The Sri Lankan government has reaffirmed its support for the International Monetary Fund (IMF) programme and confirmed its intent to proceed with the debt restructuring terms agreed with international sovereign bondholders in September.
This move, announced by the Finance Ministry on October 4, has reduced uncertainties related to the debt treatment process following the election of President Anura Kumara Dissanayake in September, according to Fitch Ratings.
Debt Restructuring Momentum Maintained
- Policy Continuity Despite Election Outcome: The election of Anura Kumara Dissanayake had raised concerns over potential policy shifts that could challenge the IMF programme and delay the debt restructuring process. However, the Finance Ministry’s statement indicates that the government remains committed to adhering to the IMF programme, mitigating fears of policy disruption.
- Successful Consultations with the IMF: The Ministry’s consultations with the IMF and Sri Lanka’s Official Credit Committee were successfully concluded, affirming that the terms of the preliminary agreement align with the principle of comparability of treatment between official creditors and bondholders. This agreement ensures compatibility with the IMF programme’s objectives and strengthens confidence in the restructuring process.
Fitch Ratings’ Perspective
- Impact on Sovereign Ratings: Fitch Ratings has maintained Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘RD’ (Restricted Default) since May 2022, as the country continues to suspend servicing its foreign-currency debt. Completion of the debt restructuring, as outlined in agreements with creditors, could lead Fitch to reassess Sri Lanka’s post-default rating, depending on the credit profile and improved relationship with the international financial community.
- Revised Local-Currency Rating: Fitch upgraded Sri Lanka’s Long-Term Local-Currency IDR to ‘CCC-’ in September 2023 following the completion of the domestic debt optimisation plan, reflecting improved stability in managing local-currency debt.
Economic Outlook and Fiscal Strategy
- Debt-to-GDP Ratio: Despite debt restructuring efforts, the government’s debt burden is expected to remain high. The IMF projects that Sri Lanka’s gross general government debt-to-GDP ratio will decline gradually from 116% in 2022 to around 103% by 2028, factoring in both local- and foreign-currency debt restructuring.
- Revenue Growth and Fiscal Reforms: Revenue collection has shown substantial improvement, increasing by 43% year-on-year in the first seven months of 2024, well above the nominal GDP growth rate of 9.5% in the first half of the year. Fitch’s baseline projections assume that the revenue-to-GDP ratio will rise from 11.4% in 2023 to 15.5% in 2026. However, any fiscal reforms introduced by the new government could alter this trajectory.
Parliamentary Election and Future Policy Directions
The President’s ability to implement policy changes will largely depend on the outcome of the upcoming Parliamentary Election on November 14. With the Janatha Vimukthi Peramuna (JVP) and its allies gaining traction, the composition of the new legislature may undergo significant changes, influencing the government’s fiscal and economic strategies moving forward.
Economic Recovery and External Liquidity
Sri Lanka’s economy has shown signs of recovery, with real GDP growth reaching 5.0% year-on-year in the first half of 2024, a turnaround from the 7.3% contraction in the same period of 2023. External liquidity has also improved, with foreign-exchange reserves rising to USD 6.0 billion in August 2024, up 66% year-on-year. However, the pace of reserve accumulation may be affected once Sri Lanka resumes external debt servicing.
The successful execution of the debt restructuring and continued commitment to the IMF programme will be critical for sustaining Sri Lanka’s economic recovery and restoring investor confidence.
Last modified: October 10, 2024
