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taxes would be increased significantly, the Government has commendably maintained its stance of lower tax rates and broader base, giving policy certainty. However an indication of further reforms could have been anticipated in the revenue side in the form of private sector investments in the state owned enterprises. Increased involvement of the private sector in investment activities could also have reduced the requirement of public investment to a more sustainable level of 5.5% of GDP, compared to the current level of close to 6%. In the absence of such reforms it is unlikely that the budget deficit could be brought below 4% by 2016.
More international bonds: A $ 750 million long-term international bond for the construction of urban and estate housing complexes through the Urban Development Authority which will be backed by a Government Guarantee, along with a further $ 750 million for the Government to finance counterpart funds required for various development projects will be issued in 2014. With the global interest rates likely to rise with the tapering of QE program of USA in 2014, the risk profile of foreign commercial borrowing is considerably higher than the past. On the other hand it is mentioned that Debt/GDP ratio is to be reduced to 65% by 2016 compared to around 80% prevailing currently.
Finance companies to merge: Any finance company which is a subsidiary company owned by a main company, to be absorbed by the main company to consolidate their operations. Banks, which have finance companies to consolidate their operations by acquiring the finance companies within the group to further strengthen banks. In support of this initiative qualifying payment status is given for acquisition expenditure of banks or companies if they have acquired any finance company.
State-owned enterprises turning around: Commendably the losses incurred by state-owned enterprises in 2012 of Rs. 154 billion (around 2% of GDP) are expected to be turned around to a profit of Rs. 38 billion in 2013. Up to September, the profit is recorded at Rs. 34 billion. The key reasons are the turnaround of Ceylon Electricity Board and significant reduction in losses of Ceylon Petroleum Corporation.
Airlines continue bleeding: Accordingly Sri Lankan Airlines has become the largest loss-making entity with an expected loss of Rs. 27 billion for 2013. A further $ 150 million will be provided to Sri Lankan Airlines and $ 50 million to Mihin Lanka in 2014 to strengthen the capitalisation of the two airlines.
A snapshot of the 2014 Budget
The Government is expecting achieve a budget deficit of Rs. 509.2 billion for 2013, an upward revision of 0.4% from the 2013 Budget. However, this is despite the budget deficit for the first nine months of 2013 reaching Rs. 491.9 billion.
Accordingly, the monthly budget deficit need to reduce by nearly 90% during the last three months of 2013 compared to the first nine months. This was seen in 2012 as well, where the actual deficit was 6.4% of GDP compared to the revised estimate of 6.2%. Thus, we consider the current budget deficit target for 2013 of 5.8% of GDP extremely optimistic and the actual deficit could be around 6.0%.
Therefore, the ambitious deficit target for 2014 of 5.2% needs to be monitored strictly. Sri Lanka has not achieved a budget deficit below 6% since 1977.
The Government projects a budget deficit of Rs. 516.1 billion for 2014, up 1.4% YoY. The widening of the budget deficit (in absolute terms) is attributable to an expected Rs. 273.2 billion (16.0%) increase in government expenditure to Rs. 1,985.6 billion, against a Rs. 266.4 billion (22.1%) increase in government revenue and grants to Rs. 1,469.5 billion.
Government revenue
The revenue expected for 2013 had been revised downwards by Rs. 74.8 billion (to Rs. 1,203.1 billion). Despite improved economic activity, it is slightly optimistic considering the total revenue of Rs. 783.2 billion up to September 2013. The monthly revenue needs to increase by over 60% in the last three months of 2013 to achieve this target.
Inflows from income tax is expected to rise 18.3% to Rs. 283.3 billion in 2014, while taxes on goods and services are set to rise 19.0% to Rs. 688.5 billion. Tax on external trade is projected to increase 29.3% to Rs. 302.6 billion.
Government expenditure
The total expenditure for 2013 is expected to be Rs. 1,712.4 billion, which is a downward revision of Rs. 73.0 billion. The actual expenditure incurred up to September was Rs. 1,275.1 billion, in line with the revised target. Public investments/GDP has come down to 5.8% from the budgeted 6.1%.
For 2014, public investments as a percentage of GDP is expected to rise to 6.7% which is too optimistic, while recurrent expenditure is set to rise by a tamer 8.4% to Rs. 1,328.3 billion.
Deficit financing
Net foreign financing is expected to be Rs. 149.8 billion in 2013, which is 74.2% above the 2013 budget target of Rs. 86.0 billion. Total domestic financing is expected to come down to Rs. 359.3 billion in 2013, well below the budgeted Rs. 421.4 billion.
However, achieving these debt financing targets will depend on the Government achieving the deficit target mentioned earlier. Meanwhile, domestic financing through bank borrowing is expected to exceed the budgeted figure by 187.7% which explains the robust market interest rates that prevailed throughout 2013.
The funding mix of the 2014 budget deficit is anticipated to be similar to what was seen in 2012 (55:44 mix of domestic and foreign borrowing) as opposed to a higher proportion of domestic borrowing in 2013. Foreign commercial borrowing, absent in 2013, is expected to be at Rs. 97.50 billion in 2014 making up 21.7% of total deficit financing.
Impact on the stock market
n The 2% NBT to be applicable to the banking sector to all banks and financial institutions.
nThe tax-free threshold applicable for VAT on supermarket scale retail trade to be fixed at Rs. 250 million per quarter (as opposed to Rs. 500 million previously). In order to prevent manipulations on the computation of turnover through exempted items, a limit of 25% of the total turnover to be fixed as exempted value from VAT in relation to such business.
nAs an incentive to business enterprises engaged in banking, finance, insurance and manufacturing activities liable to high profit tax at 28%, a half tax holiday for a period of three years is proposed, to any such company that lists its shares in the Colombo Stock Exchange in 2014.
nIntroduce a pricing formula based on the cost structure in place of a price control on poultry to regulate pricing and to safeguard both the consumer as well as the producer.
nA 15% upfront tax will be imposed in the event of lease of state or private lands to foreigners.
nA comprehensive assessment of the underperforming plantation companies is to be undertaken. Implement a credit scheme with 8-year maturity and 6% interest to every company that has so far performed well, provided they commit to replant an agreed extent, are committed to ensure social development of its plantation workers and increase the volume of its value added tea exports.
nThe present rate of 20% applicable on Telecommunication Levy will be revised to 25%.
