Sri Lanka budget sticks to IMF plan but fiscals still weak
View(s):Sri Lanka’s 2018 budget is in line with targets set by the International Monetary Fund (IMF) but the country’s fiscal position is still weak, says Fitch Ratings.
In a media statement on Tuesday, the agency said that the budget sticks broadly to the targets for fiscal deficit reduction under its three-year IMF programme but noted that “high government debt and the large cost of debt servicing weigh heavily on Sri Lanka’s credit profile and will require sustained fiscal consolidation over the long term”.
The budget targets a fiscal deficit of 4.8 per cent of GDP in 2018, which is only slightly above the 4.7 per cent target agreed with the IMF and continues the consolidation that began in 2016. Floods and drought weighed on the economy and public finances during 2017, and contributed to the government missing its initial 2017 fiscal deficit target of 4.6 per cent of GDP.
“Nevertheless, the authorities still expect the 2017 deficit outturn to fall to 5.2 per cent of GDP, from 5.4 per cent in 2016. Consolidation in 2017 has been driven by measures to boost tax revenue, including a hike in the value-added tax (VAT) to 15 per cent in November 2016 from 11 per cent,” Fitch said.
The agency said its baseline projection is still that government debt ratios will stabilise within the next couple of years, but these forecasts are vulnerable to fiscal slippage or an economic downturn. “Exchange rate depreciation could also push up the local-currency value of government debt, given around 40 per cent of the total was denominated in foreign currency at end-2016,” according to Fitch estimates.
It said Sri Lanka faces a challenging external debt service schedule in the near term, with very large external debt maturities.
| Beer industry to regain market share from ‘beer-friendly’ national budget | |
| Sri Lanka’s beer industry will regain market share from hard liquor following a more favourable tax regime for the segment announced in the 2018 budget, according to Fitch Ratings. The budget reduced excise taxes on strong beer by 33 per cent and raised that on hard liquor by 2 per cent, effective immediately. The budget also introduced a Nation Building tax of 2 per cent on all alcoholic beverage sales, which will take effect from April 2018. Fitch said in a media statement that with the latest tax revisions and barring further changes, beer’s market share of total reported alcohol consumption in Sri Lanka would increase to around 24 – 25 per cent in the medium term. “We expect hard liquor sales volumes to contract 2 per cent over this period, reversing some of the market share gains it made in the last few years. Hard liquor’s share rose to 84 per cent in 2016 from 71 per cent in 2014, after a series of tax increases for beer. The market share for beer fell to 14 per cent from 27 per cent over the same period,” it said. Beer makers will also be helped by the removal of a tax on beer cans in the government budget. Fitch expects beer to regain market share lost to hard liquor during the last two years, when frequent tax increases on beer eroded its price advantage. “We expect sales volumes of hard liquor market leader Distilleries (DIST) to drop, as consumers substitute strong beer for arrack, the most popular hard liquor in the country. Effective immediately, spirit producers will also have to pay additional duty on raw materials used for ethanol production, which will increase input costs for hard liquor makers. However, we expect these taxes to have minimal impact on DIST’s profit margins because the company has increased the price of its key product, Extra Special Arrack, by around 6 per cent per bottle to reflect both the higher input costs and taxes,” Fitch said adding that it believes the government is unlikely to impose further taxes on the industry to the extent that alcoholic beverages become prohibitively expensive to the average consumer, because the alcohol excise taxes contributed 8 per cent to government tax revenue in 2016. “As such, we expect further tax increases to be gradual, especially for hard liquor.” Both Lion (brewery) and DIST command leadership in their respective segments given their entrenched brands which continue to benefit from a complete ban on advertising of alcoholic beverages, Fitch said. |