Will Mahinda’s 7th Budget be lucky for Lanka?

• Analysts say sound fiscal programme for 2012 and medium term private sector oriented policy framework crucial for country to move forward putting behind controversial Expropriation Act
• Improving fiscal management gives hope for further progress
• Robust public investment programme; lower deficit; greater clarity and consistency taking on from 2011 Budget envisaged
• Budget 2012 tipped to showcase specific higher potential future investment and growth opportunities and sectors; select activities for import substitution to be a key focus

All stakeholders are hoping that President Mahinda Rajapaksa’s 7th Budget and his second in post-war Sri Lanka will be lucky for the country in effectively steering the nation towards greater socioeconomic prosperity.

Given the recent local developments, global issues such as the recession in the West and high oil prices, as well as some undelivered proposals from last year’s exercise, the 2012 Budget is the most challenging for President cum Finance Minister Rajapaksa.
Controversies, confusion as well as opposition to the Expropriation/Revival Bill remain an overhang, dampening private sector and investor sentiment, and analysts emphasised that despite the Government’s denial that there is no impact and insistence that the new legislation is beneficial, President Rajapaksa has a herculean task to ensure Budget 2012 is extremely private sector, business and investment friendly. Whilst Budget 2011 was considered as the best-ever in terms of stimulating new investments, year-to-date progress on that score has been mixed. Hiccups over select foreign investments deals such as Shangri-La and CATIC and BOI’s preoccupation with internal reforms as well as mixed signals from the Government in addition to other bottlenecks, may see the desired target of $ 1 billion FDI being missed this year.
On the other hand, trade union agitation for higher pay despite the Government’s reiteration that inflation is low as well as living up to 2011 promises on wages will be another challenge.

Maintaining the robust public investment drive into 2012 is also critical, whilst ensuring some key social sectors such as health and education as well as rebuilding of lives and social infrastructure in the north are other pressing needs.
The spikes in energy prices which has resulted in country’s oil bill ballooning by 50% to $ 3 billion by August and continued volatility remain a thorny issue.
Considering some of these apprehensions and challenges, Budget 2012 to be presented today in Parliament at 2 p.m. will be key to unleash if not accelerate the true post-war rebound and potential. For this, winning greater confidence of local and foreign investors and entrepreneurs will be critical.
“The Budget 2012 will reveal unlimited potential and role for private sector,” an official source told the Daily FT.
To dismiss allegations and misconceptions, the President will use the Budget speech to highlight and put in proper perspective the various achievements both in terms of fiscal management and economic development during the past year.
He will also provide greater clarity on several positive and far-reaching proposals contained in the 2011 Budget presented last year. This, as well as further enlargement of progressive proposals, is likely to emphasise the consistency factor in the Rajapaksa regime though some have blamed it for haphazard changes.
The 2012 Budget is also expected to showcase specific and vast untapped potential for private sector investments on a sectoral basis, especially taking into consideration the country’s import base.
Up to August total imports had swelled by 50% to $ 13 billion and the Government is of the firm view that several product sectors could be locally sourced via backward integration measures. Examples include textiles, pharmaceuticals, select consumer and intermediate goods.
In that context, agriculture, apparel, cement and construction, pharmaceuticals and healthcare could figure prominently in the Budget speech, along with services sectors tourism as well as ICT and higher education.
Empowering the potential for a sports economy is another sector that analysts believe would be another focus of Budget 2012, along with the critical mass, the Small and Medium Enterprises/Entrepreneurs (SMEs) sector.
On the taxation front dramatic changes aren’t envisaged, with analysts maintaining that the Government has been successful in its revenue effort. By end July Government revenue had increased by 17% to Rs. 499 billion, of which tax revenue rose by 19% to Rs. 443 billion.
In September, Inland Revenue IRD Commissioner General K.M.S. Kandegedara reinforced the idea that greater tax compliance and administration would be improved.
“At the moment about 25% of people pay direct tax and we want to further reduce this in the 2012 Budget. As a measure to assist these direct payers we will make the IRD even more people-friendly and broaden the procedure for paying VAT,” he said.
The IMF has also cautioned the Government against changing the tax regime yet again in the 2012 Budget. Instead it advised that the Government should maintain the current framework to inspire stability and predictability among local and foreign investors.
According to a Reuters report, the Budget also comes at a time when the IMF has delayed the eighth tranche of the loan, after the Central Bank rebuffed its call to stop intervening in the rupee exchange rate. The Central Bank has spent more than $ 1 billion this year defending the rupee rate.