Sri Lanka May Focus on Reducing Budget Gap After Civil War Ends

By Anusha Ondaatjie

June 29 (Bloomberg) -- Sri Lanka’s budget will aim to cut the fiscal deficit and provide incentives for investments, Deputy Finance Minister Sarath Amunugama said, as the island nation seeks faster growth after the end of a 26-year civil war.

“We are very focused on reducing the budget deficit,” Amunugama said by phone in Colombo yesterday ahead of the budget announcement in Parliament today. “It will be an investor- friendly budget,” he said, without elaborating.

President Mahinda Rajapaksa is under pressure to show fiscal restraint after the International Monetary Fund set it as a condition to release the next installment of a $2.6 billion loan. Even so, the end of the war gives Sri Lanka an opportunity to attract investors by lowering tax rates.

“They should marginally bring down taxes in sectors that are taking off like banks, tourism, agriculture and fisheries to spur growth,” said Bimanee Meepagala, a Colombo-based analyst at NDB Aviva Wealth Management Ltd., the nation’s biggest non- state fund. “Tax collections will rise as businesses expand.”

Sri Lanka is due to unveil the budget at 2 p.m. today.

The government may narrow its fiscal gap to 8 percent of gross domestic product in 2010 from 9.8 percent in the previous year, Meepagala and Standard Chartered Plc economist Samantha Amerasinghe estimated. Government finances have been the focus of investors worldwide as the debt crises in Greece, Portugal and Spain threaten the global economy.

Lower Taxes

Sri Lanka this month halved the import tax on cars and cut levies on electronics goods to spur growth to the targeted 7 percent this year, the fastest pace since 2006.

The effective tax rate on banks after including company and service levies is 60 percent, NDB’s Meepagala said. For hotels, it’s about 35 percent, said Sarath Rajapakse, director of research at Capital Trust Securities Ltd. in Colombo.

Tax revenue may climb to 18 percent of GDP in 2010 from 14.5 percent in the previous year if the economy expands at the targeted pace, said Saminda Weerasinghe, research manager at Acuity Stockbrokers Pvt. in Colombo.

Sri Lanka may also bring in more individuals under the tax net in a country where only 3 percent of the 20 million people pay taxes, Weerasinghe said.

The South Asian nation turned to the IMF in 2009 to replenish its foreign-exchange reserves, which in March this year climbed to $5.2 billion, or equivalent to about 6 months of imports.

IMF Loan

The Washington-based lender said last month it may release the next loan tranche of about $330 million after Sri Lanka pledged to trim its budget deficit.

Sri Lanka’s benchmark Colombo All-Share Index has climbed 36 percent this year, lagging behind only Mongolia and Bangladesh in the Asia Pacific region. The Sri Lankan rupee has gained about 1.3 percent since the war ended in May 2009.

This year’s budget has been delayed by about seven months as presidential and parliamentary elections were called after the government defeated the separatist Liberation Tigers of Tamil Eelam.

Peace is also aiding the Indian Ocean island nation as overseas companies plan investments and tourists return.

Emirates Telecommunications Corp., the United Arab Emirates’ biggest phone company, started services this year in the northern Jaffna peninsula after buying Tigo Pvt., the Sri Lankan unit of Millicom International Cellular SA.

Foreign Investments

HSBC Holdings Plc opened the first branch by any foreign bank in Jaffna, the former stronghold of the Tamil Tigers, while Minor International Pcl, Thailand’s biggest hotel operator, announced plans in May to invest in Sri Lanka.

Tourist arrivals jumped 42 percent in May from a year earlier, according to the Sri Lanka Tourist Board.

Consumption is also getting a fillip as central bank Governor Nivard Cabraal holds interest rates at the lowest level in almost five years. Sri Lanka’s reverse repurchase rate is 9.75 percent.

Higher tax receipts will help President Rajapaksa to rebuild war-hit regions while reining in the budget deficit, said Sanjitha Rajasekaran, head of research at Asia Securities Ltd. in Colombo. Rajapaksa plans to spend $1 billion a year on infrastructure including roads and power.

--Editors: Cherian Thomas, Stephanie Phang

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editors responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net Chris Anstey at canstey@bloomberg.net.

source - http://www.businessweek.com