Sri Lankan shares slump to near 2-year low on tax woes

COLOMBO, March 8 (Reuters) – Sri Lankan shares fell more than 2 percent on Tuesday, marking their lowest close in nearly two years as the government reintroduced capital gains tax and raised value added tax (VAT) as part of its efforts to qualify for an IMF loan.

Rising market interest rates also weighed on investor sentiment.

Sri Lanka will raise its VAT and reintroduce capital gains tax to break out of a debt trap, Prime Minister Ranil Wickremesinghe said on Tuesday, ahead of talks on a $1.5-billion loan it is seeking from the IMF.

Sri Lanka’s benchmark share index ended down 2.02 percent at 5,934.72, the lowest close since March 24, 2014. It has fallen 4.2 percent in the last six straight sessions through Tuesday.

"The interest in the share market will be down, while the capital gains tax will be one of the main concerns," said Danushka Samarasinghe, research head at Softlogic Stockbrokers.

"Trading will be choppy and the index may fall as much as 10 percent in the near future."

Other analysts said the government has no choice, but to raise taxes in order to increase its revenue and reduce budget deficit, which have been the long request of the IMF.

A Sri Lankan minister on Monday said the island nation will receive a $1.5 billion IMF loan to boost foreign exchange reserves and avert a balance of payments problem.

The index remained in oversold territory for the ninth straight session, with the 14-day relative strength index at 13.645 on Tuesday, compared with Friday’s 18.647, Thomson Reuters data showed.

A level between 70 and 30 indicates the market is neutral.

Turnover stood at 899.9 million rupees ($6.2 million), more than this year’s daily average of 712.7 million rupees.

Foreign investors were net buyers for the seventh straight session, purchasing 244.1 million rupees worth of shares on Tuesday. But the bourse has suffered a net foreign outflow of 923.7 million rupees so far this year.

Shares in conglomerate John Keells Holdings Plc fell 2.08 percent while Nestle Lanka Plc lost 2.44 percent.