2012 Budget in focus

Arrenga Capital Research takes a deeper look at Budget 2012 and impact on select listed companies

1. A challenging deficit target – 6.2% of GDP in 2012

I. Government revenue targeted to grow by 20.2% YoY to Rs. 1,126.1 b (14.7% of GDP)

II. Total Government expenditure to rise 14.1% YoY to Rs. 1,594.9 b (21.2% of GDP)

III. Recurring expenditure to climb up by 8.7% YoY to Rs. 1,107.9 b during 2012

IV. Total Government expenditure to rise 14.1% YoY to Rs. 1,594.9 b (21.2% of GDP)

V. Recurring expenditure to climb up by 8.7% YoY to Rs. 1,107.9 b during 2012

VI. Budget deficit to drop to 6.2% of GDP from 7.0% in 2011

2. 2012 Budget’s bearing on the listed counters

I. Incentives introduced to banking and financial institutions from Budget 2011 to remain uninterrupted

II. Focus on Small and Medium Scale Enterprises (SME) sector

III. Maintain high CESS of imported green grams, peanuts, ginger and maize so as to increase self-sufficiency in the domestic cultivation of these crops; removal of VAT on machinery and equipment for livestock production

IV. CESS on vegetable and other edible oils to protect domestic cultivation of coconuts along with several other programmes to encourage domestic cultivation of coconuts; taxes imposed on food produced from coconut, palmyrah and kitul to be removed

V. Provisions have been made to extend loans to improve fish production

VI. High duty on imported milk powder will be maintained to enable dairy farmers to secure better prices

VII. Consolidation of withholding tax on motor vehicles; increase of tax on luxury cars; removal of VAT on imported buses, lorries and trucks; 50% tax deduction in imported tyres of buses and lorries

VIII. Development of road network, housing facilities, airport, hotels and hospital construction

IX. Construction of domestic airport; electronic visa facilities; 50% cut in duty of imported vehicles used for tourism

X. ICT development

XI. 3% depreciation of the Sri Lankan Rupee; Rs. 75 inclusive tax on imported of per kg fabric; 35% inclusive tax on imports of branded apparel

XII. Tax relief to promote pharmaceutical products; 12% cut in income tax to promote private healthcare investments; VAT free on pharmaceutical machinery and spare parts

XIII. Strategic import replacement enterprises

XIV. Levy on outgoing and oncoming international calls; ICT development initiatives

XV. Government acquisition of unutilised lands of Regional Plantation Companies to be allocated amongst smallholders with two acres each; concessionary loan schemes for new planting and replanting; tax cut up to 12% on value added tea exports

3. Significant pre-Budgetary moves

I. Fuel hike

II. Increase in prices of cigarettes and alcohol

A challenging deficit target – 6.2% of GDP in 2012…

The United People’s Freedom Alliance (UPFA) Government presented its seventh consecutive Budget to the Parliament on 21 November 2011. Further, this would be the sixth budget paper since the current President took office in 2005.

Government revenue targeted to grow by 20.2% YoY to Rs. 1,126.1 b (14.7% of GDP)

From Budget 2012, the Government targets to achieve a total revenue of Rs. 1,126 1 b, taking the total revenue as a percentage of GDP to 14.7% compared with a 14.1% in 2011. Of the total Government revenue, tax revenue comprising of nearly 98.2% is expected to grow by 20.9% YoY to Rs. 1,000.6 m.

Out of the tax revenue, the taxes on goods and services and income tax constitute nearly 57% and 19%, where both are projected to be increased by approximately 19% YoY. The growth in taxes on goods and services is expected to be mainly generated from the increased excise tax on cigarettes, liquor, increased registration fee on motor vehicles, taxes on luxury vehicles and telecommunication charges on IDD calls.

From Budget 2012, the Government widens its focus from its previous budget on minimizing the large-scale tax evasion that is currently observed. The tax system which was simplified in 2011 by introducing a number of reforms such as the reduction in corporate as well as income tax rates with view to broad base the tax structure.

