NDB 2012 Budget Proposal Highlights

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2012B

udgetPropos

als

Date 21.11.2011

Focus on Public Investments andExternal Sector

The government has acknowledged the need to address the increasing trade deficit

in its proposals for 2012 budget. Certain long term measures have been proposed to

encourage exports as well as substitute imports to improve the external sector. A

conscious effort has been put to maintain public investments while controlling the

increase in recurrent expenditure. Broadly it could be seen as a continuation of the

direction set in the previous budget proposals as no major changes are proposed on

the revenue side.

Salient Proposals

Over Rs.120Bn has been allocated to improve the national road networks. Rs.164Bn

has been allocated for 2011 to 2014 to improve water supplies. An Investment of

Rs.177Bn has been allocated for irrigation projects due to be completed before

2014.

To encourage the local value added industries, Cess has been increased or imposed

on import of dried vegetables/ dried fruits, wheat flour, Thriposha, refrigerators, etc.

With a view to encourage large investment projects, a 6-12 year tax holiday and

other tax incentives are extended to investments in the range of Rs.300 -2,500Mn.

Incentives to encourage the expansion of existing enterprises will also be granted.

Land given to the private sector which is not utilized for the purpose, for which

lands were given, will be taken back by the Government. Government has identified

37,000 hectares of such land and proposes to enter into 30 year lease arrangements,

having demarcated 2 acre blocks, which will be distributed among smallholders.

10% increase of the basic salary of all public servants. It is essential that the total

cost of salaries, pensions and allowances will be around Rs.38Bn.

Government will look into suitable merging opportunities for enterprises (whichwere privatized after being in state control) because, control is currently with the

government.

In order to encourage the exporters and to eliminate the disadvantageous position

with regional countries exchange rate will be depreciated by 3%.


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0%

2%

4%

6%

8%

10%

12%

2009 2010 2011 (budget) 2011 (revised) 2012 (budget)

Budget deficit as a % of GDP (excluding grants)

(800)

(400)

0

400

800

1,200

1,600

2,000

2009 2010 2011 (budget) 2011 (revised) 2012 (budget)

Rs Bn

Government Revenue & Grants Government Expenditure Budget Deficit

A Snapshot of the 2012 Budget

The government projects a budget deficit of Rs.468.9Bn for 2012, down 2%

YOY. The narrowing of the budget deficit is attributable to an expected 19.8%

increase in government revenue and grants to Rs.1,126.1Bn, against a 14.15%

increase in government expenditure to Rs.1,594.9Bn. The 2012 budget deficit(excluding grants) is targeted at 6.2% of GDP, down from 7% estimated for

2011.

Source Budget Speech 2012


Budget Deficit as a Percentage of GDP

Government Revenue, Expenditure and Budget Deficit


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0

100

200

300

400

500

600

Income Tax Taxes on Goods and

Services

Taxes on External

Trade

Non Tax Revenue

Rs Bn

2011 (budget) 2011 (revised) 2012 (budget)

The proposed budget deficit of Rs.433.70Bn for 2011 has fallen short by 6.1% as

the budget deficit is revised to Rs.460Bn. Therefore, the ambitious deficit targets

need to be monitored strictly as government has failed to meet its goals in the

past.

Government Revenue

Income tax is expected to rise 19.01% to Rs.190.3Bn, while taxes on goods and

services are set to rise 19.07% to Rs.569.4Bn. Taxes on external trade are

projected to increase 27.19% to Rs.240.9Bn.


Although the revenue budget for 2011 has not been successfully achieved, the

significant increase in revenue (compared to 2010) despite reductions in tax rates

is a positive sign. The broadening of the tax base seems to have been broadly

successful.

Government Expenditure

Revised recurrent expenditure/GDP in 2011 was 15.6% as opposed to the

budgeted figure of 16.1% while public investment/GDP has also come down to

6% from the budgeted 6.5%. The shortfall in government revenue seems to have

reduced both recurrent and capital expenditure.

