ECONOMYNEXT – A rollover of 1.1 billion US dollar swap line from the Reserve Bank of India will help Sri Lanka but it also exposes a gap in external financing, and the country will have to fix its budget deficit and debt, Moody’s, a rating agency said.
"The swap lines and potential IMF financing demonstrate Sri Lanka’s access to official funding during periods when global market financing is becoming more difficult," the agency said in a statement.
"However, recourse to such official funding also highlights the fact that Sri Lanka’s foreign exchange earnings and reserves fall short of its external financing requirements.
"While the official financing will alleviate immediate external liquidity risks, Sri Lanka’s balance of payments is unlikely to meaningfully stabilize without a reduction in government deficits and debt…"
Moody’s said Sri Lanka in the recent past has relied heavily on external debt to finance projects and was now looking for more foreign direct investments including from China.
Moody’s has a ‘B1’ rating on Sri Lanka with a ‘stable’ outlook. Fitch downgraded its ‘BB-‘ rating to ‘B+’ and also cut the outlook to negative. S & P cut the outlook on it ‘B+’ rating to ‘negative’.
Sri Lanka is in talks for an agreement with the International Monetary Fund for the central bank, and associated partner agencies such as the World Bank, Asian Development Bank and Japan is expected to come up with budget financing.
Moody’s said an increase in the budget deficit led to higher imports, though domestic analysts who accurately predicted balance of payments trouble from early 2015 have pointed out that it is central bank accommodation of deficits by monetizing debt and keeping rates down was the key problem.
Bank deposit and lending rates have since moved up, but debt monetization is continuing to drive up liquidity, domestic credit and imports. Even this week the Central Bank rejected real bids at the weekly Treasuries auction.
Meanwhile Moody’s said Sri Lanka’s cabinet of ministers had recently approved an increase in value added tax and income taxes.
"While the measures await parliamentary approval, the ruling party’s coalition majority increases the probability that they will be passed," Moody’s said.
"Such measures are also likely to be part of the agreement with the IMF, currently being negotiated." (Colombo/Mar17/2016)