SL remains vulnerable to shocks, given high debt and low reserves- IMF

Sri Lanka’s economy remains vulnerable to adverse shocks given the high public debt and low external buffer, International Monetary Fund said. “The Sri Lankan economy is gradually recovering, supported by the authorities’ security and policy efforts to mitigate the impact of the Easter Sunday attacks. However, the economy remains vulnerable to shocks, given high public debt and low external buffers, with higher downside risks since the attacks, amid heightened external and domestic uncertainty,” IMF noted. “Hence, Sustained policy discipline and efforts to rebuild reserve buffers remain critical to address Sri Lanka’s vulnerabilities and strengthen the economy’s resilience, while supporting investment and growth,” IMF added. Sri Lanka’s public debt remains high compared with peers, with one of the largest ratios of gross financing needs to GDP among emerging economies. “Public debt is estimated to have increased significantly to about 90 percent of GDP at end-2018, reflecting weaker economic performance and the sizable depreciation of the rupee,” an IMF debt sustainability analysis noted. Based on disaggregated data for 2018, the composition of public debt includes debt owed by the central government (83.3 percent of GDP), outstanding amount of loans guaranteed by the central government (5.2 percent of GDP), and outstanding Fund credit (1.6 percent of GDP). Domestic debt (mostly treasury bills and bonds) accounted for about 42 percent of GDP. External debt consisted of multilateral and bilateral loans (20.6 percent of GDP), international sovereign bonds and syndicated loans (15.4 percent of GDP), and nonresidents’ holdings of treasury bills and bonds (1.1 percent of GDP). Foreign-currency denominated debt accounted for about 50 percent of total, while debt owed to official and multilateral creditors accounted for about a quarter of the total. Sri Lanka’s debt to GDP ratio remains higher than the median for emerging economies (53 percent; excluding major oil exporters), with still sizable gross funding needs. In 2018 the flexible exchange rate collapse had led to a 7.4 percent increase in public debt. The IMF said a Heat map analysis indicates “high risks” to debt sustainability. “The debt burden benchmark of 70 percent of GDP and gross financing need benchmark of 15 percent of GDP are exceeded in the program and the shock scenarios during the projection period,” the agency said. “Debt profile analysis indicates a moderate degree of vulnerabilities related to market perception, external financing requirements and debt denominated in foreign currency. “The share of debt held by non-residents is above the high-risk threshold.”

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