Budget for National Renewal:

Inclusive growth the way forward

 01

Budget for National Renewal:

Inclusive growth the way forward
➢ Having felt the pinch of COVID-19 and the ensuing economic crisis, Budget 2024 aims to revive the

economic growth trajectory by resuming delayed projects, especially in relation to the

Construction, Agriculture, and Tourism industries.

➢ State sector employees both employed and retired are provided increases in monthly allowances,

which we believe will aid in improving consumer spending although stretching the fiscal deficit.

➢ Apart from the VAT rate hike to 18% from 15% previously, there were no changes made to existing

taxes. Emphasis was placed on strengthening tax administration and collection to meet tax

revenue targets set by the IMF.

Source: Budget Speech 2024 and BRS Equity Research

 02

No Surprises
➢ We believe, there are no proposals from the
budget 2024 that could materially navigate
the direction of the stock market sentiment.
➢ Therefore, we expect investor uncertainty
which prevailed over further tax increases to
from Budget
subside and impact market sentiment
positively.
2024
➢ Hence, we continue to be bullish on overall
market valuations and assign a fair value of
13,770 on the ASPI based on 2024E earnings
projections.

Source: Budget Speech 2024 and BRS Equity Research

 Orginal Est. Revised Est. 03
LKR Bn. 2021 2022 2024E
2023E 2023E

Total Revenue and Grants 1,464 2,094 2,013 2,851 4,172

Total Revenue 1,457 2,084 1,979 2,839 4,107
Tax Revenue 1,298 1,852 1,751 2,596 3,820
Non Tax Revenue 159 232 228 243 287
Grants 7 10 33 12 20

Total Expenditure 3,522 4,427 4,473 5,253 6,978

Recurrent 2,748 3,620 3,520 4,471 5,277
Capital Expenditure and Net Lending 790 1,072 953 782 1,701
Other (15) (265)

Budget
Revenue Surplus/ (Deficit) (1,290) (1,536) (1,540) (1,632) (1,170)
Budget Deficit (2,058) (2,333) (2,460) (2,402) (2,815)

Total Financing 2,058 2,333 2,460 2,402 2,815

Total Foreign Financing (14) 342 425 340 726
Total Domestic Financing 2,072 1,991 2,035 2,062 2,125

Summary
As a % of GDP
Revenue and Grants / GDP 8.30 8.80 8.30 10.10 13.10
Revenue / GDP 8.20 8.70 8.30 10.10 13.00
Tax / GDP 7.30 7.80 7.30 9.20 12.10
Expenditure / GDP 19.90 18.60 18.50 18.70 22.20

Bugdet Surplus (Deficit) / GDP (11.60) (9.80) (10.20) (8.50) (7.60)

Deficit Financing

LKR Bn.
Total Foreign Financing (14) 342 425 340 726
Foreign Borrowings 517 717 783 780 1,000
Foreign Commercials 165 250
Debt Repayments (531) (375) (359) (440) (274)

Source: Budget Speech 2024 and BRS Equity Research Total Domestic Financing 2,072 1,991 2,035 2,062 2,125
Non Bank Borrowings 1,898 2,672 3,610 4,002 2,205
Bank Borrowings 242 (323) (1,195) (1,479)
Sri Lanka Development Bonds (380) (461) (80)
 04

Government Revenue and Expenditure

8000
6978
6714
7000

Budget Summary 6000

5000
5559

4473
5253

4107

LKR Bn
4000
2839
Bugdet Surplus (Deficit) / GDP 3000
2084 1979
- 2000 1457

1000
(2.00)
AS a percentage of GDP

0
2021 2022 Original Est. Revised Est. 2024E
(4.00) 2023E 2023E

(6.00) Government Expenditure Government Revenue

(8.00)
(7.60) Deficit Finanancing - 2024E
(8.50)
(10.00)
(9.80) (10.20)
(12.00)
(11.60)
(14.00) 25%

2021 2022 Original Est. Revised Est. 2024E

2023E 2023E

➢ The borrowing limit is to be increased by LKR 3,450bn to LKR 75%

7,350bn (from LKR 3,900bn previously).

Total Foreign Financing Total Domestic Financing

Source: Budget Speech 2024 and BRS Equity Research
 05

Revenue Proposals
• The budget does not include any new tax proposals for 2024.
• However, proposes to increase the VAT from 15% to 18% from January 1, 2024.
• VAT revenue in 2022 amounted to 26% of total tax revenue.
• Non-tariff import taxes, including CESS, Port and Airport Levy is to be phased out
within 3 to 5 years.

