A Bloomberg Intelligence report warns that any attempts to delay reforms following the upcoming presidential elections could lead to the suspension of the IMF programme, posing a significant risk to Sri Lanka’s recovery. The report stresses the importance of keeping the IMF-backed loan programme on track to bolster the country’s economic outlook.
While the current IMF-supported debt sustainability path is no quick fix for Sri Lanka’s economy, the report cautions that political risks, including proposed renegotiations of the IMF bailout by some presidential contenders, could jeopardize the programme. “Politics pose a risk to Sri Lanka’s outlook. If the new government stalls the reforms, it will lead to a suspension of the IMF programme and threaten the recovery,” the report states.
Bloomberg Intelligence emphasizes the need for continued reforms to sustain the recovery, projecting that Sri Lanka may finalize debt-restructuring deals with its dollar bondholders by the next IMF review in the fourth quarter. Under the proposed macro-linked bond deal, the country is expected to receive an effective haircut of 15 percent, lower than the initial 28 percent.
Despite some economic improvements, such as lower borrowing rates and a rebound in tourism, tight fiscal policy and weak consumer sentiment are expected to limit the economic recovery. The report also notes that the Central Bank is likely to hold off on further rate cuts until after the election uncertainty clears.
“A new administration will need to collaborate with the IMF during the third loan review towards the end of the year, which may prevent the Central Bank from easing. We expect a reduction in standing lending and deposit rates by 125 basis points to 8 percent and 7 percent, respectively, in 2025,” the report adds.
Sri Lanka’s GDP is projected to grow by 3.2 percent in 2024, following a contraction of 2.3 percent in 2023. However, if policymakers fail to go beyond IMF-mandated changes, growth is expected to improve only marginally to about 3.8 percent by 2040, far below the 5-6 percent growth seen pre-pandemic.
The report stresses the need for significant reforms, including tackling corruption and enhancing the business environment for foreign firms, to return to the robust growth of a decade ago. It also highlights the challenge posed by a rapidly aging population, which is expected to dampen long-term growth prospects.
Bloomberg Intelligence outlines two possible futures for Sri Lanka, contingent on the nation’s commitment to reform.
Source – www.dailymirror.lk/
