Sri Lanka needs over 5% growth, primary surplus of 2% of GDP to stabilise debt: StanChart

• Says achieving these goals would become challenging with current low tax rates

While Sri Lanka will get over the near term foreign currency debt challenges with recent measures taken, the country will require to expand its economic output by over 5 percent and maintain a primary surplus of over 2 percent of the Gross Domestic Product (GDP) in the budget over a sustained period to stabilise its debt, says Standard Chartered Bank. 

Sri Lanka’s economy was off to a positive start in 1Q21 recording a robust 4.3 percent growth even with the absence of tourism and entertainment industries before it was buffeted by the virus related restrictions in 2Q21, which led to the quick re-emergence of vulnerability in its external sector with slowdown in inflows amid a heavy debt load coming due for repayment 
in earnest.

The Central Bank now expects the economy to grow by 5.0 percent in 2021, down from the earlier projected 6.0 percent although many other independent projections stand below 4.5 percent.  

Assessing the prospects for the Sri Lanka economy, the Asia-focused lender forecasted the country’s fiscal deficit to reach 10 percent of GDP from 8.9 percent projected earlier, and 11.1 percent in 2020, while the public debt-to-GDP would rise to between 115-120 percent range in 2021. 

This will require 60 percent of the State revenues for interest payments alone on previous borrowings, leaving very little on other recurrent expenditure, triggering fresh borrowings even for part of the recurrent expenses and the entirety of capital expenditure. 

Primary deficit is the deficit of the budget barring the moneys required for interest payments.  

StanChart projects this primary deficit to reach 3.7 percent of GDP in 2021 pushing the State for more debt even by paying interests of the previous borrowings as over 75 percent of the State revenues are required to pay State sector salaries and pensions. 

“Our estimates suggest that the government needs a primary surplus of more than 2 percent and real GDP growth of more than 5.0 percent (nominal growth: c.10 percent) to stabilise debt,” the bank said in the Sri Lanka section in its most recent report on the global economic outlook for 3Q. 

The bank suggests that achieving these goals would become challenging with the current low tax rates, although Sri Lanka showed during the first four months that it could surpass revenues even at current tax rates provided there is a working economy, vibrant enough to activate animal spirits of consumers, businesses and investors. 

Meanwhile, the bank cut its growth projections for the Sri Lankan economy from 4.5 percent to 4.0 percent in 2021 due to the effects of the COVID-19 third wave.