Indian High Commissioner to Sri Lanka, Santosh Jha, met with Defence Secretary Air Vice Marshal (Retd) Sampath Thuyacontha at the Defence Ministry in Sri Jayawardenepura, Kotte, on February 07 to discuss strengthening defence cooperation between the two nations.

Accompanied by Defence Adviser Captain Anand Mukundan and Assistant Defence Advisor Lieutenant Colonel Mandeep Singh Negi, the Indian envoy was warmly received by the Sri Lankan Defence Secretary.

Discussions focused on deepening defence collaboration, regional security, and maritime cooperation. The Indian High Commissioner reaffirmed India’s commitment to supporting Sri Lanka in counter-terrorism efforts, maritime security, and disaster response.

In response, the Sri Lankan Defence Secretary expressed gratitude for India’s continued assistance and highlighted the importance of defence partnerships in ensuring regional stability and security.

The meeting concluded with an exchange of mementoes, and the Military Liaison Officer of the Ministry of Defence also participated in the discussions.

President Anura Kumara Dissanayake has appointed a High Commissioner and four Ambassadors to represent Sri Lanka in its diplomatic service. These appointments, made during a formal ceremony at the Presidential Secretariat, have drawn criticism from the Sri Lanka Foreign Service Association (SLFSA), which has raised concerns over the selection process.

Following the appointments, the newly designated diplomats engaged in a brief discussion with the President, who expressed confidence in their abilities. He underscored their responsibility in strengthening Sri Lanka’s bilateral relations and promoting the country’s interests on the global stage. Additionally, he emphasized the importance of improving Sri Lanka’s international image through proactive diplomatic engagement.

President Dissanayake also highlighted the need to ensure fair and equitable welfare services for Sri Lankan expatriates, particularly those working in regions such as the Middle East, South Korea, and Japan. He urged the newly appointed envoys to prioritize the well-being of migrant workers and offer necessary support without discrimination.

The President further stressed Sri Lanka’s aspirations for economic development, calling on diplomats to facilitate increased foreign investments and expand international market opportunities for local entrepreneurs. He assured them of the government’s full support in achieving these objectives and announced plans to assess progress through follow-up discussions.

Despite these assurances, the SLFSA has expressed serious reservations regarding the appointments, arguing that several Head of Mission (HOM) positions have been assigned to individuals outside the Sri Lanka Foreign Service (SLFS). The association contends that this move undermines professionalism, meritocracy, and diplomatic expertise, disregarding established norms.

In a media statement, the SLFSA voiced its disappointment, emphasizing that experienced career diplomats, who have dedicated their professional lives to advancing Sri Lanka’s foreign policy, were overlooked. The association pointed out that the SLFS consists of highly trained specialists who are specifically prepared to manage Sri Lanka’s international relations. Appointing political figures rather than career diplomats, they argue, compromises the integrity of the Foreign Service and weakens Sri Lanka’s diplomatic standing.

Furthermore, the SLFSA noted that these decisions contradict the promises made in the government’s 2024 election manifesto, which pledged to prioritize the appointment of professional diplomats with proven expertise. The manifesto emphasized selecting candidates based on merit and ethical conduct while upholding diplomatic discretion. The SLFSA insists that immediate corrective action is necessary to depoliticize the Foreign Service and ensure that future appointments are based on merit rather than political affiliations.

The association expressed deep concern over the continuation of a long-standing practice where diplomatic positions are awarded as political favors, a tradition they had hoped would end under the current administration. The SLFSA warns that this approach demotivates career diplomats who have undergone rigorous training and possess significant international experience.

Despite multiple requests for discussions with the President and the Minister of Foreign Affairs, Foreign Employment, and Tourism, the SLFSA has yet to secure a meeting to address these concerns. The association remains committed to seeking engagement with the government to advocate for a Foreign Service based on professionalism and merit

The International Monetary Fund (IMF) has urged the Sri Lankan government to implement tax reforms and manage expenditures to address ongoing budget deficits. The IMF emphasized the necessity of aligning government spending with revenue and continuing progressive tax policies to ensure economic stability.

The newly elected administration has introduced tax reforms aimed at easing financial burdens on individuals and small businesses that have struggled with inflation and rising living costs. However, these changes have drawn scrutiny from the IMF. A comprehensive assessment of the tax measures will be included in an upcoming staff report, which will be presented to the IMF’s Executive Board.

If approved, this will facilitate the release of a $333 million tranche under the Extended Fund Facility program, according to Julie Kozack, Director of the IMF’s Communications Department.

Kozack addressed media queries in Washington, stating that the Sri Lankan government must adhere to the IMF-supported economic reform agenda, including specific preconditions, before securing further financial assistance.

A former treasury secretary with extensive experience in IMF negotiations warned that deviating from IMF recommendations could strain Sri Lanka’s relationship with the institution and hinder access to future foreign funding.

The IMF’s bailout package for Sri Lanka is centered on economic stabilization, including fiscal reforms such as tax increases and debt restructuring.