Tax revenue 2022

3%
10%
Income Taxes
30% VAT

VAT rate to be
10%
Excise Taxes
PAL
20% Import Duties

26%
Other Taxes
increased to 18%
Source: Budget Speech 2024, CBSL, and BRS Equity Research
 06

Measures to improve tax 350000

Individual Income Tax payers

administration and tax collection 300000

250000

200000
Inland Revenue Department
150000
Tax Payable by Withholding
100000
• Introduction of a special return for a 2.5% withholding tax on gem sales. 50000

• Amendments to clarify provisions and improve the treatment of salary arrears. 0

2018 2019 2020 2021 2022
Tax Returns and Prosecution
• Special penal provision for prosecuting non-submission of tax returns.
VAT Tax Payers
• Clarity improvements in relevant sections 35000
30000
Mandatory submission of Taxpayer Identification Number (TIN) 25000

Going forward, opening a bank current account, obtaining building plan approval, vehicle 20000
15000
registration/renewal, and land registration will require a copy of TIN certificate. Further guidelines 10000

will be provided by the Commissioner General. 5000

0
2018 2019 2020 2021 2022

Source: Budget Speech 2024, CBSL, and BRS Equity Research

 07

Measures to improve tax administration and tax collection

Value Added Tax (VAT)
Expected Tax collection- by departments
• Amendment to empower the Commissioner General and define a uniform taxable
(2023 Fiscal Policy)
period. 1%
• Gazetted notification for a VAT rate increase from 1st January 2024.
7%
• Encouragement for registered persons to use Point of Sale (POS) machines.

Excise Department
• Introduction of an online license system for efficiency. 39% 53%
• Security evaluation and management improvements.
• Revision of licensing rules, flexible liquor licensing, and guidelines for tourism.
• Introduction of administrative fees and Key Performance Indicators (KPIs).
Department of Inland Revenue
• Policy proposals for liquor standards, license fees, and promoting investments.
Department of Customs
Customs Department of Excise
• Development of risk management capabilities, prevention of mis-invoicing, and Other
introduction of KPIs.

Source: Budget Speech 2024, CBSL, and BRS Equity Research

 08

Government Revenue Composition

4,500

4,000 287
3,500

3,000
243
2,500
LKR Bn

2,000 232 3,820

228
1,500
159 2,596
1,000 1,852 1,751
1,298
500

-
2021 2022 Original Est. 2023E Revised Est. 2023E 2024E

Tax Revenue Non Tax Revenue

Source: Budget Speech 2024, and BRS Equity Research

 09

Expenditure Proposals
• The living cost allowance for state sector employees will be increased by LKR 10,000 (from
LKR 7,800 to LKR 17,800) from January 2024 and commence payments from April 2024.
Arrears will be paid in 6 stages starting from October 2024.
• The government is to allocate LKR 383bn monthly for three primary expenditures, which
include:
• LKR 93bn for public sector salaries
• LKR 30bn for public 'Aswasuma,' medicines, and pensions
01
• LKR 220bn to cover loan interest payments
• Cost of living allowance of Monthly pension will be increased to LKR 6,025/- (increase of
LKR 2,500/-)
• Monthly allowance for senior citizens will be increased to LKR 3,000/-
• An allocation of LKR 3,000bn for foreign debt restructuring treatment on international
sovereign bonds.

Source: Budget Speech 2024, and BRS Equity Research

 10

Government Expenditure Composition

8,000
7,000
6,000 1,701

5,000 782
LKR Bn

4,000 1,072 953

3,000 790
5,277
2,000 4,471
3,620 3,520
2,748
1,000
-
2021 2022 Original Est. Revised Est. 2023E 2024E
2023E
Recurrent Capital Expenditure and Net Lending

Source: Budget Speech 2024, and BRS Equity Research

 11

1H 2023 at Glance
Tax Revenue Collection - 1H 2023 Excise Duty 1H 2023
1%
Income Tax
10%

3% 14% Ports and Airports 16% 41%

Development Levy
32%
VAT

17% Excise duty

32%

Import Duties Ordinary Liquor Cigaratte Petroleum Motor vehicle Other

28% 7% Other

1Q 2023 2Q 2023 3Q 2023 4Q 2023

Central government tax revenue (floor, in billion rupees) 650 650 800 840

Revenue achieved (LKR Bn) 578 621

Gap 11% 4%

Source: CBSL, treasury.com and IMF Country Report

IMPACT ON SECTORS
 13

Banking Sector
We do not foresee a direct impact on the listed banking sector as no taxes were introduced or

revised applicable to the banking sector. However, the following proposals were presented to

support the two-state banks in terms of capitalization and raising funds.

• LKR 450bn allocation for capital improvement.

• 20% stake in state banks to be offered to strategic investors or the public.

