http://www.ft.lk/opinion/GSP-Plus-impact/14-661186
16. http://www.asiantribune.com/node/92540
17. https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annua
l_report/2018/en/6_Chapter_02.pdf

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