IMF money will ease financing pressure – Moody’s

Shortly after the IMF announcing its deal with Sri Lanka, rating agency, Moody’s Investors Service said the IMF money and other funds in the form of budgetary support which are forthcoming could ease off the immediate financing pressures but warned of bumps implementing the fiscal reforms.

While the tax hikes, SOE reforms and targeted subsidies are measures which will ensure sustainability of the economy, the implementation of such policies are politically challenging, history has shown.

“First, programme disbursements together with forthcoming multilateral and bilateral loans will provide external liquidity to ease immediate financing pressures. It could reverse the decline in official foreign-exchange reserves and reduce Sri Lanka’s vulnerability to a sudden stop in capital inflows,” said Moody’s Senior Vice President, Sovereign Risk Group and the lead sovereign analyst for Sri Lanka, Marie Diron.

The facility comes in the wake of the Lankan sovereign credit profile is increasingly coming under pressure from its large fiscal deficits, high debt levels and poor debt affordability but Moody’s sees the upside of the country’s credit profile if the reforms could address the fiscal and external imbalances.

Diron also said the fund arrangement would also alleviate debt servicing pressures as the financing is likely to be at more favorable terms than raising the moneys through capital markets.

Sri Lanka is to leverage the engagement with the IMF to tap development funding and capital market financing as the Central Bank aims to raise US $ 3 billion in a one or more sovereign issues.

He also said if the agreement restores investor confidence in Sri Lanka’s policy framework, it could ultimately support more stable private external inflows, such as FDI. “However, we expect bumps in the fiscal consolidation path due to difficulties in implementing revenue raising measures and the possible crystallization of some contingent liabilities,” cautioned Diron.