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INTERVIEW-Sri Lanka ’11 budget to introduce reforms-treasury

[Reuters, Thursday, 29 April 2010 15:22 No Comment]

Sri Lanka will introduce fiscal reforms including tax changes in its 2011 budget, not in this year’s as had previously been pledged, the Indian Ocean island nation’s treasury secretary said on Thursday.

Sri Lanka is aiming to tap a peace dividend after the end of a 25-year civil war a year ago to boost the $42 billion economy, and revamp its tax and business codes to remove barriers to investment.

The 2011 budget reform schedule means the International Monetary Fund (IMF) could further delay disbursing the third tranche of a $2.6 billion loan, which it said it would release if Sri Lanka laid out fiscal consolidation plans in the 2010 budget. [ID:nSGE62G0EF]

The 2010 budget was originally due to be adopted in May, to allow the new parliament to be elected in April.

President Mahinda Rajapaksa will authorise three months of expenditure until July 22, and then a mini-budget will be adopted for the rest of 2010, Treasury Secretary P.B. Jayasundera said.

That will give Sri Lanka time to introduce much-needed reforms in the 2011 budget, he said.

"The aim of the (2011) budget is to focus on tax reforms, policies and a regulatory framework that would make Sri Lanka an investor-friendly country," Jayasundera told Reuters in an interview.

"Some of the taxes now are over 60 percent and those exorbitant taxes will be reduced to a rational level," he said.

EASING RED TAPE

Jayasundera, arguably the most powerful technocrat in Rajapaksa’s newly-elected government, oversees the treasury and is the top civil servant in the finance ministry and the new economic development ministry.

Rajapaksa is the finance minister and his younger brother, parliamentarian Basil Rajapaksa, heads the economic development ministry, which includes investment promotion, tourism and nation building.

"Through creation of the economic development ministry, the government has removed a lot of barriers for investors. Approval for security, environment, tax policies, investments…all will be done with one letter now," Jayasundera said.

The president won landslide re-election in January, and his government now has one the most powerful majority in over a decade, after parliamentary polls earlier this month. He has long pledged that he would make economic reforms once re-elected.

An IMF mission is due in Sri Lanka in mid-May to decide whether to disburse the next tranch and to negotiate over budget deficit targets with the government, after it missed the 2009 goal of 7 percent by recording a 9.5 percent gap.

The IMF has targeted 6 percent for 2010

"The 7.5 percent budget deficit target should be achieved comfortably as the expenditure would be the same like last year and the revenue is picking up," Jayasundera said. He said economic growth would be close to 7 percent, as earlier forecast.

The IMF loan was approved when the country was facing a balance of payments crisis with foreign reserves down to $1.27 billion. Reserves now are over $5 billion. That has led some presidential allies to question if the loan should continue.

"The reserves are more than the IMF target. I am optimistic of the IMF releasing both the third and fourth tranche together," he said.

Sri Lanka is now building and planning revitalised infrastructure including power plants, port terminals, tourist hotels and highways.

With those projects completed, Jayasundera said he expects tourism revenue to grow to $1 billion annually from its present $400 million, and foreign direct investment to boom to $1.5-2 billion annually from around $600 million now.

Jayasundera said foreign investment inflows should put upward pressure on the rupee currency LKR=. "I see a higher probability for appreciation than depreciation," he said.

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