The IMF programm will have a credit-positive effect on liquidity, but will only marginally affect government credit metrics, unless fiscal policy implementation is much smoother than we expect, Moody’s said in a statement last week analyzing the credit implications. The statement noted that the IMF agreement, which will have three potential benefits for Sri Lanka’s external financing profile, comes as Sri Lanka’s sovereign credit quality is increasingly under pressure from its large fiscal deficits, high debt levels, poor debt affordability and low foreign exchange reserves.
“…we expect bumps in the sovereign’s fiscal consolidation path because of difficulties in implementing robust revenue raising measures. We forecast a further increase in the government’s debt burden and debt/GDP ratio this year and next, leaving Sri Lanka vulnerable to a shift in financing conditions,” the statement warned.
It further warned that with slower growth in the next few years, and signs of financial stress for some state-owned enterprises, achieving significant fiscal consolidation will be challenging despite the government’s targeted deficit at 3.5% of GDP in 2020. Sri Lanka’s narrowest deficit since 1998 was 5.4% of GDP in 2013, outlined Moody’s.