PREVIEW-Sri Lanka 2012 budget eyes deficit cut, 8 pct growth

Fri Nov 18, 2011 6:26pm IST

* Government targets development in 2012

* Contradictory investment policy concerns remain

* Aims 8 pct growth, 6-7 pct inflation

* Govt expenditure, borrowing to rise

By Shihar Aneez

COLOMBO, Nov 17 (Reuters) - Sri Lanka aims to maintain 8 percent economic growth and cut its fiscal deficit to a 20-year low in the 2012 budget due to on Monday, with investors concerned after the government sent several conflicting signals on investment policy

The 2012 budget will be President Mahinda Rajapaksa's second full-year budget since the end of a 25-year war that had hindered the Indian Ocean island nation's $50 billion economy.

The budget is expected to focus on development and maintain lower tax regimes adopted in the 2011 budget, which was meant to instill confidence with investor-friendly polices.

"I think it is going to be an okay budget with the government refraining from introducing any negative investor policies," Colombo-based TKS Securities' research head Danushka Samarasinghe told Reuters.

Investor confidence has taken three big hits over the last month, with the government changing the terms on a $500 billion hotel deal, the removal of the capital markets regulator who acted against market manipulation and the passage of an asset acquisition act that drew ratings agency criticism.

"This government is trying to do business by itself, leaving the private sector and investors in tatters," said an economist with a private bank on condition of anonymity.

"They will have to introduce policies to reduce government shares in businesses and if that happens through this budget, that will be a welcome move."

The government has continuously said it will intervene in the market when it does not work efficiently.

The island nation plans to cut its budget deficit to 6.2 percent of the gross domestic product (GDP) in 2012, lowest since 1992, from this year's estimated 6.8 percent and is aiming for 8 percent economic growth.

Public investment on infrastructure will be increased by 19.4 percent to 541 billion Sri Lanka rupees ($4.9 billion), or about 6 percent of the GDP.

Annual inflation is forecast to stay at 6-7 percent, and government debt is expected to be trimmed to 75 percent of GDP from this year's forecasted 80 percent.

Rajapaksa, who is also the country's finance minister, plans to boost spending by 8.5 percent to 2.22 trillion Sri Lanka rupees in 2012, while increasing borrowing but maintaining the fiscal consolidation gains made under a $2.6 billion IMF loan programme.

Rajapaksa's government has focused its post-war efforts on building or renovating ports, roads, railways and other infrastructure, with over $21 billion expected to be spent through 2015.

The budget also comes at a time when the IMF has delayed the eighth tranche of the loan, after the central bank rebuffed its call to stop intervening on the rupee exchange rate. The central bank has spent more than $1 billion this year defending the rupee rate. ($1 = 110.205 Sri Lanka Rupees) (Editing by Bryson Hull)

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