Compared to the revised 2011 expenditure/GDP of 21.4%, 2012 figure is

projected to come down to 21.2%. Recurrent expenditure/GDPs reduction to

Tax and Non-Tax Revenue


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0

200

400

600

800

1,000

1,200

2010 2011 (budget) 2011 (revised) 2012 (budget)

Rs Bn

Recurrent Public Investments

0

100

200

300

400

Salaries and Wages Interest Subsidies and

Transfers

Other goods and

Services

Rs Bn


14.7% and increase in public investment/GDP to 6.6% signifies the long term

growth oriented nature of the budget proposals.

Source - Budget Speech, 2012


Total Expenditure

Recurrent Expenditure


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0

100

200

300

400

Total Foreign Financing Total Domestic Financing

Rs Bn


Deficit Financing

Amidst governments initial motive to rely less on foreign funding in financing

the deficit for 2011, foreign funding increased by 93% over the budgeted amount

of Rs.94.5Bn. Even though the amount of domestic financing has decreased, use

of local bank borrowings has increased by a staggering 280% to Rs.160Bn whilenon-bank borrowings have decreased by 63.1% to Rs.95.1Bn. Ability to attract

funding from foreign sources could be seen as a positive sign.

2012 budget deficit is to be primarily funded by domestic borrowings. Domestic

(63%) foreign (37%) funding mix has not changed drastically as opposed to the

revised 60:40 mix achieved in 2011. The non-banking borrowings are projected

to increase to Rs.207.6Bn while domestic bank borrowings are projected to

reduce to Rs.64Bn.


Impact on the Macro Economy

The depreciation of the rupee will have a one-off adverse impact on inflation in

the short run. In addition tax increases in imported items will also exert upwardpressure on inflation. Further the increase in salaries and subsidies will introduce

demand-side inflation as well. Therefore we feel inflation could increase close to

9% in 2012.

Deficit Financing


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0

2

4

6

8

10

12

Jan '10 Apr '10 Jul '10 Oct '10 Jan '11 Apr '11 Jul '11 Oct '11

YoY % change Annual average % change

%

Source - Central Bank of Sri Lanka

We expect a slight increase in market interest rates over the next 12 months (due

to the marginal slowdown in deposit mobilization in the banking sector and

depreciation of the rupee). However the lower budget deficit projected for 2012

would lower the need for public sector borrowings which will ease the pressure

on interest rates.

6

8

10

12

14

16

Jan '11 Mar '11 May '11 Jul '11 Sept '11

Repo rate Reverse Repo rate AWDR AWLR

%


CCPI Movement

Movements in Market Interest Rates


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107

109

111

113

115

Jan '10 Apr '10 Jul '10 Oct '10 Jan '11 Apr '11 Jul '11 Oct '11

Rs

We feel the exchange rate is likely to be stable in 2012 after the immediate

depreciation due to strong capital inflows expected. The encouragement given to

exporters and import substitution will augur well for the long term stability of the

exchange rate.


In view of the increasingly fragile nature of global economies we feel that it will

be challenging to achieve a GDP growth of 8% in 2012 (although we are

confident 8% could be achieved in 2011). Hence we expect the GDP growth to

be between 7.5% - 8% in 2012.

Impact on the Stock Market

Depreciation of the rupee will benefit the export oriented companieswhereas import based companies will be negatively impacted.

Certain plantation companies will be adversely impacted with thedistribution of the unutilised land among smallholders. However

introduction of concessionary loan scheme at 8% annual interest,

repayable in 7 years, to encourage planting and re-planting will be

helpful to plantation companies.

LKR/ US Dollar Exchange Rate


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Proposed infrastructure projects as well as relocation of governmentinstitutions (such as Inland Revenue Department) will benefit the

manufacturing and the construction sector companies.

Removal of VAT on importation of buses, lorries and trucks will beadvantageous to motor sector companies that import these vehicles.

Exemption of all taxes imposed at the point of Customs on theimportation of Yarn will be beneficial to textile manufacturers. However

garment manufacturers will get affected by the introduction of a tax of

Rs.75 per Kg on imports of fabrics.

