Sri Lanka revised budget could stoke inflation, debt path uncertain: Moody’s

COLOMBO (EconomyNext) – A revised budget with a "suggested" deficit of 4.4 percent of gross domestic product supports Sri Lanka’s credit profile, but higher current spending could stoke inflation and economic imbalances, Moody’s Investors Service, a rating agency has warned

A revised budget by the newly elected Sirisena administration plans an overall budget deficit of 4.4 percent of gross domestic product, which if achieved would put Sri Lanka in line with other countries with a ‘B1’ below investment grade rating.

If revenue assumptions which includes a ‘super gains tax’ on large firms are not met, the budget deficit could be at risk, the rating agency said.

The budget has also hit several firms including casinos with billion rupee taxes, where there is uncertainty whether they can pay.

The revenue measures could dent investments and future growth, Moody’s said.

While a 47 percent rise in public sector wages can boost consumption and growth it would also boost inflation, which has historically been high in Sri Lanka, the rating agency said.

"Given that public sector employees make up 15 percent of the work force, the 47percent increase in nominal wages will boost consumption, thus supporting growth," Moody’s said.

"However, it could also have the effect of reviving inflation which has historically been high in Sri Lanka, but moderated to an average 3.3 percent in 2014.

Analysts have warned that higher state spending, in an environment of recovering credit would hit the balance of payments first.

The budget also revealed central government guaranteed contingent liabilities which would add 14.5 percent of gross domestic product to Sri Lanka’s national debt of 74.4 percent.

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"However, it is silent on the future debt trajectory, which was originally projected to moderate to 63 percent by 2017," Moody’s said. 

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