Relief package will compound govt.’s fiscal challenges: Moody’s

The Rs.229 billion relief package announced by the government a week ago will reduces Sri Lanka’s scope for fiscal and debt consolidation, though it could support economic recovery, Moody’s Investors Service said in a brief statement today.

“While the size of the package is moderate and will be fully funded via reallocations from the budget (6% of budget expenditure in 2022), it reduces the scope for fiscal and debt consolidation at a time when fiscal flexibility is already severely limited by the large share of interest payments in government revenue (60-70%),” Moody’s said.

“Funding the package with reallocations from the budget in part reflects this limited fiscal space, which constrains the government's ability to use fiscal policy to mitigate the impact of economic shocks. Furthermore, the risk of fiscal slippage has increased with the emergence of the omicron variant of the coronavirus,” it added.

Moody’s expects Sri Lanka’s GDP growth to pick up to around 5 percent this year from around 4-5 percent in 2021 in part because of a lower base and because domestic economic activity has largely normalized.

The rating agency also expects the fiscal deficit to narrow only slightly to 9-10 percent of GDP in 2022 from around 11 percent in 2021, largely due to lower revenue growth than the budget 2022 envisages.

The budget 2022 forecasts a fiscal deficit of 8.8 percent.

“Wide deficits will keep the government's debt burden at higher levels for some time; we estimate that the debt burden will rise to around 108% of GDP by the end of 2022 from around 101% at the end of 2020 and 87% at the end of 2019, before stabilising at the elevated 2022 level thereafter, mainly reflecting the recovery in nominal GDP growth,” Moody’s noted.

Commenting on Sri Lanka’s foreign reserves position, Moody’s said it remains weak despite a US $ 1.5 billion equivalent Yuan currency swap from China.

“While the central bank indicated that reserves had risen as of the end of December with the disbursement of a $1.5 billion swap agreement with the People’s Bank of China, reserves adequacy remains very weak, with reserves at around $2-3 billion compared with $5-6 billion of foreign-currency obligations due annually through at least 2025,”