 President Anura Kumara Dissanayake, who also serves as the Finance Minister, has proposed raising the income tax-free threshold from Rs 100,000 to Rs 150,000.

While this adjustment offers relief to taxpayers, it may lead to a revenue shortfall if a significant portion of the tax base becomes exempt. To counterbalance this, the President has suggested increasing the Withholding Tax (WHT) rate from 5% to 10%.

Additional tax policy changes include VAT exemptions for locally produced yogurt and dairy products, which may reduce government revenue.

Meanwhile, tax exemptions on export services will be eliminated, with a new concessionary rate of 15%, potentially making Sri Lanka less competitive compared to nations that maintain lower tax rates for export-driven industries.

To support low-income groups, the President announced that pensioners and individuals earning below the Rs 150,000 tax threshold can apply for lower withholding tax rates or complete exemption through the Inland Revenue Department.

 Moreover, under the third IMF review, the government has committed to removing VAT on local fresh milk and yogurt to enhance child nutrition.

The IMF has proposed further tax reforms, effective January 1, 2025, to increase Sri Lanka’s tax-to-GDP ratio to 14% by 2026. These measures include new taxes, adjusted rates, and the removal of exemptions to achieve fiscal sustainability.

Notable changes include an imputed rental income tax on residential properties, expected to generate 0.15% of GDP in 2025, and a VAT increase on digital services to 18%, contributing an additional 0.08% of GDP.

Other reforms involve higher corporate income taxes on industries such as tobacco and betting, a doubling of stamp duties on leases, and the removal of the Simplified VAT (SVAT) system, which will increase administrative requirements for businesses.

Additionally, the lifting of import restrictions on vehicles and goods is anticipated to contribute 0.8% of GDP but may intensify competition for local industries.

While these reforms aim to enhance revenue generation and economic equity, they are also expected to raise costs for consumers, businesses, and property owners.Short-term inflationary pressures may arise, but improved tax compliance and reduced evasion could strengthen fiscal stability in the long run. Despite the immediate challenges, the IMF asserts that these measures are crucial for Sri Lanka’s economic recovery and long-term debt sustainability

The Central Bank of Sri Lanka (CBSL), through its Financial Intelligence Unit (FIU), has intensified efforts to combat money laundering and other financial crimes within the gem and jewelry industry. This sector, already burdened by high taxation, has been a focal point for regulatory scrutiny.

The FIU has conducted awareness programs on Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) compliance obligations, aiming to educate industry participants. These initiatives are part of Sri Lanka’s preparations for the 2025 international evaluation of its AML/CFT framework, a critical step in maintaining the country’s global reputation and securing market access.

Key measures include training on the Financial Transactions Reporting Act (FTRA) and Customer Due Diligence (CDD) requirements, particularly for gem transactions exceeding USD 15,000. However, despite these regulatory efforts, much of the gem trade in Ratnapura and Beruwala remains informal. Reports indicate that only 12% of daily transactions—valued at over Rs. 10 billion—pass through legal channels, while informal financial systems such as hawala are widely used. These unregulated methods circumvent banking oversight, complicating enforcement, according to a senior official from the National Gem and Jewellery Authority.

Although Sri Lanka’s gem exports are expected to reach USD 2 billion annually by 2025, the industry is currently facing significant setbacks. Export revenue dropped 20.9% in the first eight months of 2024, falling to USD 212.8 million from USD 268.8 million the previous year. Industry insiders attribute this decline to the imposition of an 18% Value Added Tax (VAT) on both rough and finished gemstones. This tax applies to both re-exported gems and those sold to foreign tourists, diminishing Sri Lanka’s competitiveness against major trading hubs such as Dubai, India, Hong Kong, and Thailand.

The lack of financial support has further hampered the industry’s growth, as banks generally do not provide loans to gem traders, forcing them to rely on personal capital. Additionally, the absence of a VAT refund mechanism on foreign currency sales has further deterred traders. The national risk assessment has classified money laundering risks in the gem sector as moderate, prompting calls for stronger AML/CFT measures. These include enhanced due diligence for politically exposed persons (PEPs), transaction monitoring, and internal control systems.

The predominance of cash transactions without receipts makes VAT compliance challenging and obscures fund tracking. The Finance Ministry estimates that taxing local gem sales could generate Rs. 38 billion annually, a crucial contribution to Sri Lanka’s struggling economy. However, illegal gem exports continue, with authorities identifying at least 45 regular smugglers transporting valuable stones to Bangkok and other destinations. Reports also suggest corruption among certain customs officials facilitating these illicit transactions.

Compounding the issue, smuggled gemstones from Madagascar and Burma are entering Sri Lanka’s market, being falsely sold as locally sourced gems. This practice damages Sri Lanka’s reputation and deceives buyers. Additionally, undervaluation in the mining sector leads to significant tax revenue losses.

In response, the FIU has underscored the need for gem dealers to register, report suspicious transactions, and adhere to international AML/CFT standards. These measures aim to improve transparency, curb illicit financial activities, and ensure the long-term sustainability of Sri Lanka’s gem industry.