ECONOMYNEXT – Recent tax hikes by Sri Lanka’s government as it seeks to raise revenue to reduce the budget deficit and a heavy debt burden provide some certainty for investors, brokers and analysts have said.
The government announced it will raise its value added tax and re-impose capital gains tax ahead of talks on a 1.5-billion US dollar loan it is seeking from the International Monetary Fund (IMF) after running into balance of payments difficulties.
The tax hikes brought down stock prices sharply this week, but the market recovered towards the end of the week with volumes and turnover improving along with net foreign inflows, brokers said.
The benchmark All Share Price Index is down about 13 percent so far this year .
First Capital Equities said in a research report that they expect market activity to show mixed reactions with the announcement of tax amendments.
“The announcement was welcome as it gives some certainty relating to taxes and the budget deficit for 2016,” the brokerage said.
“We advise our clients to be cautious as we move into the most difficult quarter in 2016 which provides some opportunity for investors to shift from speculative counters and invest in fundamentally sound stocks.”
The tax hikes announced on Tuesday, March 8, came after Fitch Ratings agency downgraded Sri Lanka’s rating by a notch to "B+" with a negative outlook, on concern over a ballooning fiscal deficit and rising debts.
That was followed by S&P rating agency on Thursday lowering its outlook on Sri Lanka’s B+ sovereign credit rating to negative.
Central Bank Governor Arjuna Mahendran told Reuters on Thursday he hoped the rating agencies’ negative view on Sri Lanka’s credit rating would change after negotiations this month over an IMF loan.
Sri Lanka is facing a balance-of-payments crisis after a third of its foreign exchange reserves was depleted within the 15 months to January, pressured by heavy debt piled up under the previous government, Reuters said.
"With the government’s negotiation with the IMF, and once we have a programme for fiscal consolidation, these rating agencies will take a different point of view," Mahendran told Reuters.
A government minister said on Monday Sri Lanka was expected to receive a 1.5 billion dollar IMF loan to boost the foreign exchange reserves.
Mahendran said the government had to rework its economic numbers because of the change in international economic conditions since it presented this year’s budget in November.
"Exports will continue to underperform and tax revenue will be impacted by lower imports. So you need to take all these factors into consideration," Mahendran said.
The government on Tuesday announced a 4 percent rise in value added tax and its plans to reintroduce capital gains tax to break out of the 9.5 trillion rupee ($65.89 billion) debt trap.
Sasha Riser-Kositsky, Eurasia Group’s South Asia analyst, said the tax hikes underscored the government’s willingness to confront its deteriorating macroeconomic situation and address the IMF concerns.
Fitch said after the tax hikes the government still lacked a clear medium-term fiscal consolidation plan and that left room for further fiscal slippage and a rise in debt.
"This weakness in the fiscal position remains underpinned by low government revenues that are far below many of its peers in the ‘B’ and ‘BB’ rating category," Sagarika Chandra, associate director at Fitch said in a statement.
Marie Diron, senior vice president of Moody’s said the hike and broadening tax base, "if implemented and effective", would be credit positive.
(COLOMBO, March 12, 2016)