We believe the banking sector will benefit from a recovery of consumer spending through

improved income levels of state sector employees. The concerns, however, are on inflationary

effects and budget deficit pressures leading to higher borrowing needs for the government.

Source: Budget Speech 2024, and BRS Equity Research

 14

Tourism Sector
• "Visit Sri Lanka" programme targets to bring in 5mn tourists to Sri Lanka annually.

• Modernizing the government owned resorts to promote tourism. (~3750 room capacity)

• Pinnawala Elephant Orphanage and Kithulgala water rafting area to be developed as a

Tourist zone

• Coastal tourism zone in Trincomalee

The growth in tourist numbers will undoubtedly benefit the hotel sector as a whole

albeit not having a direct impact on any particular listed counter.

Source: Budget Speech 2024, and BRS Equity Research

 15

Strengthening tax collection in Tobacco and minimising

the illegal distribution of liquor
Mention has been made to strengthen the tax collection and enforcement in the Beedi Industry. In last year’s budget,
a Beedi tax of LKR 2 per stick was enforced for the first time since January 2023, with an anticipated collection of LKR
3bn. Given the growing migration towards the Beedi market due to the massive price disparity (between legal, illegal,
and beedi prices), 5.9bn sticks were distributed in 2022, with Beedi capturing a market share of 64%.

A new excise licensing system is proposed to aid the liquor industry,

➢ streamline various licenses to address the irrational distribution of liquor licenses.
➢ introduce flexible opening hours to discourage illicit selling of liquor and to maintain industry discipline
➢ revise related regulations for tourism promotional activities
➢ introduce an appropriate policy for soft liquor licenses
➢ maintain the industry discipline at the highest possible level

* Streamlining tax collection and imposing stringent measures for licensing can to a certain extent aid local
manufacturers such as CTC, DIST, and LION if imposed, adhered and reviewed regularly.

Source: Budget Speech 2024, and BRS Equity Research

 16

Dairy Sector
Programme to increase milk production by 53% in 5 years with the contribution of the private sector by
effectively using all the farms owned by the National Livestock Development Board. This is expected to
increase the daily milk production to 20mn liters per day from 4.3mn litres.

A refinance loan scheme will be introduced to those engaged in the dairy value chain.

Further, it is expected to increase the daily production of Ambewela farms to 75,000 litres of milk (~50%
increase)
Potential beneficiaries: LMF, LAMB, WATA, CARG, SUN

Source: Budget Speech 2024, and BRS Equity Research

 17

Agriculture
Proposals have been put forward to increase the land allocation for agriculture. 300,000 acres
from government lands including State Plantation Corporation, Mahaweli A and B Zones, and Land
Reform Commission are proposed to be utilized for large scale agriculture activities. Legal
obstacles to grow other crops (than paddy) in uncultivated lands in the wet zone are proposed to
be removed.

All agrarian service centers to be upgraded as Agriculture Modernization Centers in view of

increasing the paddy production from 3.5 metric tonnes to 8 metric tonnes per hectare.

Growth in agriculture will potentially benefit companies with exposure to fertilizers and agro
chemicals: CIC, AGST

Source: Budget Speech 2024, and BRS Equity Research

 18

Capital Goods & Material Sector

Revitalizing Construction: A Strategic Initiative and Pilot Project for Sector Recovery

• To address the construction sector crisis, government agencies will provide free lands for
construction projects.

• Companies will construct buildings, receive monthly rent until costs are covered, and then
transfer ownership to the government. The Ministry of Foreign Affairs' complex will be the
first pilot project.

A program aims to improve living conditions in Colombo's urban estates and boost the
construction sector

• Construction firms will build spacious houses and shopping malls on allocated free lands,
with the requirement to provide new residences to urban estate residents. Families have
the flexibility to choose housing within or outside the designated urban areas.

Source: Budget Speech 2024, and BRS Equity Research

 19

Capital Goods & Material Sector

Infrastructure Investments: Enhancing Rural Roads, Drinking Water, and Water Projects
• Addressing the decline of rural roads in recent years, a proposed allocation of LKR 10bn for
2024 aims to renovate these deteriorated routes.
• To address drinking water issues, focus will be on incorporating funds within the
decentralized budget and securing foreign loans for the implementation of drinking water
projects.
• The allotment of LKR 2bn aims to facilitate the rehabilitation of rural roads adversely
impacted by natural disasters.
• An allocation of LKR 250mn is designated for the year 2024 to initiate preliminary activities
for the Pali-Aru water project, addressing water-related challenges in Jaffna.

Potential Beneficiaries : AEL, CIND, SIRA, ALUM, LUMX, ACL, TKYO

Source: Budget Speech 2024, and BRS Equity Research

21
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22 21

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