COLOMBO (EconomyNext) – Sri Lanka’s political risks declined with the end of a civil war in 2009, but parliamentary conflicts and uncertainty over elections could have a negative fallout while the effect on investors from new taxes was also not clear, Moody’s, a rating agency said.
"Sri Lanka’s constitutional democracy was resilient through the many years of civil conflict, and the peaceful change in leadership following the 2015 Presidential election exemplified Sri Lanka’s democratic institutions," Moody’s said in a credit update.
"However, this year has been characterized by parliamentary conflicts and uncertainty around the timing of parliamentary elections.
"A prolonged period of uncertainty could affect the growth outlook by dampening investor sentiment."
Sri Lanka’s inflation was low and the deficit in external the current account has narrowed since 2011, but low tax revenues and high foreign debt repayments made the country "somewhat vulnerable" to external shocks, Moody’s said.
In 2014, helped by lower fuel price, the external current account deficit fell to 2.7 percent of gross domestic product from 3.8 percent a year earlier and foreign reserves rose to 7.2 billion US dollars by end 2014 from 6.5 billion dollars a year earlier.
The combined effect of external and domestic uncertainties early in 2015 led to foreign currency reserves declining to $6.5 billion at end April 2015, the rating agency said.
Other analysts however had warned that the balance of payments turned in September 2014 with forex rising above 9.0 billion dollars, and external position has weakened since then worsened by rate cuts, liquidity releases by the Central Bank in the midst of worsening fiscal deficit.
Moody’s said the new administration is targeting a fiscal deficit of 4.4 percent, down from 4.6 planed by the ousted regime. The International Monetary Fund, which was also positive about the balance of payments, however had warned that the budget deficit could go up to 6.7 percent of GDP.
Moody’s said a revised budget involved higher state salaries and subsidies, which will be funded by lower capital expenditure, cuts in some current expenses, and new taxes.
"The deficit target is at risk from a shortfall in revenues," the rating agency said.
"The planned increase in expenditures is lower, at 10.4 percent. However, its composition skews towards consumption and could put upward pressure on inflation.
"Moreover, it is unclear what effect tax increases will have on investment sentiment."