Lanka makes notable progress

Moody's Investors Service has assigned a B1 rating to Sri Lanka taking into account the notable progress that the country has made over the past three years. Moody's latest report on Sri Lanka titled ‘Sri Lanka -- the post-IMF backdrop: downward growth pressures and elevated external pressures’ said that Sri Lanka's economy faces slower growth and elevated external pressure in the year ahead.

Although the Government is likely to continue to make gradual progress in reducing its deficit, the debt burden will remain high. The absence of a new funding program is credit negative from the perspectives of external payments and growth, the report stated.

The special comment examines credit implications of Sri Lanka's (B1/Positive) decision on February 12 to not seek a new funding program from the IMF, following the successful completion of a $2.6 billion Stand-by Arrangement in 2012.

Given the challenging macroeconomic environment, the report stated that a follow-up funding program would have augmented international reserves directly through borrowed IMF resources.

Through enhanced policy certainty under an IMF funding program, investor-confidence would likely have been bolstered while it would have provided additional support to the balance of payments and economic growth prospects.

The report also looks at key factors that will shape the credit outlook going forward; in particular, trends in growth and macro stability, the external payments position, and progress on fiscal consolidation.

Moody's believes the government will continue to gradually reduce its budget deficit, but the composition of deficit reduction will be the key.

Supplier cash arrears, weak structural revenue reform and contingent liabilities in state-owned enterprises are concerns. High inflation and rapid credit growth are risks to macroeconomic stability, the report stated.

While there was a modest accretion to foreign reserves in 2012, at $6.9 billion currently, reserves are still not back to the peak of $8.1 billion in July 2011, when Sri Lanka's rating outlook was positive.