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Monday July 26th, 2021

Sri Lanka 2021 revenues unlikely, bleaker fiscal outlook may hurt $4bn re-financing: Moody’s

ECONOMYNEXT – Sri Lanka is unlikely to get targeted revenues in 2021, with activity hit by import controls and worse than expected outlook for fiscal consolidation is likely to make it more difficult to re-finance 4 billion US dollars of debt in 2020, Moody’s a rating agency said.

“On the revenue side, the budgeted 28 percent increase in government revenue compared to 2020, largely stemming from robust growth in taxes on goods and services, and external trade, is unlikely to be achieved,” Moody’s said.

“Domestic demand is also likely to remain sluggish given still-subdued business and consumer confidence, and ongoing import restrictions affecting industries such as construction and manufacturing. Economic boost from budget will be limited.”

Sri Lanka revenues have fallen from around 14.1 percent of gross domestic product in 2016 to 9.5 percent in 2020 amid slow growth and December 2019 value added tax cuts, which the government wants to keep for five years, Moody’s said.

Sri Lanka was targeting a deficit of 8.8 percent of gross domestic product in 2021, against controversially adjusted 7.9 percent deficit for 2020. By 2025 a 4 percent deficit was forecasted and a 75.5 percent debt to GDP ratio.

“We forecast a similar gap for 2021, but for the deficit to remain above 8 percent of GDP through 2023 in light of persistently adverse fiscal dynamics and a slow economic recovery,” the rating agency said.

“As such, we expect Sri Lanka’s debt burden to increase to around 100 percent of GDP over 2020-21, above the Caa-rated median of 88 percent of GDP, and only begin to gradually decline in subsequent years.”

Moody’s downgraded Sri Lanka to Caa1 (CCC+ equivalent) in 2020.

If deficit reduction is worse than expected, it may be more difficult to repay debt in 2021, the rating agency said.

“A bleaker outlook for fiscal consolidation is likely to continue to challenge the government’s ability to raise financing for upcoming debt obligations and narrow annual borrowing needs, which in 2021, externally, amount to approximately $4 billion,” Moody’s said.

“Borrowing needs will stay elevated through 2025, including a large portion of maturing international sovereign bonds (see exhibit).

“Elevated repayment risks will continue to raise pressure on the government’s external and liquidity position as the recovery in major sources of foreign exchange earnings is likely to be slow, keeping the country’s international reserves position thin.”

Other analysts have warned that if there is a recovery and the central bank injects money to keep rates down, forex shortages will make it difficult to repay debt.

In 2020 some of the injected liquidity has been absorbed by foreing debt repayments – a type of reserve appropriation taking place through unsterilized dollar sales to the Treasury.

Sri Lanka has a soft-pegged central bank set up by a Federal Reserve money doctor in the style of several Latin America central banks which have ended up in import substitution, sovereign default, dollarization, re-denomination or several of such outcomes, analysts have said.

The soft-pegs inspired by Argentina central bank creator Raul Prebisch and former Federal Reserve Latin America chief Robert Triffin, had an unrestrained constitution. (Colombo/Nov23/2020)

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