COLOMBO (EconomyNext) – Sri Lanka policy rate cut and higher state spending could boost imports and hit the balance of payments while political uncertainty could hurt foreign investors when foreign reserve coverage and tax revenues were weak, Fitch, a rating agency said
"Lower oil prices, a steady inflow of remittances and tourism receipts are expected to support the current account," Fitch Ratings said in a review of Asia Pacific countries in rated.
"But wage increases announced in the interim budget and the policy rate cut in April could translate into higher imports and is a risk to the current account that bears monitoring."
Other analysts have also warned that that a cut in retail oil prices had eliminated any benefit to the current account as disposable income of people went up to import non-oil goods.
The state petroleum retailer is now in losses indicating that any benefit to the balance of payments had disappeared.
The island’s ‘BB−’/Stable rating reflects high and less volatile real economic growth compared with peers, and a favourable level of basic human development against persistent political uncertainty, weak public finances and a frail external liquidity position it said.
Political uncertainty remains given expected parliamentary elections the timing of which is still unclear although Sri Lanka witnessed a smooth transition of power in the January 2015 presidential elections, the rating agency said.
"General government revenues continue to decline and this trend is likely to continue," Fitch Ratings said in its latest Asia Pacific Sovereign Overview.
An interim budget announced in January 2015 after the new government was formed did little to address the underlying fiscal weaknesses given the one-off nature of most of the revenue measures announced.
"Sri Lanka’s foreign-reserve coverage of its current external payments remains narrow, and is vulnerable to shifts in investor sentiment," Fitch Ratings said.
"That is especially true because foreign holdings of Sri Lankan government securities are high and as domestic political uncertainty currently prevails."
Sri Lanka’s Finance Ministry said in the first four months revenues were up 22 percent without one-off measures.
However current spending is expected to pick up in the second half with, wages, pensions and subsidies to rubber and tea farmers picking up.