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Budget concessions could revive inflation : Moody's

12 February 2015 09:23 am - 0     - {{hitsCtrl.values.hits}}

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By Indika Sakalasooriya 
The public sector salary increase, fuel price cut and a number of other concessions given in the revised budget of the new government may revive inflation amid the expected boost in consumption, Moody's Investor services cautioned in a brief comment, yesterday. 

The revised budget of the Maithripala Sirisena government proposed to increase the public sector employees' salaries by Rs.10,000 and cut taxes on 13 essential goods.

Soon after the new government was elected, tax on fuel prices was significantly reduced to pass the benefit of lower oil prices in the international market to the Lankan consumer.

Moody's pointed out that since the public sector employees make 15 percent of the workforce, the 47 percent increase in nominal wages will boost consumption and thus support growth. "However, it could also have the effect of reviving inflation, which has historically been high in Sri Lanka," the rating agency cautioned.

However, in a recent interview with Minor Business, Central Bank Governor Arjuna Mahendran downplayed the possibility of an inflation pick up. "My expectation is that inflation will start to come down from February onwards. The impact of reduction in petroleum products in January and the impact of food prices reduction will have a major impact on inflation in the next two to three months," he said.

Sri Lanka's inflation spiked to 3.2 percent in January. The country's headline inflation has been rising from last December since it fell to over five-year low of 1.5 percent year-on-year (YoY) in November. Moody's further said the relief measures announced by the revised budget will also add up to the fiscal deficit. The revised budget targets a fiscal deficit of 4.4 percent this year, lower than the previous regime's target of 4.6 percent.
 
The galremarn hors to &Nett tits revised target through dvidends and letiES on state-oned enterprises, a host of one-off taxes ai high earnings indieiduals and institubons and a considerable redaction is capital and curled expendtwes. "Budget suggests continuation of fiscal consolidation but revenue measures could potentially dent investurd and future meth:Mood/8 noted.

The gavernrrerd appears to have targeted certain whale sector conpanies and sectors. which it perceived to have amassed ill-gotten' gans during the last The years. The budget also proposed retrospective taxes—tares imposed on past gains Si Lanka's premier bade chamber, the Ceylen Chamber of Canmerce. named some of the tares as 'entity-based', tinting their draconian nature. The governrnerd expects 30 percent of revenue from taxes and dividends Iran public sector enterprisesMilea super gain tax imposed on conpaniesAich made in ecco of Rs2 billdn profit for the tax year 2013/11. is expected to generate Rs/50 What or hvo third of the total cdlectun. The budget proposals also inpose additional levies on the casino industry. "These increases in taxes could deter future investment," Moody's warned.
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