Fitch says Sri Lanka continues gradual fiscal consolidation
Tuesday, 26 November 2013 01:13
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Fitch Ratings said yesterday Sri Lanka’s 2014 Budget highlights continuing success in gradual fiscal consolidation.
It also signals a strong statement of commitment to medium-term debt reduction. The ability to maintain the fiscal consolidation trend provides support to Sri Lanka’s ‘BB-’/Stable sovereign rating. At the same time, both its fiscal deficits and Government debt burden still stand at relatively high levels,” Fitch said.
It said the Government has managed to stick to its fiscal target of lowering its deficit to 5.8% of GDP in 2013, down from 6.4% in 2012. In its Budget statement, the authorities are projecting the deficit to fall further – to 5% in 2014, 4.4% in 2015 and 3.8% in 2016. The debt burden is projected to decline from around 78% of GDP to 65%, though this would still be considerably higher than the current BB rated peer median of 35%.
Risks to the path of sustained debt reduction arise from the efficacy of ongoing revenue reforms, and the high level of foreign currency debt. The medium-term fiscal consolidation plan is heavily reliant on raising the share of revenue in GDP. This could prove difficult to achieve, as efforts have already been undertaken to broaden the tax base, ensure greater compliance and limit exemptions (since 2011), but are yet to demonstrate significantly positive benefits.
Risks to achieving the revenue targets are also related to the high year-on-year GDP growth assumption of 7.5%-8% in the next few years. Lower actual growth would belie the authorities’ expectation of a significant pick-up in tax revenue.
The Sri Lankan Government also has a significant amount of foreign currency debt. At around 33% of GDP this poses a risk to the medium-term goal of debt reduction should the Sri Lankan Rupee unexpectedly weaken.
In light of these risks, expenditure restraint will prove crucial for any medium-term fiscal consolidation effort. One positive development has been that State-Owned Enterprises have become more profitable than in earlier years. This limits a potential drain on public finances. Lower operating deficits by the Government, in particular, ought to shore up domestic savings rates.
To the extent these help in reducing external imbalances and lower a structural dependence on external borrowing, accompanying public sector reforms could prove credit supportive of the sovereign’s credit profile.
