Budget 2012 will help maintain growth momentum - Analysts

by Gamini WARUSHAMANA

The economic implications of Budget 2012 are positive and will help maintain the growth momentum, keep the economic growth rate above eight percent and improve export competitiveness, economic analysts said.

The Government plans to reduce the budget deficit from eight percent of GDP to 6.4 percent and the estimated budget deficit is Rs. 468.9 billion. Inflation has dropped to five percent from eight percent last year. However, the global economic crisis, global commodity price increases and price increases of imported goods as a result of devaluation of the rupee might create inflationary pressures. However, the Government is confident of maintaining low and stable inflation levels as domestic food production has increased. Another important policy decision made in the Budget is the devaluation of the Sri Lankan rupee against the US$ by three percent. Accordingly, the rupee depreciated by 3.2 percent against the US$ during the week. This was a major demand of exporters as well as an issue that was frequently debated between the IMF and the Government. Devaluation of the rupee will make exports more competitive in the global market. The Government has also offered other incentives such as tax holidays for exporters in the Budget.

The IMF welcomed the move immediately and said the devaluation of the rupee would support the country’s export competitiveness and safeguard its reserves over the medium term, Sri Lanka’s IMF Resident Representative Koshy Mathai has told Reuters.

Moreover, the cheap rupee could pose a negative impact on public debt and inflation.

The net impact will only be positive if export growth could offset the negative impact on public debt and staggering oil bills, analysts said.

Governor of the Central Bank Ajith Nivard Cabraal, addressing a post-budget seminar in Colombo, also pointed this out. Exports have grown by 20.8 percent in 2011 against 10 percent in 2010. With the devaluation of the rupee, public debt has increased by Rs.74 billion and oil bills by Rs. 11 billion. Therefore, others have to pay for the depreciation while the exporters have the responsibility of increasing exports, Cabraal has said.

Steps have been taken to contain the widening trade deficit of the country; these include discouraging imports through the imposition of import tariffs on various commodities and promotion of import substitute businesses.

The trade deficit of the first eight months of the year recorded $ 6 billion. The devaluation of the rupee too will support this as it will increase the prices of imported commodities.

Another plus point of the Budget, highlighted by the private sector, is the absence of major additional tax burdens on businesses. The Government has shown its commitment to investing in infrastructure development to improve the business environment in the country.

Analysts said that since Rs.468.9 billion of deficit financing of the budget is from domestic borrowing, it will make an upward pressure on interest rates. The Government has supported key sectors in line with its medium-term policies providing incentives. Leisure, healthcare, manufacturing, development and banking sectors have gained accordingly.