In the 2012 Budget, the Government has paid extra attention in improving the revenue by introducing reforms to Government departments linked to tax administration, which is expected to minimise large scale tax evasion. Consequently, it is expected to generate estimated revenue of Rs. 14.5 b.

The revenue generated in terms of grants is expected to increase to Rs. 20 b from Rs. 13.8 b during 2011, whilst non-tax revenue is estimated at Rs. 105.5 b with a 10.2% YoY improvement. Accordingly, the above initiatives supported by the expected high growth in the economy and broadening of the tax base, would assist the Government to achieve its target revenue increase of Rs. 182.9 m to Rs. 1,126.1 b in 2012 ( up 20.2% YoY).

Total Government expenditure to rise 14.1% YoY to Rs. 1,594.9 b (21.2% of GDP); recurring expenditure to climb up by 8.7% YoY to Rs. 1,107.9 b during 2012

The Government’s recurrent expenditure is estimated to rise by 8.7% during 2012, with the highest growth to be triggered by the salaries and wages expenditure taking up around 33.2% of total recurrent expenditure. The Government proposal to grant a wage increase of 10% to all public servants coupled with the impact from correction of pensioners’ anomaly, revision of allowance for public servants and other allowances would all contribute towards the budgeted 14.5% YoY growth in the total wage bill.

The Government’s interest expenditure is set to grow by a nominal 4.1% YoY during 2012 to Rs. 370 b. The increase in interest expenditure is expected to contain at a minimum level. This is on the backdrop of the expected decrease in the country’s budget deficit, Government restructuring its debt profile shifting from expensive domestic borrowings to low cost foreign and local debt as well as overall savings from concessionary interest rates prevailing in the broader economy.

Total expenditure on subsidies and transfers are expected to increase by 11% YoY to Rs. 236.4 m in 2012. The proposed increase to the ‘Samurdhi’ allowance and several subsidies introduced to SMEs (particularly the plantation industry), continued fertilizer subsidy programs and expenditure on settling IDPs would be the key elements justifying the surge in Government subsidy and transfer payments. Meanwhile the expenditure on other goods and services are expected to grow by 3.2% YoY to Rs. 133.5 b in 2012.

Public investments to surge by 27.9% YoY to Rs. 497.5 (6.6% of GDP)

The Government targets to increase the public investments by 27.9% YoY to facilitate the expected high growth in the economy. Consequently, the Government has allocated Rs. 45.4 b on education and health sectors, up 14.1% YoY.

With the Government’s intention of building a knowledge society, it plans to invest around Rs. 2.5 b for an ongoing 6,000 school development program whilst nearly Rs. 24.4 b has been allocated for universities towards improving new skills development. Furthermore, Government plans spend around Rs. 500 m on a vocational training program in the highly unemployed districts.

Government’s other infrastructure development expenditure is expected to rise by 29.5% YoY to Rs. 452.1 b, making up over 90% of the total funds allocated for public investments. Infrastructure development projects mainly in the areas of roads and bridges, electricity, ports and aviation, irrigation and water supply are expected to continue as they are citied as key highlights of the economic condition of any country.

Consequently, Government moving ahead with its ‘Maga Neguma’ and ‘Gama Neguma’ projects has allocated Rs. 123 b under the Ministry of Ports and Highways to improve national road network, Rs. 164 b for 2011 to 2014 to improve water supplies and Rs. 34.2 b to improve generation and distribution of electricity.

With the planned additional expenditure of Rs. 102.9 b (representing a 29.5% YoY growth) on infrastructure development projects during 2012 over the Rs. 349.2 b allocated in 2011, the current high growth in the economy’s infrastructure and construction-related sectors are expected to heat up even further to bring in lucrative advantages to enterprises having exposure to manufacturing and construction.

