October 12, Colombo (LNW): Sri Lanka’s poverty rates continued to rise for the fourth year in a row, with an estimated 25.9% of Sri Lankans living below the poverty line in 2023. Labor force participation has also seen a decline, particularly among women and in urban areas, exacerbated by the closure of micro, small, and medium-sized enterprises (MSMEs).
Households are grappling with multiple pressures from high prices, income losses, and under employment. This has led to households taking on debt to meet food requirements and maintain spending on health and education.
“Sri Lanka’s economy is on the road to recovery, but sustained efforts to mitigate the impact of the economic crisis on the poor and vulnerable are critical, alongside a continuation of the path of robust and credible structural reforms,” emphasized Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal and Sri Lanka.
“This involves a two-pronged strategy: first, to maintain reforms that contribute to macroeconomic stability and second, to accelerate reforms to stimulate private investment and capital inflows, which are crucial for economic growth and poverty reduction.”
Lower-income households in Sri Lanka spend 10% of their income on value-added tax (VAT), while the wealthiest contribute 95% of pay-as-you-earn (PAYE) and personal income tax (PIT), according to the Institute of Policy Studies (IPS).
At the launch of the state of the economy report 2024, IPS Research Economist Priyanka Jayawardena highlighted ongoing issues with tax evasion, noting that only 48 billion rupees of the expected 131 billion PIT revenue for 2023 was collected.
Jayawardena pointed out that recent VAT hikes and exemption removals have disproportionately affected the poorest households, with the bottom 10% paying about 10% of their income on VAT compared to 6% for the wealthier. Macroeconomic policies have further hit the poor through inflation and currency depreciation.
In contrast, excise taxes on alcohol and tobacco are more progressive, with the wealthiest paying nearly half of these taxes. The poorest households consume less legal alcohol due to high excise duties.
Reforms were suggested to balance VAT with increased excise taxes to create a fairer tax system. The discussion also noted that public service pensions favor wealthier households, with a proposal to shift towards a contributory pension scheme.
