Sri Lanka’s Budget 2016 presented by Finance Minister Ravi Karunanayake on Friday has attracted mixed opinions from research analysts attached to several securities research firms in the country.
Here are some interesting remarks expressed in the post-Budget analysis reports released by four selected entities todate.
- Lanka Securities Research:
Big, Bold and Progressive
We believe the maiden full-year budget of the unity government is progressive and visionary to some extent. The budget did lack certain elements of a being a ‘revolutionary budget’ as coined by the FM ahead the budget speech. However, we do acknowledge that it is unrealistic to reform the decades long structural deficiencies in one single budget.
- Contrast to the populist budgets presented earlier, the new government certainly had looked at driving the investments and several praiseworthy measures have been proposed in this regard. Such point of view is commendable in contrast to the consumption driven model followed in earlier instances. Rather than going down the fiscal consolidation path, we believe the government has given prominence to maintaining a higher growth rate in the economy.
- FM’s lengthy budget speech touched on most areas of the economy with more emphasis on education, promoting PPP, digitalization of economy, creating business friendly environment, and also on increasing government revenue. Changes in certain taxes was introduced targeting a simplified tax system along with removal of certain taxes. Numerous projects were introduced to provide infrastructure support to the businesses such as industrial parks, Colombo International Financial Center etc, while measures were introduced to enhance the employability and skill development of the work force along with policy changes such as Foreign Exchange Management Bill etc.
- Instead of creating a rosy picture, the government has given more realistic fiscal targets. A fiscal deficit target of 5.9% in 2016 as opposed to 5.7% in 2014 and 6.0% in 2015 seems achievable in the given context. However, in most of the time governments have succeeded in setting prudent fiscal targets but execution will be the key. The preceding governments in most occasions overstepped the expenditure limits and have been unsuccessful in achieving the revenue targets. In this regard, we believe achieving a 12.7% tax revenue through effective tax collection would be challenging. On the other hand, the proceeds from partial or full-exits from the non-strategic investments can be a source of income for the government.
- Budget speech, as indicated before, was structured in-line with the PMs policy statement for most part but one major contradiction was seen in terms of the composition of direct and indirect taxation. The government proposed to reduce the income tax (1.9% of GDP in 2016 compared to 2.2% in 2015) while increasing the indirect taxes (10.8% of GDP in 2016 compared to 9.2% in 2015) such as ESC, NBT and VAT clearly contradicts the PM’s statement on increasing the direct tax ratio.
- In terms of capital markets, positive measures were proposed such as removing share transaction levey, concluding demutualization by 2016, amending SEC act, introduction of RIETS, SME Board and commodity exchange, increasing deemed dividend tax etc.
2. Bartleet Religare Securities
The first full blown budget of the coalition Government was far kinder than the capital markets evidently expected. Sri Lanka has planned a budget deficit of 5.9% of GDP (LKR 740bn) for 2016, in the same neighbor hood of the 2015 deficit of 6%. However, contrary to Finance Minister’s guidance provided prior to the budget, more came from indirect taxes (LKR90bn out of proposed 223bn came from Nation Building Tax (NBT), a turnover tax of sorts) pushing up the indirect tax revenue proportion. Encouragingly, all prominent revenue proposals came from recurring sources as opposed to the interim budget’s regressive quick fixes. We believe this is a sustainable budget with realistic deficit targets although the revenue challenges in the macro sphere seem to remain.
Corporate sector breathes a sigh of tax relief
We believe much of the corporate trading multiples should be re-rated upwards with the lower corporate tax bracket of 15% from the existing 28%. Only the Banking, Finance and Insurance, Liquor, Tobacco, Gaming and Betting, and Trading constituents will pay corporate taxes above 30%. The Government loses LKR 6bn in this proposal.
Share Transaction Levy (STL) cancelled
The Government loses 2.5bn LKR removing the Share Transaction Levy of 30 basis points but would boost activity in the CSE bringing down trading costs significantly.
Banking sector gearing for a rough ride
Banking sector is looking at higher taxation (NBT and VAT), losing the leasing book and taxation on withdrawals.
Simplification of income taxes
The progressive taxes we expected enforced will be removed with the Government increasing the tax free allowance to LKR 200,000pm and any balance being taxed at a flat 15%. The Government will lose a further LKR 4bn with this simplification.