Budget deficit to drop to 6.2% of GDP from 7.0% in 2011

According to the Government target the country’s budget deficit for 2012 is expected to drop to 6.2% of GDP compared with a 7% in 2011. The contraction in budget deficit is expected to be achieved with the expected sharp resurge in Government income taking over the increase in Government expenditure by 600 basis points. It remains a challenge for the Government to achieve the incremental revenue through effective implementation of efficiency improvements in Government tax administration system whilst at the same time limiting itself within the set expenditure targets. The Government plans to fulfil nearly 63% of the deficit through domestic financing, with non – bank borrowings forecasted to take up nearly 71% of it. Notably, the local bank borrowings are budgeted to decrease by 60% YoY to Rs. 64 b, which is likely to reduce the pressure prevailing on the banking system currently with the heavy growth in credit demand. With the Government’s decision to depreciate rupee by 3%, it is expected to assist the current tight liquidity position, created primarily with the dollar sales by the Central Bank of Sri Lanka to defend the dollar peg further burdened by the excessive credit growth in the economy, to some extent. With the proposed relaxations, it is likely that the economy would be able to maintain its current concessionary interest rates, which is inevitable to achieve the set growth targets.

2012 Budget’s bearing on the listed counters:

Incentives introduced to banking and financial institutions from Budget 2011 to remain uninterrupted….

Considerable concessions including the removal of debit tax, reduction in VAT on financial services from 20% to 12% and the cut in corporate tax rates introduced from last year’s budget, led the overall banking sector to be a key beneficiary of the 2011 Budget.

The Government, in an effort to achieve its growth targets, has taken steps to move ahead with the same provisions, thus leaving space for banks and financial institutions to continue with the current growth momentum. Furthermore, with the proposed 27.9% YoY increase in Government infrastructure expenditure, the development projects in the economy is expected to inevitably speed up. This would enable the current growth in private sector credit to continue.

The proposed depreciation of rupee by 3% with immediate effect will directly benefit the country’s export market, thus improving growth potential for banks in export oriented industries, whilst also positively reflecting on the foreign exchange gains. As per the Budget 2011 proposal, the tax savings generated by banks from concessions introduced were maintained at an Investment Fund Account which has accumulated to nearly Rs. 10 b as of now. The fund is expected to become a strong source of long term lending for banks over the next two years as it would infuse additional capacity to absorb high credit growth.

Focus on Small and Medium Scale Enterprises (SME) sector…

With the Government identifying that the banks and financial institutions are not paying adequate attention to provide funds for SME sector, it has included a provision mandating lending of 10% each out of the total funds in the Investment Fund Account to SME and agricultural sectors respectively.Furthermore, the Government has encouraged all banks and financial institutions to set up special SME bank branches, where it is proposed to reduce income tax rate from 28% to 24% on interest income earned from such banking and other fee levying activities. Going further, Government intends to provide a 50% guarantee for banks providing loans to SMEs. This will encourage financial intuitions to improve their commitment towards country’s SME sector, which has been a key driving force in the economy.

Maintain high CESS of imported green grams, peanuts, ginger and maize so as to increase self-sufficiency in the domestic cultivation of these crops; removal of VAT on machinery and equipment for livestock production

With maize taking up nearly +40% of feed cost of most poultry operators; Bairaha Farms and Ceylon Grain Elevators along with its subsidiary, Three Acre Farms continue to see their margins being affected. Despite the growth in revenue witnessed by the poultry players during 1HFY12, overall performance was impeded with the increase in cost production owing to increased cost of maize.  All the poultry operators witnessed dip in their Gross Profit margins with local supply being hindered after the occurring of floods during the Maha season. With the Government continuing to maintain high cost of imported maize, we expect the poultry firms’ margins to be affected especially with the Yala Season (in September) favouring rice cultivation. It should be noted that though the Government looks to increase self-sufficiency of local maize cultivation, the country still continues to import almost 50% of its total requirement. The broiler operators have already expressed their issues pertaining to the quality of the locally cultivated maize as local growers lack technological support to be in line with regional growers whilst availability of large extents of land in the dry zone continues to be a bottleneck for new entrants.

