Fitch Ratings on Wednesday affirmed Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’ with a ‘Stable Outlook’. In Fitch’s view, policies aimed at fiscal consolidation and maintenance of a disciplined monetary stance under the framework of the 3-year IMF-supported program have improved Sri Lanka’s policy coherence and credibility, the rating agency said in a media release.
Although GDP growth of an estimated 3.9 per cent in 2017 fell short of forecasts due to weather-related supply disruptions, “we” expect growth to recover and stabilise at around 5 per cent in 2018 and 2019, Fitch said.The shift towards greater exchange-rate flexibility since 2015 has strengthened the external position, and the planned shift towards flexible inflation targeting should further enhance monetary policy credibility. Credit growth has declined to a more sustainable level of around 15 per cent in 2017 from a high of 20 per cent in 2016.
Fiscal performance has improved following the approval and implementation of tax reforms. Fitch said it expects Sri Lanka’s ratio of general government revenue to GDP to improve to 15.5 per cent in 2018 and 16.2 per cent by 2019, from a low of 11.6 per cent in 2014, reflecting the passage of revenue-enhancing measures under the IMF programme. These include an increase in the VAT rate to 15 per cent in 2016 from 11 per cent, and implementation of a new Inland Revenue Act from April 2018 that aims to simplify tax laws, reduce exemptions and improve the efficiency of the tax system.
“We think the increase in general government revenues will support a further narrowing of the budget deficit to 4.8 per cent of GDP in 2018 and 4 per cent in 2019 from an estimated 5.2 per cent in 2017. While these revenue reforms should be positive for a more credible fiscal framework over time, ineffective implementation and/or weaker-than-expected GDP growth remain downside risks to our fiscal projections,” it said.