Moody’s: No Major Disruptions Expected in Sri Lanka’s IMF-Backed Reforms

COLOMBO (News 1st); International rating agency Moody's does 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).

It added that however, some policies are likely to be reprioritised amid challenges in maintaining fiscal consolidation that could keep credit risks elevated for some time.

Moody's said that Fiscal consolidation would contribute to a durable strengthening of Sri Lanka's credit profile.

However, Moody's 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 we rate, albeit an improvement from more than 70% in 2021.

International rating agency Moody's does not expect any significant shifts in Sri Lanka's reform trajectory or policies, although some reprioritisation is likely. 

It added that crucially, former president Ranil Wickremesinghe had pushed through an economic transformation act in parliament in May. The act – in the absence of a new act or changes approved by parliament – will oblige future governments to the current set of economic and fiscal reforms, including adhering to fiscal and debt targets set under the IMF programme. The act also requires any government to present to parliament the steps and measures being taken to achieve specific targets stipulated in the act by 31 March each year, to maintain reform momentum.

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.

International rating agency Moody's said that any negotiation of potentially revised targets or changes in specific measures will take time, there could be delays in disbursements or finalisation of external debt restructuring with private-sector creditors. 

It added that early parliamentary elections could also add to the delay. 

Besides fiscal reforms, Sri Lanka has also made considerable progress in rebuilding its external position, it added, noting that 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.