On a positive note, we believe Bairaha Farms would make use of the current depreciation of the currency to penetrate into its long term target markets, Maldives, with its value added product range whilst making use of VAT exemptions on investment in machinery & equipment. However, we believe that the high cost of production would continue to weaken its competitiveness in the global market.

However, CIC Holdings – a local key agri producer, will prove to be a direct beneficiary of the export incentive moves. CIC Holdings, with its exposure to maize through CIC Feeds (Pvt) Ltd and rice cultivation will stand out to be a direct recipient with the Government looking to discourage import of feed. With the 3% devaluation of the domestic currency after the Budget, we expect CIC Holdings to better position its agro products in the global market, though export contribution remains minute, but is believed to grow in the upcoming periods.

CESS on vegetable and other edible oils to protect domestic cultivation of coconuts along with several other programmes to encourage domestic cultivation of coconuts; taxes imposed on food produced from coconut, palmyrah and kitul to be removed

Coconut exports make up nearly 1.2% of our total exports whilst accounting for 10.9% of total agricultural exports. With the decline of coconut production to 1,483 m nuts during one to eight months of 2011, Sri Lanka has initiated the move to encourage coconut production.

Renuka Agri Foods along with its investment vehicle, Coco Lanka, saw their bottom lines falling during 1HFY12 and this can be reasoned out with the low rainfall. Renuka Agri Foods, an export oriented coconut-based product manufacturer, is said to be exporting to more than 52 countries with the export sales making up nearly 95% of its topline.

The Government looks to encourage coconut cultivation as they target to harvest around 3,650mn nuts by 2016. A high CESS of has been imposed on vegetable and other edible oils to protect coconut cultivation and other related industries. Taxes imposed on food produced from coconut, palmyrah and kitul will be removed with a view to improve related production.

Adding on, both these counters will stand out to benefit on a better pricing formula, with the depreciation of the local currency, in the international markets.

Provisions have been made to extend loans to improve fish production…

Tess Agro, a group with interests in engineering, deep sea fishing, export of marine products and fruits and vegetables; will stand out to be a direct recipient of the Government’s move to encourage the fisheries industry.

Tess Agro, with 96% of its sales being taken up by exports would stand out to be another export oriented agri player to benefit with the devaluation of the Lankan Rupee whilst also receiving tax holidays for investments as an active local agri player. It should be noted that canned fish has also been VAT exempted. All the above mentioned agricultural operators, animal husbandry/ or processors and fisheries are eligible for tax holidays starting for a period of minimum four years for investments ranging from Rs. 25 m to Rs. 100 m.

High duty on imported milk powder will be maintained to enable dairy farmers to secure better prices

With the maintenance of high duty on milk powder, Lanka Milk Foods, would continue to pay out their usual taxes with ‘Lakspray’ continuing to make up nearly 70% of their topline. ‘Lakspray’ is being imported from the global market to be packed for distribution in Sri Lanka. The present price ceiling for powdered milk stands at Rs. 264 per 400g pack. This restricts the ability of Lanka Milk Foods to pass on any cost increase, related to its imports, to the customer.  However, with powdered milk reaching its maturity stage, the company ventured into liquid milk segment in 2010. The liquid milk segment, whose contribution is improving significantly to the company’s earnings, will help Lanka Milk Foods, to reduce its exposure in the powdered milk segment whilst also benefitting as a local dairy farmer operating through the brand, Ambewela.

Nestle Lanka, will continue with its tax structure related to the import of its infant milk category, but will prove to benefit with its strong hold of 1,100 liquid milk collection points across the island. Its recent Rs. 10 b investment plan will benefit of tax holidays if it has exposure to animal husbandry and or processing.

