Fitch Ratings: Fitch rating says that Sri Lanka’s GDP which contracted by 2.7% yoy in 2Q23, slowing from the 12% contraction in 1Q23 is expected to contract by 1.4% yoy in 2023 before growing by 3.3% and 3.5% in 2024 and 2025, respectively.
Agriculture and services grew in 2Q23, but industry continued to shrink, although at a slower pace from 1Q23. Inflation measured by the Colombo CPI, averaged around 30% yoy until August 2023 but continued the decline from end-2022. “We also expect another rate cut before end-2023 by Central Bank.”
Sri Lanka’s foreign-exchange (FX) reserves have been improving, with gross FX reserves rising to USD3.6 billion in August 2023, from USD1.9 billion at end-2022, partly the result of IMF disbursements and suspension of external debt servicing.
“We expect a gradual pick-up in exports in 2024-2025 after a contraction in 2023. Overseas worker remittance inflows are also rising. We therefore expect the current account deficit to stabilise at 1.6% of GDP over 2024-2025.”
Fitch Ratings has upgraded Sri Lanka’s Long-term Local-Currency Issuer Default Rating (IDR) to ‘CCC-’ from ‘RD’ (Restricted Default). Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below. The Long-Term Foreign-Currency IDR has been affirmed at ‘RD’ and the Country Ceiling at ‘B-’.
The Short-Term Local-Currency IDR has been downgraded to ‘RD’ from ‘C’ following the exchange of treasury bills held by the central bank and subsequently upgraded to ‘C’ in line with the Sovereign Rating Criteria, as we believe the local-currency debt exchange has now been completed.
The upgrade of Sri Lanka’s Long-Term Local-Currency IDR to ‘CCC-’ reflects the completion of the local-currency portion of Sri Lanka’s domestic debt optimisation (DDO) plan, launched in July 2023.
Fitch Rates assumes that the debt restructuring will lower Sri Lanka’s gross financing needs over the medium term, in line with the targets under the IMF’s Extended Fund Facility, and support an improvement in the country’s debt metrics over time.
“General government debt and the interest costs faced by the government will remain high, despite the debt restructuring. Sri Lanka’s gross general government debt-to-GDP ratio is set to fall only gradually to just above 100% of GDP by 2028, from 128% of GDP in 2022, according to IMF programme forecasts published in March 2023, which incorporated a local- and foreign-currency debt restructuring scenario.
“We believe IMF programme implementation, in particular fiscal measures, will be central to achieving debt sustainability.”
Authorities have taken several tax measures since May 2022 to improve revenue Collection. “This resulted in revenue collection rising 43% yoy in 1H23.”