International Monetary Fund in a revised country report on Sri Lanka says that the main external downside risk is the resumption of capital outflows in response to a significant further strengthening of the US dollar and higher rates, or due to a weakening of the external position.
The yet-unproven commitment to exchange rate flexibility under capital outflows adds to the risk. The main domestic risks stem from further delays in revenue mobilization and SOE reforms, as well as pressures from the government’s large gross financing needs (19 percent of GDP in 2017), of which 40 percent is financed externally.
A larger-than-estimated fiscal cost of drought could also add to these financing pressures. Another risk emanates from the still uncertain economic consequence of the floods in late May 2017.
With a tapering of foreign outflows from government securities, the CBSL purchased $442 million over March–April, exceeding the committed amount by a substantial margin. The CBSL will continue to make net FX purchases, as well as draw upon a syndicated loan of US$700 million, with monthly monitoring of the progress.
By end 2017, the GIR will return to the pre-programmed path under the first review—about $7.2 billion at 65 percent of the ARA metric and 3.3 months of prospective imports. FX swaps with domestic commercial banks have been declining since end-2016, and are expected to gradually fall to around $2 billion by end-2017.
IMF also states that the Public debt is expected to rise slightly to 85 percent of GDP in 2017 due to still large fiscal deficit and exchange rate depreciation.
The medium-term overall deficit target of 3.5 percent of GDP remains appropriate for reducing the risk of debt distress, and would lower the public debt to GDP ratio to 76 percent of GDP by 2020 under the programmed fiscal consolidation. If contingent SOE debt is included, total public debt would rise to 94 percent of GDP (considered as a shock scenario in DSA) and decline below 90 percent of GDP by 2020.
While a small negative output gap is estimated for 2017, GDP growth is projected to reach 5.2 percent over the medium term in line with potential.
The consolidation path envisaged under the program scenario is projected to bring down the ratio of public debt to GDP from 84.2 percent in 2016 to 70.5 percent in 2022.
It will reduce the debt to GDP ratio by about 2–3 percent annually from 2018 on-wards, supported by favorable debt dynamics with a negative interest-rate-and-growth differential and primary surpluses.
Gross financing needs are projected to rise to 20 percent of GDP in 2018 and then decrease to around 13 percent of GDP in 2022.
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