Opinion: Budget 2017 expectations, unrealistic or achievable?

Oct 28, 2016 (LBO)- Gearing for the new budget in a few weeks time Finance Minister Ravi Karunanayake is optimistic about Budget 2017.

An equity buyout for Hambantota port is on the cards, and the second IMF tranche will be back on track, although continued support for SriLankan Airlines is likely, Karunanayake said, speaking to the Foreign Correspondents Association.

The previous budget was “created during an experimental stage’, but Karunanayake is positive that there will be no hiccups in the new budget.

But the main concern among many is the newly passed VAT and NBT act.

With the raised VAT and NBT figures, they expect to collect revenue of 15 billion rupees within the next 2 months, he said. Although in a previous statement to media, Karunanayake said that 1.5 billion needs to be raised in November and December 2016 and 10 billion rupees was expected to be raised within a year.

He is positive that the budget deficit target of 5.4% is achievable, and is confident of the 4.7% target for 2017, and eventually 3.5% in 2020. But, given that we overshot our target in 2015, it remains to be seen whether 5.4% is achievable.

Equity buyout for Hambantota Port

The idle assets of Sri Lanka such as the Hambantota port, is due for an 80% equity buy out in a PPP agreement with a Chinese company. The agreement is to be signed within the 1st week of November 2016 with the private party who is a ‘vibrant port operator,’ he said.

Currently the value added revenue earned from the Hambantota port is Rs. 300 Mn which is insufficient for debt servicing, but with the PPP agreement in place, sufficient funds will be received to retire the high end debt, while retaining the low interest rate debt currently in place.

Interest has been shown in the Mattala airport as well by 10 parties but this needs to be whittled down before a final selection is made.

Further support for SriLankan
Despite previous statements made that the national carrier Sri Lankan Airlines will be supported only until October 2016, Karunanayake said that they will not sell the airline just for the sake of selling.

There are 3 interested parties, 1 investment bank, 1 fund and 1 airline and the final decision will take time. Therefore the debt burden of Sri Lankan Airlines will impact budget 2017 as well.

In an attempt to reduce brain-drain, and to get higher remittances from overseas employment, a minimum wage rate is to be applied for workers seeking jobs overseas.

FDIs and Funding
Budget 2017 is expected to have plenty of incentives to attract FDI’s to the country with some innovative, non- conventional financing options in place (unique funding system), although a further sovereign bond issue is not completely off the table.

With the assurance of an inflow of FDI’s, Karunanayake is not worried about pressure on the rupee, as it will be managed although interest rates may see a hike.

IMF second tranche
With government revenue set to rise, the second IMF tranche is expected to be received within the next 2 weeks, which had been on hold until tax reforms were put in place. However Karunanayake has gone on record to state that budget decisions are not made or governed by the IMF.

While there is optimism about the new budget increasing government revenue, the question remains whether it will be sufficient? Debt due till April 2017 in sovereign bonds and other debt is $5.3 Bn while there is a further $3.3 Bn outstanding in swap facilities.

And since Sri Lanka now falls under the lower middle-income category, the concessional loan facilities have reduced and the non-concessional loans have increased from 4% in 2009 to 15% in 2016 (as of end May). Sri Lanka’s per capita debt has increased from Rs. 63,000 in the year 2000 to Rs. 4Mn in the year 2015.

While a stunning budget is expected to be released in the next few weeks, we can only hope it does not keep us awe struck for the wrong reasons.