NBT being the key income generator
With LKR 90bn budgeted with the doubling of NBT, we are of the view that the Government earlier 80:20 indirect to direct tax structure will not improve. We also feel that this move may be inflationary. However, the benefits to the public may offset this and we will have to wait further for the short term pain that would push SL up from the bottom rungs of the Revenue/ GDP ladder.
3. CT CLSA Securities (Pvt) Ltd
Third Wave of Reforms
The National Budget Proposals 2016 can be termed as a reformist agenda. Being used to budget speeches that were extremely populist, or included implausible / regressive proposals, the proposals presented on 20 November 2015, though falling short of being ‘revolutionary’ as promised in the lead up, look to adequately address the short term risks in the economy, whilst setting Sri Lanka up for the long run.
The proposals look to instill confidence amongst the investment community. Overall, the proposals appear to have taken note of comments made by a range of stakeholders, whilst comprising a more medium to long term planning perspective.
Whilst state intervention is likely to remain, or return, in some industries, there seems to be better distinction being made between essential and non-essential involvement; thereby exiting some industries and/or projects. Removal of some exemptions and protectionist measures is a positive. Unlike in many previous years, the proposals do not appear to favour one segment of the labour force over another.
The GoSL forecasts the fiscal deficit for 2016E to decline to 5.9% of GDP (Rs.740bn), against a deficit of 6.0% (Rs.675bn) targeted for 2015E (surpassing previous target of 4.4%, or Rs.499bn)
Total revenue and grants to rise at a staggering +39% YoY to Rs.2,047bn in 2016E. GoSL estimates total expenditure to increase +29% YoY to Rs.2,787bn in 2016E, with Public Investment to rise +68% YoY to Rs.868bn.
We are of the view there is likely to be some shortfall in revenue and overshoot on expenditure. However, we expect some scaling back in public expenditure in such a scenario. Accordingly 2016E fiscal deficit forecast at 6.0% of GDP (i.e. Rs.754bn).
4. Softlogic Stockbrokers (Pvt) Ltd
Today (20th of November 2015) in parliament, the Finance Minister, Mr. Ravi Karunanayake of the coalition unity government presented fiscal budget for 2016. The new fiscal plan is mainly targeted towards developing the SME sector, widening the tax base and simplifying the tax structures, reduction in cost of living, boosting consumption, restructuring SOEs and increased allocations to education & healthcare.
Government revenue expected to increase 38.5% YoY to LKR2,047 bn in 2016E largely backed by indirect taxes. However over the past years Sri Lanka has fallen behind its revenue targets, thus in 2015 it was just 11.4% of GDP. Government has brought in various measures to increase it to 12.7% of GDP in 2016 by widening the tax base, simplification and tax compliance.
Government expenditure to rise 29.4% YoY to LKR2,787 bn with recurrent expenditure increasing 17.0% YoY (15.4% of GDP) whilst public investment increasing 67.9% YoY (6.9% of GDP). The key expenditure proposals have been targeted in strengthening middle income earners, developing SME and creating a knowledge based economy.
Thus fiscal deficit to GDP has been curbed at 5.9% of GDP (6.0% of GDP in 2015) which would be largely funded through domestic borrowings (c.75%).
Increase in tax free threshold, removal of stamp duty, reduction in prices of essential commodities is likely to boost the consumption activities whilst removal of foreign land ownership restrictions and relaxation of exchange controls is likely to foster FDIs.
On the equity market the removal of the share transaction levy would be a great boost to market activities. Broadly it is positive for most retail, consumer, leasing, agriculture, construction and export oriented entities. However Liberalization of lubricant and bitumen markets would negatively impact on LLUB and LIOC whilst removal of tiles from the negative list would challenge RCL, LWL and TILE. Further reduction in corporate tax on alcohol & tobacco was neutralized by new levies and excise revisions. Increase in ITOL would impact DIAL and SLTL whilst increase in corporate tax, NBT, VAT would be impact all counters negatively.
Overall, it was a balanced budget which was positive for most sectors of the economy. However, historically our problems have been on the implementation of the budget proposals. Therefore we believe the unity government would bring in strong mechanism to implement the said budget proposals. The current budget articulates first steps of Prime Ministers medium term economic vision in creating a social market economy to drive Sri Lanka to become a globally competitive economy.