Financial Times

Budget seen strengthening growth momentum
The budget for 2004 should strengthen the economic recovery and help maintain a sustainable growth rate, given a stable political environment, business chambers and analysts said last week.

The private sector generally praised the budget and while being critical of certain tax proposals that would impose a burden on companies, said this was bearable given the improved macro-economic climate.

However, the stock market initially reacted negatively to the budget because of the proposal to impose a 15 percent tax on share trading profits. Some brokers said the tax was reasonable given the "super profits" made by investors in recent months as share prices soared.

"Overall, this is a fairly well balanced budget that aims to achieve sustainable economic development," said Angelo Ranasinghe of Bartleet Mallory Stockbrokers. "It takes into consideration economic as well as social factors such as the cost of living which is a major issue."

Dushyanth Wijayasingha of Asia Securities said the budget strengthens the fiscal position of the government. "Also there is a substantial commitment to providing a further boost to economic growth through several infrastructure projects." Dr Dushni Weerakoon of the Institute of Policy Studies said the inflationary impact of the changes in the value added tax was still unclear with prices of different items either going up or down.

"Even if there is an upward pressure on prices this is likely to be offset by the stable rupee and reduction in import duty surcharge," she said. The Ceylon Chamber of Commerce said the macro-economic improvements such as lower inflation and interest rates, a stable rupee and reduced government borrowing should compensate for whatever negative impact there was on the private sector.

"Certain revenue enhancement proposals may impose burdens on the private sector, but they will have to be accepted because of the benefits of sound macro economic management and in particular, the reduction in interest and inflation rates would more than offset such burdens."

Most welcomed the pay hike to the public sector but the government's call for the private sector to give employees a pay hike met with a lukewarm response. The Employers Federation of Ceylon (EFC) said in a statement that it "commends the government for not making any intervention in respect of private sector salaries in this budget."

The statement came after Labour Minister Mahinda Samarasinghe called on the private sector to raise their employees' salaries. The EFC said it had "repeatedly pointed out to successive governments that the private sector, particularly within a market economic framework, has to determine their expenses including employee wages based on market factors." Hasitha Premaratne of HNB Stockbrokers said investors and brokers were hoping the tax on profits from the sale of shares would be reduced or eliminated.

"We feel this is not the right time to impose such a tax, especially because the stock market is just picking up," he said. "Investors in the last couple of weeks got enough shocks and so could do without more shocks." He said there should be more time for the market to consolidate, and especially for foreign investors to get into the market.

Angelo Ranasinghe of Bartleet Mallory Stockbrokers the government had no option but to raise revenue by taxing those who could afford to pay in order to give relief to the less privileged. "The budget is well balanced. When the government is losing revenue from one end, it has to recover from another end."

S.R. Balachandran of the National Chamber of Commerce described the budget as a "tax oriented budget". "After losing Rs 60 billion through the tax amnesty and Rs 20 billion in poor VAT collection, the government needs to strengthen tax revenue," he told a news conference.

Weerakoon of the IPS said the thrust of the revenue proposals was to rationalise the tax system and widen the tax net. "The government appears to still have some concerns whether VAT will generate the anticipated revenue so it has introduced direct tax measures such as the one percent Economic Service Charge. The government has very limited options given that tax collection as a percentage of GDP has been declining over the years."

She said the possible inflationary impact of the increase in VAT on diesel to 15 percent from 10 percent could be offset if oil prices come down as anticipated. The big increase in capital expenditure should give a boost to the construction industry.

Surath Wickramasinghe, president of the Chamber of Construction Industry, described the budget as being "good for the construction industry." There are several construction related and infrastructure projects identified for implementation, he said.

"This is a welcome deviation from the piecemeal infrastructure development that has been undertaken in the past." At a post budget seminar held by the Ceylon Chamber of Commerce, N.R Gajendran, partner of Gajma and Company said the macro-economic situation had improved significantly in the past six months with the private sector receiving a considerable amount of benefits.

"In a sense, the benefits for the private sector have already been accrued, therefore further relief cannot be given as the budget proposals are mainly concentrated on revenue generation."

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