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Wednesday May 12th, 2021

Sri Lanka faces currency pressure, low reserves, deficits, debt as Coronavirus hits: Moody’s

ECONOMYNEXT – Sri Lanka’s government finances which had started to deteriorate before a Coronavirus pandemic, had been compounded with currency pressure and low forex reserves, Moody’s a rating agency said.

“Sri Lanka’s fiscal position was already deteriorating before the ongoing domestic and external shocks,” Moody’s Investors Service, which had put the island’s ‘B2’ rating on watch for downgrade said.

“We expect the shocks to further weigh on Sri Lanka’s fragile fiscal position, as indicated by widening budget deficits, a growing debt burden and weakening debt affordability.”

Rating agencies had already sounded warning when value added taxes were slashed in January 2020 in a ‘stimulus’ to get higher economic activity instead of waiting for the economy to recover on its own from a currency crisis in 2018.

Sri Lanka cut rates on January 30, and then started to inject cash from February to undermine a soft-peg with the US dollar and make it more difficult to repay foreign debt by creating a ‘foreign currency shortage’ with excess rupees, analysts had pointed out.

In the past rating agencies had downgraded when money was printed to generate foreign shortage and reserve falls, rather than simple expansion in the deficit.

In 2018, though the deficit did not increase, the currency and forex reserves were hit on liquidity injections

“Sri Lanka (B2 review for downgrade) is facing simultaneous domestic and external shocks amid the global coronavirus outbreak,” Moody’s said.

“Capital outflows, marked local currency depreciation, wider risk premia and a further decline in real GDP growth will raise Sri Lanka’s debt burden, liquidity constraints and the cost of external debt servicing.

“This comes at a time when Sri Lanka’s credit profile is highly vulnerable given low reserve coverage of large forthcoming external debt service payments and very weak debt affordability.”

A currency fall would also worsen the debt while slowing growth.

Moody’s said they expected deficits to range around 8 percent of gross domestic product in the near as revenues fell and spending rose.

“Given wider fiscal deficits, we expect Sri Lanka’s debt burden to rise to nearly 100 percent of GDP, weakening Sri Lanka’s already fragile fiscal position,” Moody’s said.

In 2020 and 2021, Sri Lanka has to settle a foreign debt of around 4.5 billion US dollars.

For 2020, Sri Lanka has got 500 million US dollars from China, 300 million US dollars from ADB, and from AIIB and AFD in France.
A swap from India for 400 million US dollars, an IMF program of around 800 million dollars (if a full quota size is given), and another 1.5 billion US dollar equivalent swap from China was on the cards. (Colombo/Apr29/2020-sb)


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