Moodys investor services say that they believe that Anura Dissanayake becoming President would not halt the broad appetite for reforms and they will remain intact.
“We do not expect any significant shifts in Sri Lanka’s reform trajectory or policies, although some reprioritization is likely.We do not expect significant disruption to the country’s reform agenda or macroeconomic policies, which include the ongoing debt restructuring and structural adjustments under its programme with the International Monetary Fund (IMF).”
Fiscal consolidation would contribute to a durable strengthening of Sri Lanka’s credit profile. Since its default in 2022, fiscal authorities have implemented a number of reforms to restore fiscal sustainability, such as raising the value-added tax and corporate income tax rates and lowering the personal income tax free allowance.
These reforms increased revenue to slightly more than 11% of GDP in 2023 from 8.3% in 2021. In turn, the government’s fiscal deficit narrowed to 8.3% of GDP in 2023 from 11.7% in 2021.
“However, we expect the government’s debt affordability to remain weak, with interest payments likely averaging 40%-50% of revenue over the next two to three years, and still among the weakest across sovereigns, albeit an improvement from more than 70% in 2021.”
In terms of policy priorities, Dissanayake has spoken about the need to tackle corruption, alleviate conditions for the poor and reduce austerity affecting social welfare, while pursuing economic and fiscal reforms. The new president has not opposed Sri Lanka’s debt restructuring deals and has said any changes to policy and reform measures will be in consultation with the IMF. However he has opposed the privatisation of state-owned enterprises in important sectors.
Besides fiscal reforms, Sri Lanka has also made considerable progress in rebuilding its external position. Official foreign-exchange reserves rose to around $6 billion as of the end of August – sufficient to cover around 3.5-4 months of imports – from well below $2 billion for most of 2022.
“In turn, the rebuilding of external buffers has fostered a more stable macroeconomic environment, including a return to real GDP growth, rapid disinflation and improved balance of payments.
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