Sri Lanka negative outlook remains -Standard & Poor’s

Local economists this week questioned the lack of foresight in the government’s monetary policy after Standard & Poor's Ratings Services affirmed its ‘B+’ long-term foreign currency and ‘BB-’ local currency sovereign credit ratings on Sri Lanka with the country’s outlook remaining negative.

“The ratings on Sri Lanka reflect the high level of government indebtedness and weak revenue mobilisation, together with security concerns posed by the unresolved conflict with Tamil separatists,” said Standard & Poor's credit analyst Agost Benard in a report. “These factors are balanced against the economy’s demonstrated resilience and favourable medium-term growth prospects, as well as the benign terms of its external debt, which impose minimal stress on external liquidity,” he added.

Sri Lankan economist Harsha de Silva told The Sunday Times FT that presently it’s the country's private sector and the migrant worker population that is keeping the ‘economy afloat’. “This is the ‘resilience’ that the government is harping on when it is in a rut where the economy is concerned,” he said, stressing the lack of foresight in government policy.

Standard & Poor's Ratings Services said that Sri Lanka’s limited fiscal flexibility due to weak public finances and a narrow tax base is a significant constraint on its credit rating. Although recent tax rises caused a notable increase in the tax-to-GDP ratio to an estimated 15.5 percent in 2006 from 13.1 percent in 2003, the country’s tax base remains fundamentally deficient. “Sri Lanka’s revenue and expenditure rigidities prevent a more robust pace of fiscal consolidation, which is needed for improved debt sustainability. The attendant fiscal gaps in turn fuel the inflationary impetus via the government’s partial monetization of its deficits,” said Benard.

The high level of public indebtedness resulting from perennial large fiscal deficits which is averaging 8.7 percent of GDP for the past ten years excluding grants is an additional constraint on the ratings. A lack of political will and the divergent policies of successive governments hampered consolidation efforts in the past. General government debt stood at an estimated 90 percent of GDP in 2006, and the interest burden on this debt at close to 30 percent of general government revenues further restricts fiscal flexibility. The debt-to-revenues ratio at an estimated 470 percent is more than double that of the median for similarly rated countries, and highlights Sri Lanka’s high level of indebtedness and the relatively low fiscal resource base to service it, the report said.

De Silva said that the Central Bank is doing what it should never do --- that is printing money to bridge the budget deficit. Presently the cumulative credit by Central Bank stands at over US$1 billion and no right thinking Central Bank would let this happen, he said.

“The top brass at the Central Bank doesn’t understand economics,” he said.