Demonetisation | The story so far

Sri Lanka’s demonetisation pinched only the rich

Down memory lane: A man counts Sri Lankan rupees at a money exchange counter in Colombo. Sri Lanka demonetised 50 and 100 rupee notes in the early 1970s.   | Photo Credit: DINUKA LIYANAWATTE

As India grapples with the implications of demonetisation, many Sri Lankans are watching it keenly. Not just those planning a trip across the Palk Bay but also others who remember a similar exercise undertaken by the Sri Lankan government in the early 1970s to declare 50 and 100 rupee notes illegal tender.

It was the initiative of N.M. Perera, a renowned Left politician who was then Finance Minister. The Trotskyist Lanka Sama Samaja Party (LSSP) he led was in the coalition government, led by Sirimavo Bandaranaike of the Sri Lanka Freedom Party.

The LSSP’s current leader, Tissa Vitharana, said the initiative came when there was evidence that large amounts of money had been out of the banking system. “There was a feeling that people had not declared their wealth for taxation,” said Mr. Vitharana, who served as a Cabinet Minister in the government of Mahinda Rajapaksa.

Unique exercise

Many economists have deemed the exercise unique in Sri Lanka’s monetary history.

“In the process, the details of the owner were passed on to the Department of Inland Revenue. With this information, it was possible to rope in additional sums of tax,” wrote economist Saman Kelegama, in his commentary on N.M. Perera’s Policies and Achievements as Finance Minister, a book authored by senior academic Buddhadasa Hewavitharana.

“There was not as much chaos as there seems to be in India now,” said former cricket administrator and businessman Chandra Shaffter, who was on a visit to India, when The Hindu contacted him. “At that time in Sri Lanka, ordinary citizens were not inconvenienced, only the rich who had hoarded money complained,” he recalled.

According to W.D. Lakshman, economist and former Vice-Chancellor of the University of Colombo, the exercise brought a substantial amount back into the banking sector and helped maintain a healthy tax-to-GDP ratio. “It was a very innovative attempt. N.M. Perera had a long history of activism,” he said.

“Ordinary people responded positively, while the upper middle class, particularly those who had kept money hoarded, had an issue,” Prof. Lakshman said. It was, some observed, part of a general resentment at the Leftist leader whom the wealthier classes saw as bad for business. Not very long after, Prime Minister J.R. Jayawardene, who won a massive mandate in the next general election, liberalised the economy in 1977.

The positive response of the ordinary citizens was also to do with the strong banking sector in the early 1970s, Prof. Lakshman said

The move hurt only those who had a lot of cash on hand, not others, said Devanesan Nesiah, a civil servant at that time. .

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Printable version | Jan 18, 2022 9:57:38 AM |

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