Mini-budget for big problem?

Tuesday, 3 April 2012 00:37 - - {{hitsCtrl.values.hits}}

Everyone is familiar with the saying there is no such thing as a free lunch. In that case, what is the cost for Sri Lanka’s development?

With a rapidly depreciating rupee that seems to have levelled off and a near US$ 10 billion trade deficit, the Government last week decided to reduce imports still further by stamping down on vehicle imports.

The mini-budget resulted in raising taxes on vehicle imports, cigarettes and alcohol. The move will have immediate implications with vehicle prices going up by amounts ranging from Rs. 300,000 to Rs. 5 million, hard-liquor by Rs. 60 a litre, imported beer by Rs. 50 a litre and local cigarettes by Rs. 1. The Government said it was expecting to raise Rs. 3 billion from the tax on tobacco and liquor.

This means that the price of a Maruti 800 cc would increase by a minimum of Rs. 300,000, while the price of a new Hybrid would increase by Rs. 1 million. He said the price of a Toyota Allion would go up by Rs. 1.5 million and a Toyota Vitz by Rs. 1.2 million. The price of a van would increase by about Rs. 400,000.

The price of a three-wheeler is likely to increase by Rs. 100,000 and a motorcycle by Rs. 50,000. Such numbers mean that the aspirational purchases of many people will be dispelled, resulting in the Government losing favour.

Brushing the situation bleaker, top investment bank UBS has issued a warning on the Sri Lankan economy, lowering the 2012 growth rate to 6% and suggesting a degree of overheating in addition to hinting at interest rates going up, further pressure on the exchange rate and interest rate and Budget deficit. This is much lower than the Central Bank projection of 7.2% growth.

The report exposes some of the mistakes made in the recent past with regard to economic management as well the resultant challenges the country has to deal with in 2012 and beyond. It insists that Sri Lanka is going through a modest episode of overheating and that the economy appears to have over-expanded.

UBS predicts interest rates in Sri Lanka to go up another 150-200bp to reflect the much wider external gap and higher headline inflation in prospect. The report goes on to say that the domestic economy is already softer, but further weakness appears likely as higher rates depress spending and the current red-hot credit growth slows down. Overall the prognosis is to look for real GDP growth to slow to around 6% in 2012 from a number likely to be close to 8% in 2011.

With the Sinhala and Tamil New Year around the corner, the cost of living will begin to hit headlines, if it hasn’t already, putting the Government under pressure to impose unsustainable stopgap measures. There is also danger that the trade deficit will edge up on people splurging during the festive season and keeping a lid on spending will be challenging.

Essential food importers have already promised higher prices and with staples like milk food dangerously on the edge of becoming more expensive, it is likely that the spending power of the common man will shrink during the next few weeks.