Macro Analysis /
Sri Lanka

Sri Lanka: Interim Budget Analysis - August 2022

  • Higher VAT will increase collections to LKR 375bn in 2022

  • Social safety support to drive expenditure above govt’s forecast

  • 2023 budget to focus on revenue measures

Sri Lanka: Interim Budget Analysis - August 2022
Asia Securities
31 August 2022
Published byAsia Securities

Key takeaways:

  • Overall, the expenditure proposals are a positive to support the low-income households amidst rising cost of living

  • On the revenue generating policies, this came in lower than our expectations given the Government's ambitious fiscal target of 9.8% of GDP in 2022 (we forecast this at approx. 13.0% of GDP)

  • We factor in continued money printing by the Central Bank to bridge the deficit, to support the Government’s expenditure proposals for the rest of 2022

  • While the higher VAT rate will negatively impact consumption amidst a contracting economy, we expect this to support cash flows to the government in the near-term

  • Despite the lower-than-expected revenue measures, we expect the SoE restructuring plans to support in easing the Government’s debt levels in the medium-term

  • We continue to expect the announcement of an IMF Staff Level Agreement in the coming days

  • We expect GDP to contract approx. 9.0% YoY in 2022 

Higher VAT will increase collections to LKR 375bn in 2022

  • As activity levels increase in August, we perceive the interim budget one that will support this momentum, given the lower-than-expected revenue proposals

  • With the higher VAT rate of 15%, we expect collections from VAT to improve to LKR 375bn in 2022 (+21.6% YoY)

  • We note that collections stood at LKR 136bn for 4M 2022, ahead of the May VAT hike

  • For 2022 we factor in total tax revenue collections of LKR 1.70tn (approx. 7.3% of GDP) slightly lower that the Government’s forecast of LKR 1.85tn

  • This will improve further as economic activity picks up in 2023

Social safety support to drive expenditure above govt’s forecast

  • The President announced a number of proposals to support the lower income households impacted by the economic crisis

  • This is a key positive at this juncture, where poverty levels look to have increased since 2019

  • However, we note that the distribution of funds plays a key role, given that the Samurdhi system is reported to have significant leakages

  • Overall, we expect the Government’s recurrent expenditure to continue its upward trajectory barring any material policy decisions to reduce the public sector workforce

  • We expect recurrent expenditure to reach LKR 3.8tn in 2022, above the Government’s forecast of LKR 3.6tn

2023 budget to focus on revenue measures

  • Despite the tax measures announced in May which will come into effect in October, we expect further tax proposals to be announced in the 2023 budget, expected to be presented in Parliament in November ‘22

  • In our view, this is likely to include 1) higher corporate taxes and 2) higher income taxes/wealth taxes to support the Government’s fiscal consolidation efforts to reach a primary surplus of 2% in 2025

  • At this point, we note that the Government must focus on targeted fiscal consolidation measures to reach the IMF’s proposed targets by 2025