ECONOMYNEXT - Sri Lanka is expected to grow 4.6 percent in 2017 and a 'robust' 5.2 percent up to 2021, but the country has to watch it debt and external payments and state-owned enterprises, Moody's, a credit rating agency, said.
"Despite ongoing fiscal consolidation, Sri Lanka's credit profile will remain constrained by its large debt burden and very low debt affordability, combined with contingent liability risks from state-owned enterprises," Moody's said.
Moody's has assessed Sri Lanka's credit profile in terms of Economic Strength, Moderate (+); Institutional Strength, Low (+); Fiscal Strength, Very Low (-); and Susceptibility to Event Risk, Moderate.
Sri Lanka, which has been rated a speculative B1, has higher income levels when compared with similarly rated sovereigns, but also higher debt and lower tax revenues.
Total government revenues are also very low, with a general government revenue/GDP ratio of 14.3 percent in 2016, and is one of the lowest among B-rated sovereigns, Moody's said.
"Sri Lanka's low tax efficiency and tax collection provide significant scope to broaden the tax base and increase the tax revenue/GDP ratio, which was only 12.4 percent in 2016", William Foster, a Vice President and Senior Credit Officer at Moody's, said.
Other analysts, however, has said that absolute levels of revenue have little value, but what is more important is to curb spending and trim the deficit, which will reduce the accumulation of new debt.
Sri Lanka has had 20 percent plus revenue to GDP up to the late 1980s, with expenditure exceeding those levels and frequent balance of payment crisis, due to financial repression as the Central Bank finances deficits (by printing money).
Progress on reducing external vulnerability has been slower, Moody's said.
External and foreign currency debt account for about 43 percent of total government debt, giving rise to significant exposure to external financing conditions.
"In particular, large volumes of external government debt maturing in 2019-22 will test government liquidity and external vulnerability," Moody's said.
"Further measures to build foreign exchange reserves would help establish buffers against external pressure, in particular ahead of 2019."
"Signs that planned fiscal consolidation measures are less effective than Moody's currently expects or that the authorities' commitment towards such steps has diminished would weigh on Sri Lanka's rating, particularly if foreign exchange reserves remain low while refinancing of market debt is challenging."