Consolidation of withholding tax on motor vehicles; increase of tax on luxury cars; removal of VAT on imported buses, lorries and trucks; 50% tax deduction in imported tyres of buses and lorries

Registration charges have been amended with increase in taxation of luxury vehicle segment. As the table below shows only the passenger vehicle segment has seen an increase in duty whilst most of the agri-related and commercial vehicles remain with the same registration levy.

The annual license fee too has been increased for the motor bicycle, three-wheelers and to all categories other than lorries, tractors, buses and trailers.

Ashok Leyland has its heavy weight buses and lorries out of the new vehicle registration levy picture. VAT on bus imports has been removed whilst Customs Duty on Lorries as well as trucks too have been removed. This would fuel up demand for Ashok Leyland’s products whilst a 50% cut on the duty of imported tyres for such vehicles too would reduce maintenance cost to maintain demand levels. Furthermore, its buses operating in the field of tourism will also see a 50% import duty cut. The management shared that it had so far sold nearly 4,000 buses and targets to sell around 7,500 for FY12.

The Leasing and hire purchase industry players; Lanka Orix Leasing, People’s Leasing Company, LB Finance and other banks with interest in leasing, will see demand flowing in for the tourist related vehicles, commercial lorries and buses.

Moving on the theory of demand and supply; increase of taxation on imported luxury, semi-luxury and dual purpose vehicles will certainly hamper the demand for such vehicles. With United Motors focusing on its ‘Mitsu’ vehicle segment ranging between 1,500-3,000 cc and ‘Peradua’ below 1,000 cc, would feel the increase in the tax structure in its demand for vehicles.

However, with the increase hitting a maximum of Rs. 50,000, less damage is expected especially with guaranteed demand still expected to flow in from the duty free permit holders. Holding around 15% of the motor cycle market, United Motors’ TVS Lanka is believed not to have a big impact following the Rs. 500 increase in the registration fee.

Diesel & Motor Engineering will see the volume of its luxury vehicle segment; Benz, Chrysler and Jeeps; react to the change in the duty structure and vehicle registration cost. However, it will continue to benefit from the favouritism laid on agri and tourism related vehicles.

Kelani Tyres might see competition from imported tyre brands with the 50% deduction in imported tyres of buses and lorries but will make use of the VAT free clause on investments in machinery of rubber related products.

All motor players will have to face the increase of import cost related to the depreciation of the local currency.

Development of road network, housing facilities, airport, hotels and hospital construction

With the infrastructure drive still active, we can expect all entities related to the construction field to benefit. Of this would include; ACL Cables, Kelani Cables, Royal Ceramics, Tokyo Cement, Lanka Ceramics, Lanka Floor Tiles & Lanka Walltiles. These counters would only stand out to benefit if the raw materials for the planned projects relating to road network expansion, electrification and ports & highways; take in materials from the domestic manufacturers. The cable manufacturers, who are already seeing their margins sway with the volatility in the copper prices, will have to face the additional import cost involved with the devaluation of currency. ACL Plastics can make use of VAT exemption in the import of machinery of plastic manufacturing.

Construction of domestic airport; electronic visa facilities; 50% cut in duty of imported vehicles used for tourism

With the allocation of Rs. 750 m to construct domestic air ports in Kandy, Nuwara Eliya, and Iranamadu in 2012, so to facilitate domestic air travel, more local as well foreign tourism can be expected. With the implementation of online visa facilities, carrying a US$ 10 charge for travellers from the SAARC countries and US$ 20 for others, most of the hotels are expected to benefit. Most hotels and resorts are on their last stages of their refurbishment and rebuilding phase to face the upcoming Winter Season.  Sri Lanka had already seen around 537,787 tourists till August 2011 and targets around 750,000 in 2011 with 2020E looking at 3,038,766 arrivals. The tourism industry is being transformed to a US$ 1 b industry. Family travel has been further promoted with no visa charge for children whilst commercial travel to the island has been supported with no visa charge to those who spend less than 48 hours in the country. The island will look to be a cheaper form of tourist destination with the 3% depreciation of the foreign currency.

