While Sri Lanka’s economy shows robust medium-term growth prospects, credit challenges including large borrowing needs and a fragile external payments position are worrying factors, a report by Moody's Investors Service has revealed.
The report, credit analysis titled "Government of Sri Lanka -- B1 Negative" elaborates on Sri Lanka's credit profile in terms of Economic Strength, Moderate (+); Institutional Strength, Low (+); Fiscal Strength, Very Low (-); and Susceptibility to Event Risk, Moderate.
In a media release on Friday, Moody’s said it expects real GDP growth of 4.6 per cent this year, which reflects the temporary negative impact of adverse weather-related events during the first half of the year. Moody's expects GDP growth to average 5.2 per cent per year in 2017-21, a robust growth rate, the release said.
"Sri Lanka's low tax efficiency and tax collection provide significant scope to broaden the tax base and increase the tax revenue/GDP ratio, which was only 12.4 per cent in 2016," said William Foster, a Vice President and Senior Credit Officer at Moody's. Total government revenues are also very low, with a general government revenue/GDP ratio of 14.3 per cent in 2016, one of the lowest among B-rated sovereigns.
Despite ongoing fiscal consolidation, Sri Lanka's credit profile will remain constrained by its large debt burden and very low debt affordability, combined with contingent liability risks from state-owned enterprises. Moody's expects general government debt to decline only gradually to around 78 per cent of GDP in 2018, from 79.3 per cent in 2016.
Signs that planned fiscal consolidation measures are less effective than Moody's currently expects or that the authorities' commitment towards such steps has diminished would weigh on Sri Lanka's rating, particularly if foreign-exchange reserves remain low while refinancing of market debt is challenging, the release said.
Meanwhile, evidence of effective implementation of reforms that leads to significant and lasting improvements in tax collection, and more stable external financing conditions, would support a return of the rating outlook to stable, it added.
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