Strong mandate is positive, says Standard Chartered Global Research

• Says rare opportunity for Sri Lanka to undertake long-overdue structural reforms
• Points out with President and PM from the same party, fewer political roadblocks are expected in the way for government to implement its political and economic agenda
• Notes the ability to capitalise on this opportunity would depend on transparent fiscal planning and effective negotiations with international partners including IMF
• 2024 out-performance on fiscal consolidation and revenue growth could possibly create some room for the government to provide relief on taxation
• Says a clear direction on fiscal policies would only emerge when the final 2025 budget is presented in February next year

By Nishel Fernando 

Standard Chartered Global Research, the research arm of Standard Chartered views the National People’s Power (NPP) coalition’s sweeping victory in Sri Lanka’s parliamentary elections as a positive development, presenting a rare opportunity to undertake long-overdue structural reforms and advance fiscal consolidation. 

The NPP, led by President Anura Kumara Dissanayake, secured a two-thirds majority in Parliamentary Elections held on 14 November, easing the path for constitutional amendments and long-term economic strategies.

“The strong mandate allows the government to focus on the long term and provides it with an opportunity to embark on a structural transformation of the economy to boost growth and support revenue-focused fiscal consolidation,” Standard Charted stated in the latest report. 

With both the President and the Prime Minister from the same party, fewer political roadblocks are expected in the way for the government to implement its political and economic agenda.

The ability to capitalise on this opportunity would depend on transparent fiscal planning and effective negotiations with international partners including the IMF.

The new Cabinet of Ministers is scheduled to be sworn in today. A delegation from the IMF is currently in Sri Lanka to conduct the third review under the country’s Extended Fund Facility (EFF) programme.

The NPP pledged to renegotiate with the IMF to ease the burden for the common man during both Presidential and Parliamentary elections. Standard Chartered Global Research believe that there’s some move to maneuver on the fiscal front to grant relief for the public given the current fiscal performance. 

“The 2024 out-performance on fiscal consolidation and revenue growth could possibly create some room for the government to provide relief on taxation,” it added.

While a strong mandate is positive, Standard Chartered Global Research was cautious of possible policy missteps given the strong mandate. The report noted that a clear direction on fiscal policies would only emerge when the final 2025 budget is presented in February next year, while a vote of account is expected in December this year which could provide some early signals on the fiscal direction.

“We think the final budget will give us an indication of fiscal policy direction under the new government, though we expect it to adhere to IMF’s debt sustainability parameters,” the report stated. 

Meanwhile, the research maintained an “Overweight” or “Buy” stance on Sri Lankan sovereign bonds, projecting a recovery value of 70 at an 11 percent exit yield.

Sri Lanka is planning to launch the proposed macro-linked bond exchange this week, as per media reports. Citigroup Global Markets has been appointed to manage the bond exchange.

“S&P and Fitch have expressed their inability to rate the macro-linked bonds, though we think that should not matter as the straight bonds will still be rated,” the report noted.

Sri Lanka’s sovereign bonds have rallied in the past couple of months since the presidential election.