ICT development

PC House would stand out to be a direct recipient of the Government’s move in spreading IT education in Sri Lanka. The country targets to improve computer literacy to 75% by 2015. Government plans to set up a technology city in Hambantota whilst continuing to target the industry to be worth Rs. 1 b by 2015. Customs duty for imported computers have been made nil from 5% previously.

3% depreciation of Sri Lankan Rupee; Rs. 75 inclusive tax on imported of per kg fabric; 35% inclusive tax on imports of branded apparel

So as to be in line with regional competitors in the export market, a 3% devaluation of the domestic currency has been implemented with immediate effect. Apart from the above mentioned entities, other export oriented counters; Plantations, Kuruwita Textiles and Hayleys MGT, will prove to be direct beneficiaries whilst the oil palm entities such as Good Hope, Indo Malay, Selinsing, Shalimar and Bukit Darah will have foreign exchange gains at point of conversion to local currency.

The textile players; Hayleys MGT and Kuruwita Textiles will benefit from the country’s plans to discourage imports of textiles and encouragement of local textile manufacturers through the extension of long term tax holidays and reduced income tax burdens. However, textile items are now prone to a unit-based taxation as opposed to ad-valorem.

Export oriented apparel manufacturers such as Kuruwita Textiles, who are exporting a minimum of 75% of their production will be permitted to sell the balance in the local market on the payment of all inclusive tax of Rs. 25 per piece and Rs. 25 for a bundle of six pieces of selected categories.

Tax relief to promote pharmaceutical products; 12% cut in income tax to promote private healthcare investments; VAT free on pharmaceutical machinery and spare parts

It has been proposed to extend tax relief to the private sector to promote production of pharmaceuticals and to enter into contracts to import high quality pharmaceuticals. The Healthcare sector as a whole will be benefiting especially with the reduction of income tax to a maximum of 12% in view of the Government to promote private healthcare investments. Colombo Pharmacy, a dispensing chemist and a retail dealer, will also benefit from this move.

Strategic import replacement enterprises

In order to discourage imports, certain production of items to replace imports either by a new enterprise or by way on an expansion of an existing enterprise with the corresponding investment will be eligible for concessions (see table). Lanka Cement as well as Tokyo Cement will benefit out of this move.

Levy on outgoing and incoming international calls; ICT development initiatives

Key players in the telecommunication sector, Dialog Axiata and Sri Lanka Telecom, stand to benefit from the development initiatives taken by the Government in the country’s ICT services. Several Government offices are now using IT services and the Inland Revenue Department is expected to be fully automated by 2013.

Steps are being taken to improve accessibility of computers and ICT literacy rates in the country with the Government targeting a computer literacy rate of 75% by 2015. Low broadband and internet penetration due to the low usage of computers and the lack of computer literacy has always hindered Dialog Axiata’s and Sri Lanka Telecom’s broadband expansion. Furthermore, the Government is also looking to set up a technology city in Hambantota in order to attract investment in information technology and related industries, creating opportunities for DIAL and SLTL to grow in tandem with increased ICT services. The Government’s efforts to transform the ICT industry to a US$ 1 b dollar industry by 2015 will invariably be advantageous to the operators. The Telecommunication Regulatory Commission is planning to implement policies and strategies to encourage telecommunication companies to focus on the development of their broadband network facilities.

Following the implementation of a levy of Rs. 2 per minute on outgoing international calls last year, the Government has opted to raise the levy to Rs. 3 per minute for 2012 whilst also increasing incoming international call tariff to US$ .09 from US$ .07. Although the Government may be looking to eliminate the cross subsidisation of domestic telephony through international telephony whilst improving its revenue generation through the telecommunication sector, the increase is expected to have a negative impact on the companies’ earnings and the country’s overall BPO industry.

