Pledges by Sri Lanka’s new President, Anura Kumara Dissanayake, to reduce taxes and modify the country’s International Monetary Fund (IMF) bailout plan may keep the nation’s credit risks elevated for some time, according to Moody’s, a leading rating agency.
“We do not expect significant disruption to Sri Lanka’s reform agenda or macroeconomic policies, which include ongoing debt restructuring and structural adjustments under the IMF programme,” Moody’s stated.
However, Moody’s cautioned that some policies may be reprioritised, adding that challenges in maintaining fiscal consolidation could sustain elevated credit risks for an extended period.
Since defaulting in 2022, Sri Lanka has undertaken several measures to restore fiscal stability, including raising VAT and corporate tax rates while lowering personal tax-free allowances.
Moody’s, which rates Sri Lanka just above default at Ca, noted that these efforts had increased government revenues to over 11% of GDP in 2023, up from 8.3% in 2021, and reduced the fiscal deficit to 8.3% of GDP from 11.7%.
Despite these improvements, the fiscal deficit remains significant, and debt affordability is expected to remain weak, with interest payments likely consuming 40%-50% of revenues over the next two to three years.
Moody’s highlighted that, while this represents an improvement from over 70% in 2021, it still places Sri Lanka among the weakest sovereigns in terms of debt affordability.
