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The 2012 Budget is a catalyst for future growth, despite the surprise announcement of the 3 percent rupee depreciation, which compromised the Central Bank’s autonomy and could have serious long term consequences, Religare Capital Markets Limited said in a special report.
The Religare report said: "The Sri Lankan government presented a development oriented Budget for year 2012, providing support to almost all key segments of society and economy. The government has done an excellent job by sticking close to the budget deficit milestones in the framework announced two years ago, targeting to bring it down to 6.2% of GDP from estimated 7% in 2011, without cutting down public investments.
However, in a surprise move that may be seen by many as compromising on the autonomy of the central bank, the President announced in the Budget speech the decision to let the Sri Lankan Rupee (LKR) devalue by 3% with immediate effect, in a bid to maintain export competitiveness and further promote tourism.
We believe that the budget is positive for tourism, automobiles, agro-based, textile and export based industries. At the same time, the telecommunications sector is likely to suffer a decline in profitability because of an increase in tariffs on incoming and outgoing international calls. Overall, the 2012 Budget has a series of policy reforms, as expected by us in our last monthly (Macrosphere), aiming to further strengthen the country’s position as a rapidly expanding, export orientated economy.
Focus on public investments: Receipts are budgeted to grow at 19.8% YoY to LKR 1106bn in 2012 (see table). The taxes on external trade and commercial collections on goods & services are likely to be the major contributors, accounting for more than 80% of the total tax collections. On the expenditure front, public investment is budgeted to grow at 27.9% YoY, underlining government’s emphasis on creating world class infrastructure to sustain 8%+ growth over this decade. The government plans additional expenditure on various welfare schemes aimed at low income families, child and women protection.
Budget deficit at 6.2% of GDP: The government estimates the budget deficit at 6.2% of GDP, down from 8%/7% over 2010/2011. The government plans to reduce the budget deficit to 5% levels by 2014 (see table). The government debt, which had ballooned during the war, is also forecasted to come down to 66% of GDP by 2014 from of 82% in 2010.
LKR devaluation announcement surprises, aimed to aid exports and tourism: The President, in his Budget speech, surprised the markets, by announcing the decision to let the LKR depreciate by 3% with immediate effect. The move compromises the central bank’s autonomy, and may have serious long term consequences. The move will aid tourism and export oriented sectors, but also push up imported raw material prices and reduce margins going forward. The adversely effected sectors are demanding a duty entitlement scheme, popular in many emerging economies. The depreciation of currency along with 10% salary hike is also likely to build inflationary pressures in the economy.
Tax holiday and banking sector impact: A tax holiday of 4-6 years for investments in the range of LKR 50-300mn is proposed for investments in the SME sector. Banks with dedicated SME branches will pay a lower tax rate of 24% as against 28% previously. Sri Lanka is a net importer of cement, steel, pharmaceuticals, fabrics and milk powder and entities producing them will be entitled for a five-year tax holiday and then concessionary tax rate of 12%.
Telecom: The sector is likely to get doubly hit from increase in charges on both incoming and outgoing international calls - US$ 2 cents and LKR 1.0 respectively. The companies might find it difficult to pass this burden entirely with the current level of competition."http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=39726
The Religare report said: "The Sri Lankan government presented a development oriented Budget for year 2012, providing support to almost all key segments of society and economy. The government has done an excellent job by sticking close to the budget deficit milestones in the framework announced two years ago, targeting to bring it down to 6.2% of GDP from estimated 7% in 2011, without cutting down public investments.
However, in a surprise move that may be seen by many as compromising on the autonomy of the central bank, the President announced in the Budget speech the decision to let the Sri Lankan Rupee (LKR) devalue by 3% with immediate effect, in a bid to maintain export competitiveness and further promote tourism.
We believe that the budget is positive for tourism, automobiles, agro-based, textile and export based industries. At the same time, the telecommunications sector is likely to suffer a decline in profitability because of an increase in tariffs on incoming and outgoing international calls. Overall, the 2012 Budget has a series of policy reforms, as expected by us in our last monthly (Macrosphere), aiming to further strengthen the country’s position as a rapidly expanding, export orientated economy.
Focus on public investments: Receipts are budgeted to grow at 19.8% YoY to LKR 1106bn in 2012 (see table). The taxes on external trade and commercial collections on goods & services are likely to be the major contributors, accounting for more than 80% of the total tax collections. On the expenditure front, public investment is budgeted to grow at 27.9% YoY, underlining government’s emphasis on creating world class infrastructure to sustain 8%+ growth over this decade. The government plans additional expenditure on various welfare schemes aimed at low income families, child and women protection.
Budget deficit at 6.2% of GDP: The government estimates the budget deficit at 6.2% of GDP, down from 8%/7% over 2010/2011. The government plans to reduce the budget deficit to 5% levels by 2014 (see table). The government debt, which had ballooned during the war, is also forecasted to come down to 66% of GDP by 2014 from of 82% in 2010.
LKR devaluation announcement surprises, aimed to aid exports and tourism: The President, in his Budget speech, surprised the markets, by announcing the decision to let the LKR depreciate by 3% with immediate effect. The move compromises the central bank’s autonomy, and may have serious long term consequences. The move will aid tourism and export oriented sectors, but also push up imported raw material prices and reduce margins going forward. The adversely effected sectors are demanding a duty entitlement scheme, popular in many emerging economies. The depreciation of currency along with 10% salary hike is also likely to build inflationary pressures in the economy.
Tax holiday and banking sector impact: A tax holiday of 4-6 years for investments in the range of LKR 50-300mn is proposed for investments in the SME sector. Banks with dedicated SME branches will pay a lower tax rate of 24% as against 28% previously. Sri Lanka is a net importer of cement, steel, pharmaceuticals, fabrics and milk powder and entities producing them will be entitled for a five-year tax holiday and then concessionary tax rate of 12%.
Telecom: The sector is likely to get doubly hit from increase in charges on both incoming and outgoing international calls - US$ 2 cents and LKR 1.0 respectively. The companies might find it difficult to pass this burden entirely with the current level of competition."http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=39726