Government acquisition of unutilised lands of Regional Plantation Companies to be allocated amongst smallholders with two acres each; concessionary loan schemes for new planting and replanting; tax cut up to 12% on value added tea exports

Moving along with the proposal made in 2011 Budget, the Government has proposed to acquire nearly 37,000 hectares of unutilised land from regional plantation companies. The Government was prompted to this decision with the land being not utilised for any productive purpose since the privatisation in 1992. The acquired land is expected to be distributed among small holders on alternative 30-year lease arrangements, with the necessary financial support also to be extended to the small growers.

Although this at a glance seems to adhere growth prospects for plantation companies; it will improve the production level in the economy, specifically the tea, rubber and coconut production in the long term assisting to improve the bought leaf crop of the regional plantations. This is further assured by the Government proposal to increase the current subsidy given to tea smallholders for replanting and new planting to be increased by Rs. 50,000 and Rs. 100,000 respectively. Furthermore, Budget 2012 includes a provision to introduce a concessionary loan scheme for plantation companies for replanting and new planting. All these efforts are clearly focused on improving the current yield levels of the industry, which lag behind the competitive nations. This is likely to benefit plantation sector in the long term as productivity improvement is the key in sustaining profitability of the industry.

Meanwhile, the CESS imposed on bulk tea exports will remain unchanged at Rs. 3.5 per kg whilst revenue generated from this CESS is to be utilised to promote the Ceylon tea brand in the international market. This is critical to remain competitive so as to retain Sri Lanka’s share in the global tea market. Adding further the proposed depreciation of rupee by 3% will benefit the entire plantation industry increasing the export competitiveness of their products. A newest initiative taken by Government from the Budget 2012 is the provision to reduce income tax payable by joint ventures between tea producers and export companies. This includes a provision to reduce income tax up to 12% payable by such joint ventures engaged in tea exports under Sri Lankan brand names. This will encourage consolidation between tea planters and value added tea exporters, where the regional plantation companies which have already ventured into value added tea exports will directly benefit. Moreover, the Budget has proposed incentives for other agricultural crops including cinnamon, pepper, cardamoms and cocoa. These include increasing the funds allocated to Export Agricultural Department reduce taxes on equipment required for promoting high quality water management techniques.

Significant pre-Budgetary moves

Fuel hike

Sri Lanka raised fuel prices on 30 October 2011 due to pressures created by high cost of global oil prices. Petrol price went up by Rs. 12 (a 10% increment) per litre with diesel surging by Rs. 8 per litre. This price hike is believed to assist reduce pressure on an exchange rate peg with the US dollar and match re-balance domestic demand.

Delays in raising imported fuel prices cause losses in petroleum distributors which have to be financed by bank credit, pushing up aggregate demand and pressuring Sri Lanka’s soft dollar peg with the US dollar and increasing inflation.

Increase in prices of cigarettes and alcohol

Ceylon Tobacco Company: Prices of cigarettes were increased with effect from 20 October 2011 with a change in the tariff structure with effect from 19 October 2011. This would invariably improve CTC’s net revenue by circa Rs. 0.21 with every Rs. 1 price revision. Following the monopoly status of CTC and the addictive nature of the products, demand has remained price inelastic. So a price revision is said to have less impact on CTC’s performance.

Lion Brewery, Ceylon Beverage Holdings, Cargills Ceylon & Distilleries Company of Sri Lanka: Prices of wine, arrack, foreign and malt liquor was increased with effect from 25 October 2011.

Following the increase of the duties, most of the companies increased their prices to offset the tax increase. The liquor manufacturers have already incorporated the increase in tax for liquor to their calendar as they foresee the Government moving to discourage liquor as well as tobacco consumption.

The price increment for these products has been taken positively due to the inelastic nature of demand. However, beer manufacturers have categorised their product as income elastic and feel that continuous increase of duties may hamper their volume levels.

The Budget 2012 read that liquor produced from local plant product will be subject to a lower excise duty of Rs. 100 per proof litre. Lion Brewery, Millers Brewery through Cargills (Ceylon) as well as Distilleries Company of Sri Lanka are all local manufacturers of liquor. (Source: Arrenga Capital Research)