Reduction of income tax on health services to 12% will be advantageousto healthcare sector.

Increase in levy on outgoing and incoming international calls may havean adverse impact on the telecommunication sector.

Detailed guidelines of the above proposals need to be studied for a more comprehensive understanding of their real impact on the

economy.


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This document is based on information obtained from sources believed to be reliable, but we do not make any representations as to its accuracy, completeness or

correctness. Opinions expressed are subject to change without notice. Any recommendation contained in this document does not have regard to the specific

investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to

be taken as substitution for the exercise of judgment by addressee. NDB Stockbrokers (Pvt) Ltd and its associates, their directors, and/or employees may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking

services for these com anies.

Summary of the Budget

2009

(actual)

2010

(actual)

2011

(budget)

2011

(revised)

201

(budge

Total Revenue and Grants 725.57 834.20 986.10 937.00 1,126.1

Total Revenue 699.64 817.30 963.50 923.20 1,106.1

Tax Revenu e 618.93 724.80 862.10 827.50 1,000.6Income Tax 139.56 135.60 154.90 159.90 190.3

Taxes on Goods and Services 352.01 435.40 495.50 478.20 569.4

Taxes on External Trade 127.37 153.70 211.80 189.40 240.9

Non Tax Revenu e 80.71 92.50 101.40 95.70 105.5

Grants 25.92 17.00 22.60 13.80 20.0

Total Expenditure 1,201.93 1,280.20 1,419.90 1,397.20 1,594.9

Recurrent 879.58 937.10 1,017.00 1,018.80 1,107.9

Salaries and Wages 271.23 300.60 344.00 321.20 367.9

Interes t 309.68 352.60 353.90 355.40 370.0

Subsidies and Trans fers 190.17 196.20 207.30 212.90 236.4

Other Goo ds and Services 108.50 87.70 111.70 129.30 133.5

Public Inves tment 330.45 356.50 413.70 389.00 497.5

Education and Health 29.75 32.50 54.00 39.80 45.4

Other Infrastructure Development 300.66 324.00 359.70 349.20 452.1

Other (8.10) (13.40) (10.80) (10.50) (10.40

Revenue Surplus(+)/Deficit (-) (179.93) (119.80) (53.40) (95.20) (1.80

Budget Deficit (476.36) (446.00) (433.70) (460.00) (468.90

Total Financing 476.36 446.00 433.70 460.00 468.9

Total Foreign Financing 83.89 194.90 94.50 183.10 175.3

Net Foreign Borrowings 26.48 83.00 94.50 73.60 120.3

Gross Concessional Foreign Borrowings 147.03 158.10 189.50 163.60 270.3

Debt Repayments 110.29 75.10 115.00 90.00 150.0

Foreign Commercial 57.41 111.90 20.00 109.50 55.0

Total Domestic Financing 392.48 251.10 339.20 277.10 293.6

Non-bank Borrowings 196.53 204.10 339.20 95.10 207.6Foreign Inves tments in T Bills / Bonds 146.92 48.90 39.60 22.00 22.0

Bank Borrowings 49.03 (1.90) 42.00 160.00 64.0

Revenue and Grants /GDP (%) 15.00 14.90 15.60 14.30 15.0

Revenue/GDP (%) 14.50 14.60 15.20 14.10 14.7

Tax/GDP (%) 12.80 12.90 13.60 12.70 13.3

Expend iture/GDP (%) 24.90 22.90 22.40 21.40 21.2

Current Expend iture/GDP (%) 18.20 16.70 16.10 15.60 14.7

Public Inves tment /GDP (%) 6.80 6.40 6.50 6.00 6.6

Revenue Surplus (+)/ Deficit (-)/ GDp (% ) (3.70) (2.10) (0.80) (1.50)

Budget Deficit/ GDP (%) (Excluding Grants) (9.90) (8.00) (6.80) (7.00) (6.20

Rs Bn

Documents

NDB 2012 Budget Proposal Highlights