Colombo stocks surge on Rajapaksa tax cut bonanza

November 28, 2019 (LBO) – The stock market in Sri Lanka started the day in rally mode with most of the major indices up approximately 1.5%. The sharp rise comes on the back of large tax cuts enacted by new Finance Minister Mahinda Rajapaksa in order to stimulate a sputtering economy.

The tax cuts equate to billions of dollars in fiscal stimulus and should give a significant boost to GDP growth which has been clocking near an anaemic figure of 2%. Former Finance Minister Mangala Samaraweera has been blamed for the slow growth and was often accused of running a tight fiscal policy at the behest of the IMF.

Trading volume in the first hour of trading was heavy at US$7mn, a figure which is near the average daily trading volume for the year.

Sri Lanka’s stock market has been in rally mode as it started to anticipate a victory for the current President Gotabaya Rajapaksa. Rajapaksa has been viewed as a stock market friendly leader for some time now. However, despite the local bullish sentiment sparked by Sri Lanka’s new President, foreign investors have been consistently selling the rally with net foreign outflows of approximately US$50mn since the end of August.

The sweeping new tax cuts are certain to increase the budget deficit and complicate matters with regards to Sri Lanka’s agreements with the IMF. The new Central Bank Governor will also have his or her hands full managing debt refinancing, foreign reserves, and currency stability after such drastic fiscal stimulus. Indrajit Coomaraswamy, the highly respected current CBSL Governor, is slated to step down on December 20th. His replacement is yet to be announced.

Former CBSL Governor Ajith Nivard Cabral was recently named as a Senior Advisor to the Prime Minister on economic affairs.