Budget highlights fiscal challenges, may not significantly boost growth –Moody’s
View(s):Despite the growth focus of Sri Lanka’s 2021 budget, it is unlikely to provide a meaningful boost to output, while increased spending will add to fiscal pressures, which is credit negative, Moody’s, a global rating agency, said in a statement this week.
The budget targets a 2021 fiscal deficit of 8.8 per cent of GDP, compared with a revised 2020 estimate of 7.9 per cent of GDP.
“We forecast a similar gap for 2021, but for the deficit to remain above 8 per cent of GDP through 2023 in light of persistently adverse fiscal dynamics and a slow economic recovery. As such, we expect Sri Lanka’s debt burden to increase to around 100 per cent of GDP over 2020-21, above the Caa-rated median of 88 per cent of GDP, and only begin to gradually decline in subsequent years. We expect the government to face challenges in rationalizing government spending and delivering fiscal consolidation post-coronavirus, as a large interest bill, rigid public sector wages, and subsidies and transfers keep recurring government spending elevated. The dilemma between delivering on ambitious fiscal consolidation targets and supporting economic recovery will continue to weigh on Sri Lanka’s credit profile ahead of significant and recurring external debt-servicing requirements through 2025,” it said.
The budget includes large allocations for domestically financed infrastructure development, incentives for domestic production, support for small and medium-sized enterprises and upgrading Sri Lanka’s rural road networks, to which the largest portion of public investment spending has been allocated. It also includes scaled-up support to the tourism industry, which has taken a severe hit given the country’s border closures.
But despite the focus of the development-oriented budget on reviving economic growth and reducing poverty, the benefits will be limited by the magnitude of the pandemic-driven hit to demand for Sri Lankan exports and the collapse in tourism activity. Domestic demand is also likely to remain sluggish given still-subdued business and consumer confidence, and ongoing import restrictions affecting industries such as construction and manufacturing.
Moody’s said it expects Sri Lanka’s economy to contract by more than 3 per cent in 2020, with prospects for a gradual rebound in 2021 increasingly at risk given renewed virus flare-ups and lockdown measures globally. The plan to support domestically financed infrastructure projects may also face funding constraints as a weak economic recovery curbs revenue and as rigid recurrent expenditure is difficult to rationalize.
On the revenue side, the budgeted 28 per cent increase in government revenue compared to 2020, largely stemming from robust growth in taxes on goods and services, and external trade, is unlikely to be achieved.