ECONOMYNEXT – Sri Lanka expropriated and now state-run Pelwatte and Sevenagala sugar firms are burying ethanol, State Minister for Primary Industries Chamara Dasanayake said, after a tax hike on top of a currency fall led to a collapse in demand.
“What the less affluent people drank was ‘extra special (athi vishesha),” Dasanayake told parliament.
“The cost of production is 1,200 rupees but it is sold at 3,200 rupees. The economic experts (arthiker osthar) are advocating high taxes but what they do not know is there is moonshine (kasippu) in this country.”
Before the Covid-19 crisis, a bottle of arrack made with cane sugar ethanol (coconut toddy arrack is more expensive), was 1,900 rupees, leading to taxes close to 2,000 rupees, he said.
“In some bars sales are down 25 to 75 percent,” Minister Dasanayake said. “If the government wants more revenue it will have to reduce the 2,000 rupee gain and boost legal consumption.”
Sri Lanka’s legal alcohol producers are not buying ethanol produced at state-run Sevenagala and Pelwatte sugar firms and the material is piling up.
“There are about 10 lacks (million) barrels of ethanol piled up. Alcohol firms with licenses are not buying. They are burying ethanol in the ground.”
“Before 2019 imports were banned, ethanol was being imported to the country. But now there are no buyers.”
Sri Lanka banned imports to give more profits to politically connected and state-run ethanol producers at the expense of tax losses to the state, critics say.
However Dasanayake told parliament Pelwatte and Sevenagala sugar firms were willing to give ethanol at a lower price now.
Central Bank Cycles
In Sri Lanka alcohol and chicken consumption usually falls after the central bank cuts rates with liquidity injections to boost growth and triggers a currency and economic crisis and then imposes an economic slowdown to stop a balance of payments crisis.
Like alcohol firms, Sri Lanka’s poultry firms also get hit after a currency crisis.
In the latest currency crisis where a surrender rule led to the failure of a float, the rupee collapsed steeply from 200 to 360 to the US dollar driving up inflation to 70 percent, sharply reducing the disposable income of the population and tipping many people below the poverty line.
Industry officials say sales are down to around 40 percent from pre-crisis levels in many alcohol factories.
In addition to inflation reducing disposable income, there were other fallouts of currency crises driven by rate cuts in the stabilization period. The construction sector also slows after a currency crisis.
The small 185 ml bottle (Karley bothalaya) which was easiest on the purse used to sell in urban areas heavily due to the construction sector.
“When the construction sector slows, the people go back to their villages,” an industry official said.
“We do not know what they drink there, but legal arrack sales fall.”
Personal Income Taxes
The income tax hikes have further reduced the sale of large full bottles (750 ml).
“Even the higher income people can no longer afford to drink at the increase in income taxes. They have to pay children school fees, and meet housing and lease payments,” the person said.
“Instead they are looking for jobs outside the country.”
“Not just young people but people in their 50s are now looking to at least go abroad and work the few years they have left and save something. There is no savings.”
Minister Dassanayake said in his electorate in the Badulla District there was a steep increase in kasippu consumption among the people resident in plantations. (Colombo/Oct23/2023)
