A tightrope of confidence

A Budget generally brings mixed fortunes and the latest edition seems to be no different. Following the presentation by President Mahinda Rajapaksa, there was a wide range of reactions with the most shocking coming from the currency market that froze following the announcement to depreciate the rupee by 3%.

Since then the rupee has hit a selling rate of Rs. 114.88 and gained words of praise from the International Monetary Fund (IMF), which insists the depreciation will help exports and reduce erosion of foreign reserves. Ironically, it is this same commendation that is spurring the United National Party (UNP) to accuse the Government of formulating a Budget that is pro-IMF rather than pro-people.

The Government disagrees and points out that the increased Samurdhi handouts, increased pensions and 10% allowance in basic wage has provided relief to the masses. It further contends the measures taken to stabilise inflation, increase exports and continue investment in infrastructure keeps Sri Lanka on an 8% or higher growth trajectory. Predictably the opposition does not give this much of a hearing.

Though commending the Budget overall, the Ceylon Chamber of Commerce with regard to plantation lands identified as lands that are not used productively and which are to be reallocated, proposed that any measure to reallocate lands should be taken in consultation with the Regional Plantation Companies, being mindful of plantation management aspects. This was perhaps the biggest curveball thrown by the Budget raising concerns that the 37 companies to be taken over by the Government is just the first in a longer list.

Criticism against the nationalisation has been steadily increasing with two international rating agencies joining the chorus by issuing warnings over the possible detriment caused to Foreign Direct Investment – concerns that so far have fallen on deaf ears despite renewed action by Pelwatte Sugar to extricate itself from the doomed list. It will be recalled that the latest writ application by Sevanagala Sugar was also dismissed by the courts, creating tension between the private sector and Government. It is clear that resolving takeovers will be key to deciding the local and foreign investment in Sri Lanka.

Aside from this, the stock market remains unimpressed by the Budget and continues to suffer near 10% negative return. Taxation has remained largely unchanged, paving the way for continuity and a margin of stability. Tax incentives for existing foreign investment and Diaspora companies are also seen as positives. Vehicle registration charges have risen, but this is not likely to have a deep impact on imports but will increase Government earnings.

Clearly the core concern pre- and post-Budget appears to be the power balance between the private and public sectors and if economic freedoms will be infringed on by the Government’s takeover initiatives, which are clearly in the pipeline. Dealing with the 37 companies and 37,000 hectares in a transparent and accountable manner, ensuring productivity and shoring up investor confidence all at the same time is a tightrope of confidence that the Government has to tread.

Apart from some criticism, most stakeholders have welcomed the Budget as progressive or balanced. When good Budgets are presented, the greatest challenge is in their implementation with an equally supportive and optimistic private sector. The next few months will tell whether both the Government and the private sector are collectively walking the talk in terms of action.